The Fed does not raise interest rates and sends shivers down markets as the risk of a global recession becomes real.
Markets have tumbled after the US Federal Reserve (Fed) decided not to raise interest rates on September 17. It declared that “recent global economic and financial developments may restrain economic activity.” This is code for Chinese economic woes that are making the global economy wobble. Compared to other major economies, the United States is currently the healthiest. Yet as Shakespeare once put it, “something is rotten” in the global economy and the Fed is caught in a bind. Raising rates may lead to recession. Keeping rates low might not help either. It is increasing asset prices and deepening inequality, without necessarily warding off recession.
Not too long ago, markets were all powerful. James Carville, the fellow who plotted Bill Clinton’s path to power, wanted to be reincarnated as the bond market instead of president, pope or baseball star. Today, Carville would like to be Janet Yellen, the chair of the Fed. Her power stems from the financial crisis of 2007-08. Markets and financial institutions have been propped up by the torrent of money released by central banks to stave off a worldwide depression. Central banks led by the Fed have certainly avoided economic disaster, but how long can they keep the party going? Like a spinning top losing momentum, the global economy faces the risk of tipping over into recession.
At the heart of the matter are three unresolved economic contradictions.
First, debts have grown much faster than GDP since the Great Recession. Global debt is now over $200 trillion, inching toward 300% of the world GDP. On July 4, this author pointed out that the Greek debt crisis marked the beginning of the end of debt-fueled global financial system. The fiction that all debts can be repaid cannot be regarded as truth anymore. Issuing new debts to pay back old debts as in the case of the Greek bailout will not work for much longer.
Second, the continuous devaluation of currencies is unsustainable. Historians observe that declining empires and crumbling economic systems tended to debase their currencies. The content of gold or silver in Roman or Mughal coins fell as the strains on public finances and the wider economy increased. The lowering of interest rates and quantitative easing is the equivalent of printing more money and is the de facto debasement of currencies. This debasement is competitive and is a de facto trade war as each country tries to outdo another in a desperate attempt to encourage bank lending, increase investment, stimulate consumption, boost exports and lower imports.
Devaluation has another consequence. The world is certainly not producing dramatically greater quantities of wheat or cars. The supply of services such as accounting or law have not increased much either. Yet there are more dollars, yuans, euros and other currencies sloshing around. This generally leads to inflation, but the global glut of labor has kept wages down. So, the prices of assets instead of bread or haircuts are going up. Those who own apartments in New York and shares of Facebook are laughing all the way to the bank. Those who serve as baristas are not so thrilled. This is creating a new society of masters and serfs, which is not quite as sustainable as it seems.
Third, the economy is suffering from a mismatch of supply and demand. There is no shortage of the supply of stocks, iPhones and email accounts. Yet the US, still the richest country in the world, has crumbling infrastructure. Its roads, airports, ports, public transport and schooling system are in shambles. There is clearly an unmet demand for better infrastructure. In emerging economies, there is massive demand for drinking water, basic health care and primary schooling. Yet supply lags demand by a long way.
What is going on?
There are over 7 billion people on the planet. A vast majority of them are earning their living selling their labor. Factories even in India and China no longer require as many hands. Efficiency gains in processes and technology mean that fewer people can do more. With the emergence of artificial intelligence, which is worrying technology savants like Elon Musk, there will be even fewer jobs. In the global labor market, demand is decreasing while supply is still increasing. Some economists posit that the service sector shall step in to create new jobs. Yet there is a limit to the number of nannies, cleaners, yoga instructors, masseurs and bartenders that the economy can support.
Blind trust in markets and technology à la Marc Andreesseen cannot solve the global jobs crisis. This in turn is leading to a demand crisis. If people find it harder to get jobs and jobs themselves pay less than before, then how will they keep consuming the stuff that the factories are geared to produce. Central banks are trying to get the butcher, the brewer and the baker to keep producing by printing money. Yet how long is this possible, and how can the global economy keep growing?
Voters are starting to grasp this conundrum and are reacting accordingly. Jeremy Corbyn, a bearded old-fashioned man of the left, is the new leader of the Labour Party in the United Kingdom. Corbyn was an unknown entity until very recently, and he won because his party and his country are starting to chafe against privilege and inequality in a deeply divided society. The likes of Margaret Thatcher and John Major who came from humble roots are no longer in fashion, as Old Etonians like David Cameron and Boris Johnson strut the stage in a manner befitting the 1950s. Corbyn, a parsimonious chap, is a modern day Roundhead taking on Cavaliers.
Australia witnessed a coup too. Tony Abbott, the none too pleasant prime minister, has been ousted by Malcolm Turnbull, the brash former chairman of the Australian Republican Movement that aims to get rid of the British monarchy. One Catholic Rhodes Scholar has replaced another, but the new fellow has more progressive views on abortion, stem cell research and same-sex marriage. The reason Turnbull won, though, was because his party regards him as a safer steward of the economy. After years of boom, Australia is stumbling after living off a commodity-driven export bonanza led by Chinese demand. Even in idyllic Australia, “the times they are a-changin” and the world is facing the specter of a global recession again.
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[seperator style=”style1″]Israel’s Response to Boycott Movement Threatens Democracy[/seperator]
Israel’s attacks on the legality of BDS have global implications for civil liberties and the right to protest.
In August 2014, at the height of Israel’s latest incursion in Gaza, Steven Salaita was dropped from his tenure at the University of Illinois over his public criticism of Israel. Tweets by the professor appeared online at a time when Israel’s actions attracted worldwide condemnation for the high number of Palestinian deaths—over 2,000, including some 500 children.
Critics of the university, which received threats from donors ready to withdraw their funding, decried the move as an indictment of free speech. University officials explained that Salaita’s comments were “uncivil” and that they “promote malice.”
In September of the same year, Salaita’s appeal for reinstatement was almost unanimously rejected by the university board.
The implications for free speech in this situation are obvious—be prepared to toe the line or face accusations of anti-Semitism and/or summary dismissal—and it is a clear testament to the power of Israeli hasbara that has… Read more
[seperator style=”style1″]Refugees, War and Our Future[/seperator]
The refugee crisis is an opportunity to support the stateless and set up the necessary infrastructure in a world of unprecedented climate challenges.
We turn our attention to Europe, compelled by shocking images of refugees’ deaths. To the stories of the stateless having identification numbers written on them and told their trains are headed to safety, rather than camps. Eerie reminders from the past merge with disturbing pictures of the present.
What will be the refugees’ future?
War has uprooted half of Syria’s population, creating over 4 million registered refugees, with tens of thousands more fleeing to Europe to escape humanitarian crisis or armed conflict from Afghanistan, Eritrea, Nigeria, Iraq, Somalia, Pakistan and Sudan.
Inspiringly, former Uruguayan President Jose Mujica is opening his summer home to 100 children, while Pope Francis calls on parishes and religious communities to provide shelter. Yet globally, few nations are doing enough. The US has accepted less than 1,500 Syrians, although President Barack Obama has pledged to increase it to a nominal 10,000… Read more
[seperator style=”style1″]An EU Without the UK?[/seperator]
Europe must prepare for the possibility of an EU without the UK.
A recent poll by The Daily Mail showed that in a sudden change, 51% of British voters now want to leave the European Union (EU), whereas 49% want to stay in.
This big change in opinion seems to be related to the refugee crisis, because the poll also shows that voters strongly favor British Prime Minister David Cameron’s unwillingness to accommodate large numbers of Syrian refugees, opposing German Chancellor Angela Merkel’s call for all EU countries to accommodate a substantial quota.
This dramatic change in opinion shows how a referendum result on a particular day can turn on unexpected events, and how a permanent decision can be influenced by what may prove to be temporary phenomena
The United Kingdom already had a referendum on whether to stay in the EU in 1975. Now, it is to have another in 2017. But will the upcoming referendum settle the question?
Eurosceptics, like Nigel Farage, have welcomed the decision of Cameron… Read more
[seperator style=”style1″]The State of Capital Markets in India[/seperator]
In this edition of The Interview, Fair Observer talks to Amit Singh, a partner at Allen & Overy.
As the Indian economy moves forward under the leadership of Prime Minister Narendra Modi, a lot of work lies ahead for capital markets. Even though the S&P BSE Sensex gained 5571.22 points (24.88%) for fiscal year (FY) 2015 that ended on March 31, investors were worried about the low corporate earnings that did not justify their earlier valuations. Global volatility has had an adverse impact on Indian equities, but other factors such as high corporate leverage, low credit growth and high bank non-performing assets (NPA) are to blame.
Nonetheless, multinational professional services firm Ernst & Young (EY) is optimistic about the initial public offering (IPO) sentiment going forward. With a number of private equity firms willing to realize their profits through sales, and favorable macroeconomic forecasts, it seems “the listing activity in India, Middle East and Africa exchanges are also looking optimistic for the rest of 2015.”
The debt capital markets have faced a number of problems… Read more
[seperator style=”style1″]Turkish Government Makes a Strategic Mistake[/seperator]
The Justice and Development Party’s nationalist gamble is a mistake in terms of immediate electoral aims and wider strategic goals for Turkey.
It has been well-documented that the current Turkish government offensive against the Islamic State (IS) is largely being conducted as a cover for a far wider assault against the Kurdistan Workers’ Party (PKK) and the People’s Protection Units (YPG) of the closely aligned Democratic Union Party (PYD) in Syria. Both in terms of arrests and airstrikes, PKK and YPG targets have been engaged in greater numbers than have IS.
Given Turkish government policy to date regarding the Islamic State, in which it has been conspicuously reticent about joining the US-led campaign against the organization, this is perhaps unsurprising. This reticence compounded a situation where Turkish authorities have appeared to tolerate IS cross-border activity, bringing fighters and supplies into northern Syria via Turkey.
However, the decision to pursue PKK and YPG targets can be viewed as a strategic mistake on the part of the Turkish government for several… Read more
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
Photo Credit: 401k