Can we avert economic Armageddon?

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Big banks and mainstream economists are now predicting an economic disaster befalling the world economy over the next few years.

Some previous neo-liberal stalwarts of free-market capitalism are now demanding that the state intervenes to save capitalism from itself.

Many of the measures being proposed involve a reversion to a type of economic intervention common in the immediate post world war two era but which fell into disrepute under the free-market fundamentalism that largely governed economic thought through the 1980s and 1990s.

These measures involve government led-spending to protect working people’s living standards and having the state invest in social and economic infrastructure if the private sector is reluctant to do so.

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This has been combined with a new concern about inequality worldwide . Previously conservative international economic institutions like the OECD are suddenly arguing that reducing inequality will be good for the economy after arguing the opposite for decades.

The entire economics profession appears paralysed. The 2008 Great Recession brought home the fact that the emperor had no clothes. The “theories” – actually simple apologies for the system – were abandoned in the face of threats of economic collapse. Reserve Banks which had been given “independence” from governments so they could run “tight money” regimes to prevent the scourge of inflation returning were suddenly printing money almost without limit to avert disaster. Governments abandoned arguments in favour of fiscal prudence and the need for budgetary surpluses in favour of deficit spending and accumulating debt.

In New Zealand, the newly-elected National Party government ran what would have been almost a classically “Keynesian” policy. The government went from a budget surplus equivalent to 3% of GDP in 2008 to a 9.2% deficit in 2011. The government debt to GDP ratio as a consequence went from 14.5% of GDP in 2007 to 32% in 2011.

The New Zealand government was lucky in one sense. The previous Labour Government had been so fiscally “prudent” that it had run surplus budgets every year for nine years and reduced the government debt to extremely low levels by international standards. This gave the incoming National Government plenty of opportunity to borrow without triggering too many alarm bells in the international debt markets. Borrowing costs remained modest.

The “surplus” obsession would have been a massive drag on the economy if it had not been for the explosion of private debt. Banks expanded loans massively to feed credit cards, mortgages, farms debt and business loans. Private sector credit grew by 600% over the two decades to 2009 – from $44 billion in 1998 to $266 billion in 2008. Much of this was financed by overseas borrowing by NZ banks.

Of New Zealand’s overseas debt at 30 June 2008, $138.9 billion (61.5 percent) was attributed to the banking sector. House prices in New Zealand are amongst the highest in the world in relation to people’s income as a consequence – a bubble waiting to burst.

A similar story could be told for the USA and Europe. The 2008 world recession threatened to collapse this debt balloon. The government spending, including on the Christchurch earthquake rebuild, and the surprising continuance of high dairy prices for a time despite the world recession, kept the economy ticking over and a very partial recovery has happened.

Internationally the collapse was averted by printing money and massive credit and debt expansion of one form or another. Often the financial system was “rescued” by simply giving the banks more money to cover up their greed driven orgy of speculation. Theft and fraud on a monumental scale was ignored. Governments took on the debts of the private sector they rescued.

But the existing government debt levels were often already around 100% of GDP and the weakest links were punished mercilessly by the international bond traders to force economic and social policies onto reluctant populations.

Printing money and expanding debt only averts the danger for a time.

Governments like households have to service their debt. This has been helped by exceptionally low interest rates over recent years. But any recovery in the economy will inevitably see interest rates rise. That is what is being signalled by the US Federal Reserve’s decision to raise the official cash rate last month as well as its previous “tightening” measures.

But the consequence of this tightening has been a massive reduction in commodity prices – including milk products which account for a third of New Zealand’s export incomes. Highly indebted dairy farmers are hurting as a consequence.

Any significant tightening measures threaten to choke off the recovery. But The US Federal Reserve may not have any choice in that matter as they have to somehow neutralise the printed dollars before they feed into an inflationary collapse of the dollar’s value.

This has been avoided to date as the money has essentially been hoarded by the capitalist class. But as soon as they sense the US recovery may get traction they will want to try and use it to get a competitive advantage. Throwing their hoarded trillions into play will lead to an inflationary burst like hasn’t been seen for decades.

But it has been nearly ten years since the beginning of the last world recession. Normally the business cycle is about a decade long. On the usual schedule, we should be heading towards a new downturn rather than a new boom. However, the recovery from the last recession has been so anaemic and slow that it may have prolonged this cycle for the US at least.

Any renewed recession would also be in a period when governments are in a much weaker position to simply print money to spend to overcome it. That was tried. The debt levels are much higher as a consequence. The printed hoards of token currency are still in play. The possibility of a collapse in currency values as a consequence are that much higher.

The normal rules no longer seem to be in play. Economists have started to talk about a period of prolonged economic stagnation rather than a new boom being possible.

There has also been renewed interest in theories of “long waves” in capitalism’s history. This is the view that there are periods of history in capitalism which stretch over some decades where the 10-year business cycle is dominated by the upward swing in the cycle, which are then followed by decades where the cycle is dominated by the downward phases.

The view is growing that we have entered such a period of capitalist history.

What the consequences of that may be I will look at in a future blog.

39 COMMENTS

    • “What about that beautifully packaged for sale bit of corporate welfare WFF?” – Bevanjs

      That’s a pretty dumb comment, Bevan. Did you come up with it yourself, or just parrot it from your Act mates?

  1. We have been letting Reserve bank governors shock and traumatise, let’s get this through our heads, reserve bank governors have been torturing NZ workers with interest rates since the 70’s.

    I believe the saying goes – low currency rate is good for exports.

    Some one has to rein these guys in

  2. “There has also been renewed interest in theories of “long waves” in capitalism’s history. This is the view that there are periods of history in capitalism which stretch over some decades where the 10-year business cycle is dominated by the upward swing in the cycle, which are then followed by decades where the cycle is dominated by the downward phases.”

    I reckon Kondratieff nailed it when it comes to the patterns you can find in cyclical capitalism. K Waves are troubling theoretically, since they suggest that the economic ‘winters’ which eventuate when bubbles pop signify only a crisis for those over invested in the economic trend which caused that bubble, and essentially clears the way for the next one.

    Wallerstein pointed out that if you analyse the capitalist world economy as an historical system, you find that K waves tend to be around a half century out of kilter with hegemonic/imperial eras, so that the major military hegemon of the day is always living off the gains from an economic boom which is already declining. Meanwhile, new centres of economic production point to likely indicators of who will be next. This is of course why the BRICs are historically interesting, in terms of how theory based around imperial and nation state structures might accommodate a bloc where there isn’t a single ideology or ruling party in control. It may of course also mean that the apparent correlation between Kondratieff’s waves and hegemonic cycles was a series of flukes and won’t be borne out by the events which follow the American economic collapse.

  3. Karen Hudes on her You Tube and Twitter sites has demonstrated with proof that “Big Banks” are all part of the network of global corporate control and that what these banksters and their employed “economists” are saying is disinformation caused to create FEAR, which is Fear Everything and Run .. or Face Everything and Rise. I choose the latter.

    Currencies are being revalued/devalued; Fed US worthless dollar is being swapped for Treasury Gold backed US dollar. After the global currency reset comes NESARA.

  4. I have long held that Michael Cullen was one of the best finance ministers this country has ever had. People don’t remember him because he wasn’t doling money around like candy and people like Paul Henry continually harped on about excessive taxation. It’s funny when the table’s turn, you don’t hear arseholes like Hosking and Henry about budget deficits, but as soon as there is a surplus (used to pay back previous largess ironically usually by RIGHT-WING Governments) they suddenly feel they’re being overtaxed.

  5. A major “correction” on the stock and other markets appears increasingly likely, and it is not surprising. There are too many factors coming into play, that interact and apparently lead to something of a downward spiral. On macroeconomic levels we do globally have low and even falling commodity prices, particularly in petroleum, iron ore and so forth.

    The oil price is the result more than just usual market trends that led to over-supply. There are geopolitical and strategic factors at play, such as the tensions between Saudi Arabia and Iran, and also the West and Russia, same as between some other centres of power.

    Saudi Arabia can handle the low oil price for a good length of time, as they have massive currency reserves and low production costs for oil, so they still earn, but have to run a deficit, which is though not hurting them much yet.

    Iran is after the nuclear deal with major powers keen on rejoining oil exports on a larger scale, but they need a much higher price to earn on produced oil, so they are really suffering now. So is Russia, already suffering the sanctions by some nations over its support for Russian separatists in Ukraine, and over the re-claim of the Crimea.

    Russia is in economic trouble, and as it depends so much on oil and gas exports, things are getting worse.

    These are things Saudi Arabia, the US and so are not unhappy with, it serves their strategic long term planning. There is Syria, a place where all the above players have strategic interests, and as there is no realistic chance for peace, they continue fighting each other with various means, also economic.

    China is of course the main focus, where the economy is finally slowing down significantly, which is overdue. They had a long boom that never seemed to end, but although the state and most private households are conservative with their finances, and good at saving, there has been too much debt created by over-investment in various vanity and infrastructure projects by some cities and regions. There are real bubbles that have been created, and they are at risk of bursting. It is easy to talk of a change from a production to a service industry kind of economy there, but to bring about such a change, this comes with costs, like industries having to shrink, and new sectors having to grow.

    This also brings with it shifts in investment, and divestment, so there are inevitably massive changes happening.

    As China is also keen on playing off various commodity suppliers against each other, to get good prices, New Zealand and other economies now so dependent on the Chinese market, are going to be hurt. China also produces more food at home, so forget the dairy boom, many farmers will not get rid of their debt and may have to sell their land, if they cannot finance an investment in alternatives to dairy.

    Globally the slow down in many nations, it will lead to serious risks of recession if not a depression. While we save on petroleum others lose revenue due to low prices, and they stop buying our products, also Chinese products. A vicious downward cycle can be started, similar to some things that happened before the Great Depression.

    So indeed, times are getting “very interesting”, fasten your seat-belts, dear friends. This will though not be the end of capitalism, as the lure of consumer goods will keep enough enticed and mesmerised, like addicts, they (ordinary, short sighted consumers and people desperate for any work, making endless compromises on their own personal independence) will do all to keep the machinery running, even when it starts making ominous noises.

    People need to change their thinking, and prepare for some sacrifices one way or another, you cannot have it both, glossy mags, endless consumer goods that “entice” you and tickle your fancy, and solid ground underneath your feet at the same time. Refocus on what really matters, ensure the basics are there, for food, health care, education, clothing, water, transport, housing and other infrastructure.

    Forget those gadgets and the latest flash car from overseas, perhaps, and in some cases, grow your own veges, and most certainly create local community networks, to support each other when the shit hits the fan.

  6. its national every time fucks the country up with there greed
    this artical from Bernard Hickey makes sobering reading households debt is a basket case. greed and foolishness by our fellow citizens .they have borrowed between 5 and 7 times there incomes what else can you say banks pushed debt better than any drug dealer ever could
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11545650

    plus this government put all our eggs in one market china
    new Zealand sadly after the 30 years of neoliberalism new Zealand is a house of card where largest part of the economy is housing ponzi scheme
    there is nothing else
    the big short and the inside job should compulsory viewing

  7. ‘There has also been renewed interest in theories of “long waves” in capitalism’s history. This is the view that there are periods of history in capitalism which stretch over some decades where the 10-year business cycle is dominated by the upward swing in the cycle, which are then followed by decades where the cycle is dominated by the downward phases.’

    Forget about waves, long or short. Forget about business cycles. We are now living in a completely different world from that of all previous economic-financial crashes.

    1. Global conventional oil extraction peaked over 2005 to 2008, and the system has been propped up by increasingly expensive (financially and environmentally) unconventional oil. Unconventional oil is even more unsustainable than conventional oil.

    2. Since the so-called GFC of 2008-9 interest rates have been pushed down; in some countries they are already negative. There is no ‘ammunition’ left, other than negative interest rates everywhere. And that will solve nothing. Meanwhile, debts have burgeoned to unsupportable levels.

    3. The Earth has entered an Abrupt Climate Change phase; Scripps data for 13th January 2016: 404.81ppm, a staggering leap in atmospheric CO2.

    https://scripps.ucsd.edu/programs/keelingcurve/wp-content/plugins/sio-bluemoon/graphs/co2_800k_zoom.png

    and, unsurprisingly, planetary overheating has moved up a notch:

    http://robertscribbler.com/2016/01/14/december-of-2015-at-1-4-c-above-1890-is-a-terrifying-new-jump-in-global-temperatures/

    There is no way to put this Abrupt Climate Change ‘genie’ back in the bottle, and the consequences for NZ and everywhere else will be dire in the short term and catastrophic in the medium term (will probably render the Earth largely uninhabitable).

    The abject failure of successive governments here and elsewhere to address this most-pressing of matters now means there is no long term.

  8. Most of the above is beyond me. I’m not trained as an economist. I do know however that our government should be the balance post between capitalism and socialism. Neither can survive without the other which means we must pay taxes to well trained, well educated politicians to protect us through the financial waves and shocks that seem to occur naturally.
    But they didn’t and still do not do that. They , instead , sold our stuff off to private individuals for their profits and our losses. It’s our politicians who need to be made to atone.
    I can see a near future where we will desperately need our infrastructure and our resources we all paid for, for us to use in times of crises …. and where are they now ? Sold for beans to foreigners to pillage while they held us to ransom to inflate share prices in resources that used to belong to us all.
    We need to hunt down those who took our belongings and try them for treason, sabotage and criminal neglect. We need to asset strip them and return our money back to our coffers and they must go to prison as a lesson to others who may be thinking along the same lines.
    We must remember; they didn’t do this to us mistakenly thinking they’re were doing the right thing by us. They did this to us because we were innocent and we trusted them and they took advantage of that for their personal wealth creation.
    John Key, our prime minister, is but one of the many crooks that’ve ripped you and me off. He should be in prison as I write. The others should have the police banging on their doors right about now.

    I keep repeating this to those who think detailed minute is required to clear the waters.
    New Zealand .
    The size of the UK but with a population of Melbourne AU.
    New Zealand .
    Rich in every vital resource. I.E. Water, fish, fruits …

    New Zealanders .
    Broke and getting more behind the developing world when once we lead the developing world.
    Asset stripped and abandoned then blamed for our struggling dysfunctions .
    Lured by our abusers into the absurd debt levels they insist we buy from them .
    We’re now a suiciding , alcohol addicted, lost soul species floundering with poor mental health and increasing debt dependancy to off-shore money lenders vying for who gets first pick once John Key sells us out via the TPP.
    Our enemy is in the closest electoral office to you taking your money and blaming you for not working harder. Are you angry now ? Yes ? So you fucking well should be.

    • iam all for hanging the fuckers who stole our assets and wreaking our economy they have stolen from the future and we need to restore what hen be taken

    • countryboy,well said. the asset sales and privatisation are a deliberate
      ploy to strip NZ and sell to overseas corporates, they will own NZ outright soon if something dos’nt happen to stop Key the crooked salesman.
      The debt we owe other countries is also deliberate,it enriches the wealthy, and makes it easier to own NZ.
      Greece owes a massive debt so is at the mercy of the Eurozone,the people are tasked with paying back the debt the governments and banks have created.
      The debt is a cash cow and the people are being milked,the interest is increasing the debt constantly,so that bailouts are required for people to pay the banks,its a vicious circle.
      NZ owing so much debt is inline to follow suit,then Key will enact the TPPA to entrench the corporate ownership of NZ,and the people will pay the cost of this market traders ambition,NZ sold, job done.

  9. If I may make a minor correction

    They did this to us because we were innocent and we trusted them are smug, lazy thinkers, always up for cheap short term electoral bribes, and so they took advantage of that for their personal wealth creation.

    otherwise on the button.

    • @Richard
      Your argument assumes that what governments have done was what the people voting for them expected and wanted. This just isn’t true. Every NZ government since at least 1984 has gone into each election promising one set of things, and especially promising not to do certain unpopular things they claim their opposition will do. Most of the things we get frustrated about on this site were either things they implied they wouldn’t do, or things they carefully avoided debating of during election campaigns. Many of them, such as pursuing Low Wage Treaties (*cough* “Free Trade Agreements” *cough*), were done whichever of the major parties formed a government, so you really can’t blame that on people accepting election bribes.

      • Key made it clear he was going to sell our assets and continue with his criminal activities during the last election. The fools still voted for him.

  10. I think as usual the economists are late to the party. Its been pretty clear for some months now that many economies are in dire straits.

    I notice too that there seems to be a rise in interest in Keneysian solutions to our economic problems.

    But I fear that this is just early interest. Those who still hold power won’t want to give that up until its clear they have to. And so far things aren’t bad enough for them to capitulate.

    There is plenty of opposition to the things that people like Jeremy Corbyn and Bernie Sanders have to say.

    And in NZ I don’t see anyone standing up and saying the things they’re saying at all. Unless you count the Greens, and no one seem to listen or cover what they’re saying.

    Can we avert economic armageddon? Nope.

    In NZ I don’t think so. Our household debt to income ratio is again over 160% which is unsustainable. The only way this thing is going to fix itself is in a big washout.

    And I notice NZ is not ready to capitulate. There is very little talk of bubbles and popping in NZ, and when it is said it is greeted with derision.

    The thing about that kind of economic behaviour is when greed and euphoria overtake populations and create bubbles there is always only one solution. It pops. And it creates a damn mess. And there seems to be nothing anyone ever has been able to do to stop it once the bubble has formed.

    I follow all the markets closely. And I’m noticing that NZ and Australia are the last to turn, and have the steepest rises to date since 2009. That’s not good.

    Just my opinion of course.

  11. There have been numerous references to economics and economists.

    Let’s get one thing clear: economics, as practiced in the western world, is fraudulent. Fake. Phony.

    Modern economics pretends to be a science but has none of the characteristics of real sciences like chemistry and physics. Rather than carrying out observations and developing theories that explain observations, theories can be used to make prediction, economics starts with theories and foists those theories onto society, like some kind of ‘God-given’ set of commandments that can never be questioned.

    Let’s be clear: modern economics is founded on ignoring all the fundamentals that make an industrial society function -such as readily available energy and resources- and assumes they will be available forever; modern economics ignores the effects of pollution. The insane nature of economics is summed up by:

    ‘Anyone who believes in infinite growth on a finite planet is either a madman or an economist’.

    Well, the shit is hitting the fan because we do live on a finite planet.

    Modern economics rewards destructive, wasteful behaviour because it’s prime motivator, GDP, is fraudulent. GDP measures movement of money and money-printing. So if you have an accident, get divorced, let your house burn down, get sick…… it’s all good because you’ll have your car repaired or buy a new one, set up an additional household, buy another house and furniture, spend money on pharmaceuticals etc.

    It is inherent in the economic system that the economic system will collapse because the system rewards consumption, inefficiency and waste, and will keep doing so until the system does collapse..

    It is also inherent in the dominant economic system that the Earth will be reduced to a barren rock.

    The corrupt, mendacious politicians who have been ‘running the show’ for decades are simply opportunistic agents of money-lenders and corporations. And there is a ‘gentleman’s agreement’ to NEVER MENTION any of the fundamentals, such as the impossibility of infinite growth on a finite planet, the Ponzi nature of Fractional Reserve Banking, the impossibility of charging interest on loans within a stable system, the fraudulent nature of GDP, the real state of the energy supply, the real state of the environment etc.

    Parliament is a puppet show, geared to keeping the masses misinformed, compliant and believing in the system, as the system progressively screws everyone and everything.

    The days of the masses being bought off by the toys and trinkets of consumerism are rapidly coming to an end.

    The present dire situation was flagged 40 years ago, when ‘Limits to Growth’ was published. And the timing for collapse suggested by the LTG team was not far off.

    Pity the next generation because they are going to have to endure the dire consequences of bizarre theories being adopted and promoted by economists, politicians and bureaucrats.

    Of course, the really bizarre aspect is that economists, politicians and bureaucrats are so insane they actively destroy their own children’s futures along with everyone else’s.

    • Well said Afewknowthe truth, right on the nail, except Keys kids wont suffer, they are alleady removed from NZ,Max in Hawahii,Stephanie in France.Keys money is most likely moved to another jurisdiction as he himself will be soon. Key has soiled his nest in NZ and will leave and let the people clean up the foul nest he’s left.

    • I once read that someone calculated if the world economy grows at 2% per year for 2,500 years, we will need all the power in all the stars in the known universe to power our world.

  12. Mike: Some previous neo-liberal stalwarts of free-market capitalism are now demanding that the state intervene to save capitalism from itself.

    Nope.

    It’s central bank intervention (= governments interfering) that got us into this mess in the first place.

    Artificially low interest rates first in Japan then the US followed by the ‘creative accounting’ of the Chinese Communist Party.

  13. Short answer – no. We’re fucked. In a few years, it’s going to be like a scene from ‘The Walking Dead’, except instead shuffling corpses wandering an apocalyptic wasteland, you’ll have ‘The Cowering Rich’, shivering behind their fortress-like enclaves, as private security firms reap a blighted financial harvest keeping the feral peasantry at bay.

    Eventually the wheezing, gangrenous husk of civilized society will shudder and expire, and we’ll all regress to a simpler, more brutal way of life, where roving bands of psychotic marauders attempt to bludgeon your children to death before spit-roasting them and fashioning patio furniture from their bones.

    So, yeah… I think you’ll agree we have a lot to look forward to. Thanks neo-liberalism. Thanks corporatocracy. And thanks, John, for that brighter future you promised us.

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