Читать книгу TOO MUCH MONEY - Gregory J. McKenzie - Страница 5

“I violently disagree with what you are saying.

But I will defend, with my own life,

your right to say it.”

Anon

The search for a ‘new normal’ in our economic systems will not be an easy ride. The success of any new economic normality will depend on the political system that exists. You cannot separate economics from politics. Any economic system depends on political support. The free enterprise system depends on a representative democratic government to bail it out when trouble comes. Command systems depend on government planning. Economics only works when there are incentives to accumulate. These incentives must either, be market based, or, politically motivated.

During the GFC large American corporations, former bastions of free enterprise, went cap in hand to Washington. Even the ones who turned up in their private jets got a bail out from the US Congress. Then the US Federal Reserve had to bail out certain merchant banks but not all of them. Politics was again probably to blame. When a new President of the United States turned up he had a simple message for corporate America:

“No more bail outs.”

In 2020 it was the other way around. Many economies considered to be market based, began the year with an arrogance of self interest. But as soon as the pandemic imposed lockdowns they lost this spirit of free enterprise. Now it became the democratically elected governments that were supporting the wages of workers. By the end of the year big government stimulus packages were common. In 2020 year it was estimated that over $17 trillion dollars of stimulus spending had been proposed for global economies.

The Command economy depends on an authoritarian government for support. In mainland China after 2008, the small private businesses had to appeal to the CCP (Central Planning Committee of Communist China) for help. Massive spending was used to restore positive growth. Yet for economies like Cuba and North Korea there was no money for such spending.

Still no country escaped some form of government intervention after 2008. In Iceland, the government had no choice but to take a hard line with its profligate banks. The European Union did the same with whole member states, in this case it was the so called PIIGS (Portugal Italy Ireland Greece Spain) of southern Europe. The Bank of England had to bail out British banks. Some central banks were printing money via quantitative easing. The politics of economic crisis management was evident. But so too was the guilty overreaction of regulators who were asleep at the controls before 2008.

Yet after 2012 these market based and command economies thought they could go back to pre-GFC financial habits. Fiscal consolidation, more free trade deals, asset inflation stimulated from low official interest rates and even more risky credit creation were encouraged. The swaps market, perhaps a major cause of the GFC, was left untouched. Speculators returned with gleeful anticipation of using cheap loans from banks.

Luckily for the world, the Bank for International Settlement in Basel, Switzerland was not impressed with all these bank bail outs. So it promulgated Basel III mandatory controls. In 2010 the Group of Governors and Heads of Supervision (GHOS) set higher global standards for banks. Once endorsed at the Group of Twenty meeting in November, 2010; Basel II was replaced with Basel III. Common equity, in all banks that wanted international settlement accounts, would have to be built up to establish capital buffers against future failures. A set liquidity ratio would keep these banks away from the over lending that was common before 2008.

These measures saved the world from another financial crisis in 2020. They had also being matched by limits put in place by command economies to discipline their financial sectors.

Depending on the ‘new normal’ to automatically evolve inside economic systems, the political system concentrated on health and welfare emergencies in 2020. Far be it for an economist to suggest political change, most economists hate change of any type. But stable political outcomes can help keep any ‘new normal’ economic system locked into the real world. In those countries where political opponents put aside their differences and sought consensus, the economic recovery seemed to have been encouraged not stifled.

As for command economies they can use authoritarian measures to enforce cooperation. Still this works better in countries with a social unity of purpose. Vietnam seems to be the best macroeconomic manager. Communist China relies too heavily on regional debts and enforcement measures. North Korea is simply a basket case of economic inefficiencies. Cuba was at least more unified after its government allowed citizens to buy and sell properties. This seemed to help national unity in 2020. All four command economies will have different paths out of recession.

The greatest enemy of any economic system is political corruption. One way to minimize corruption is to make all politicians accountable for their decisions. There must be no opportunities for voters to be deceived about the real intent behind political decision making. Infrastructure spending must be undertaken for the primary intent of job creation. In fact all stimulus measures must be able to give social outcomes that help economies recovery quickly.

Economic systems cannot work in a vacuum. Look at the countries that have excessive sovereign debts. In almost every case, the fundamental reason for this was a finance industry that grew too big. The strict regulation of the domestic finance industry is necessary if any economic system is to have a better chance for success. When a domestic economy system fails despite this chance, then it is simply using the wrong economic system. In no way is it possible for one economic system to succeed in every country. Some may argue that free market capitalism has done just that, but this is an illusion. Even capitalism must adjust to national differences.

Vietnam is the best example of what can happen if an economic system adopts national characteristics. It has a communist political structure. But the Vietnamese government blends this political system with capitalism to have a uniquely Vietnamese flavored economic system. Whilst the traditional industries of agriculture, forestry and fishing employ many Vietnamese workers; so too does the newer industries of consumer goods manufacturing, wholesale/retail and construction. Labour productivity has more than doubled since 2008. And the services sector employs one in three workers. Nine out of the top ten exports out of Vietnam in 2019 were manufactured or semi-manufactured goods. This sounds more like one of the Asian tigers than it does of a command economy.

Capitalism was invented for large market based economies with a democratic political system. Britain adjusted capitalism to suit its Westminster political system. Japan took the American free enterprise capitalism of the post war era and made it work with their Asian political system. But the lockdowns in 2020 saw an unintended build up of stocks, This inventory investment is unwanted at a time of reduced consumption spending. Other Asian countries followed their own paths to capitalism with Asian characteristics. But many of them had a similar build up of unsold stock. Thailand, for example, saw its inventory investment rise to unhelp levels. The reduction in tourist arrivals has been damaging to the economic growth in many South East Asian countries.

Some Asian economies suffer from periods of hoarding. Japan is learning that free market capitalism does not always suit their country when it has to overcome periods of disinflation. Other Asian countries, struggling with free market based financial system, are finding it allows unwanted attacks on their exchange rates. In particular, the saving habit in some Asian countries does not easily fit in with the current demands for constant economic growth.

Once again only Communist China has turned a classic capitalist leakage of money from an economy (aggregate savings) into a source of venture capital. This was done through its central plan. Surplus units were instructed to save in the state banks. The state banks then directed surplus funds to politically designated industries and businesses. This way central bankers in China was able to control liquidity flows and the velocity circulation of money.

But there is still a tendency to allow legal monopolies to develop under authoritarian regimes. The State firms in China have being building up large debts. This makes them less efficient than the smaller businesses that may not have their diseconomies of scale. Then government owned businesses tend to hoard productive assets. Smaller privately owned businesses cannot do this and may benefit from dynamic net investment.

Hoarding and monopolies are poor outcomes for any market based system. Singapore and South Korea seemed to be the exceptions in 2008, but the 2020 pandemic still found them struggling. Without rampant globalization both these Asian countries can suffer from stagnant economic growth. By the end of October 2020, South Korea had returned to positive growth. Singapore still needs global tourism to return to 2019 levels. But not all Asian countries rely that heavily on tourism. They are able to serve their external economy but the same cannot be said about their domestic economies. Consumers must take up the slack and decrease their savings.

Some African countries are just starting out on their “take off” stage of economic development. Yet income inequality in Africa had been made worse by the Great Recession. Financial contagion dramatically increased sovereign debts. This necessitated reductions in social security and welfare programs during the four years of the Great Recession. By 2015 income inequality in Africa was alarming enough to warrant the attention of reputable global economic research centers. Now that data from 2015 is finally being made publicly available, the full starkness of that income inequality in Africa is in the public domain.

But African countries have been even more severely affected by COVID-19 pandemic in 2020. The poor social overhead capital in these countries is seeing the economic situation deteriorate. Starvation is already present. Poverty is never far away for most workers. But if the surplus units flee this continent it will lose much needed surplus funds. In some cases economic development may go into reverse. The lack of foreign direct investment may be very limiting.

The lessons from the GFC of 2008 have been applied to macroeconomic management practices. Any outcome, including sustainable economic growth, will require prudential supervision of all finance industry businesses. Strong capital reserves and careful lending procedures are vital for the velocity of circulation of money. But in 2020 there was a flight of capital to safe havens that encourage hoarding. In such adverse financial winds the fledgling economies of Africa fell deeper into a recession cycle. Now in 2020-21 the IMF and World Bank are poised to prevent such an outcome for less developed economies.

The single most important cause of poverty is unemployment!

Governments must focus on job creation programs for 2021. This is a critical success factor for any post-pandemic recovery plan.

John Maynard Keynes explained that economic units on lower incomes need more help than economic units on high incomes. So the low wage earners, the small business firms and those on social security need help after the 2020 pandemic. As for the upper middle income earners, the larger firms and the big companies - well they can wait and rely on their cash reserves.

Especially in the developed economies governments which have embraced globalisation, the labour market is complicated by a dominance of casual employment, gig economy contracts, piece work contracts and consultancy subcontractors. The old fashioned full time worker with full benefits is much less common in 2020. This means that wage subsidies may be an ineffective way to stimulate private domestic consumption. Something like a Universal Basic Income supplement may be a better way to return an economy to higher economic growth paths. Again it is the permanent income that matters. Consumers need confidence in their ability to sustain their standard of living.

So, if any government wants to increase private domestic consumption expenditure, then it must address the casualisation of the workforce. But exactly how this can be done is not clear. Just giving money to employers will not work if they do not have any full time employment opportunities. Subsidies to businesses are usually ineffectual in times of low job growth. The temptation to see such government payments as cash flow instead of consumer welfare can be overpowering. A business that is facing imminent failure cannot be relied upon to employ more workers. Even strong businesses may seek to use the government subsidies to increase returns to their stakeholders.

Providing incentives to large infrastructure projects will also not work if they take too long to become “shovel ready”. China used large, debt-funded infrastructure projects between 2008 and 2012 to restore economic growth to its planned outcome. Yet this approach failed to return China to pre-GFC growth levels. This may because not all infrastructure spending creates new jobs. Some goes to consultancy fees and public sector wages.

China was the first into a COVID-19 lock down and first to emerge. Unique parameters allowed their central planning authority to keep the Chinese economy going but at a reduced level for three months. Then in April 2020 the Chinese domestic economy was kicked started. This was done in a typically Chinese way. Th central planners meet to set guidelines and put in place finance options.

By using the excessively high savings pool of its population, central planners encouraged the 4500 small lending institutions in China to give financial help to struggling enterprises. The Chinese central authority was planning to bring the economy back to growth but at a lower level. But the task may yet prove too difficult for financial institutions carrying debts estimated at trillions of dollars. The second wave of infections that broke out in Beijing showed how hard the road to recovery could become even in planned economies. Then more breakouts at the beginning of 2021 put more pressure on growth targets.

The central planners in China in their Fifth Plenum (late October 2020) have ruled out further “old fashioned” infrastructure spending for the foreseeable future. Instead they have identified some “new style infrastructure” innovation projects like the roll-out of the 5G network. Then they plan to stimulate private domestic consumption expenditure. Just how this double economic miracle will occur was not revealed to western eyes.

The magnitude of the recovery task both here in Australia and overseas is enormous. For Australia it will mean getting over one million workers back into some sort of employment. That is after the JobSeeker wage subsidy employees stop working from their homes and go back into the workplace. The JobSeeker recipients will not be counted as unemployed persons; but may be countered as underemployed given that they are all staying at home. The end of job support programs will be another economic adjustment for Australia. Particularly if deglobalization shuts off lucrative export revenue streams.

In Europe, the composite PMI feel from its low point of 29.7 in March of 2020 down to floor level of 13.5 in April of that year. As a comparison for the whole of the period known as the ‘Great Recession’, this index of European composite PMI was never below 36.2, even during its worst months. By June of 2020, the European Commission was forecasting that savings in the Euro zone would reach nineteen percent of household income. This would be the highest savings ratio for the euro area since the start of the monetary union. By comparison, the household saving ratio for 2019 had been thirteen per cent. Again hoarding is proving the Achilles heel of recovery in some European democratic countries. Particularly in the area of job creation.

For the second quarter of 2020 there were no overseas tourist arriving in places like Milan to spend up big on luxury items. This was true also in cities like Paris for a shorter period. However, by June of 2020, Paris was largely open to tourist who were buying up luxury items. This suggests that the household savings ratio for the Euro zone was not consistently high all over Europe.

By June 2020 retail stores were open in Germany. The German media did a street survey of shoppers in the big retail stores of Berlin. Some shoppers admitted that they were not buying as much as they usually did on their shopping trips. So the first lock down in Europe certainly had both an immediate impact on consumption spending and a lasting influence on future spending plans. It was t5he second lock down that really hurt the Euro zone economy.

Milton Friedman warned that consumer spending was tied up with a worker's permanent income. In other words, consumers need to know that their job is safe before they increase private domestic consumption expenditure. With Germany going into a second lock down period in 2020, the prospects for a quick ‘snap back’ of economic growth proved to be optimistic.

All this led to the launch of what was called NEXT GENERATION EU. This was a fiscal stimulus package meant to haul the Euro zone out of recession once the lockdowns were finalised. When the second wave hit many European countries, this fiscal stimulus became critical to the survival of the European model of economic cooperation. Unfortunately two member sates of the Euro zone vetoed this particular package. Since then suggested political alternatives have been proposed to bypass these vetoes.

Europe struggled, right up until the end of 2020, to agree on a unified stimulus package for the Euro zone. At one point a schism developed between the southern member nations and the northern members. To help struggling member countries, the European Central Bank issued the first 750 billion Euros of its quantitative easing program. This was under their Pandemic Emergency Purchasing Program (PEEP).

The European Commission continued attempts to launch its own $(US) 1.25 trillion recovery plan. That was to include another 750 million Euros of loans and grants to poorer member countries. Then in July 2020, they had another go at bailing out the struggling southern economies. This time the hard nosed northern members insisted on much stricter conditions for Euro bonds to be used to help economic recovery across the Euro zone. It took some tough negotiations to get a compromise past all Euro zone members.

Luckily the richer European countries launched their own domestic fiscal rescue plans. Germany decided to commit 1.78 trillion Euros largely through tax deferrals and credit guarantees. France, on the other hand, outlaid 622 billion Euros in the way of direct fiscal spending. With an unsatisfied appetitive for long-term bonds prevailing on European money markets, there was little trouble in getting this deficit spending financed at or near zero percent interest. still the poorer southern European countries were effectively locked out this cheapest of bond markets due to their heavy sovereign debts.

The European Central Bank has also pushed official interest rates in the Euro zone into negative figures. They have authorized a monthly allocation of 20 billion euros in further quantitative easing. With inflation rates at or near 0.1 per cent there is concern that the members states may have to cope with a long period of stagnation. Some market based economists have encouraged European central banks to look at other options that involve even lower debt repayment schedules. Long term bonds sales are going ahead to try and lock in current near zero interest rates.

In what would have been yet another Olympic year the US has come in first again. But as in the postponed 2020 summer games awards ceremony there will be no gold medals handed out this year. In one week alone in April 2020 more than 4.4 million laid-off workers in the USA applied for unemployment insurance. This has set a Twenty-First Century record over the five weeks since the COVID-19 emergency in the US was declared nationally.

As far as can be ascertained from those filing for unemployment insurance, about 22 million people were jobless in the USA by the end of April 2020. Then in July of 2020 there was another surge in joblessness. The US labour Department reported that for the week ending July 4, the number of people claiming unemployment insurance equaled 31.8 million.

Why was unemployment so bad when there was no national lock down of the whole economy? It had to be the blind panic caused by the COVID-19 virus. For example, a sharp increase in hoarding cash was detected in many states of the USA. The US Mint, in late July 2020, began to encourage American to stop hoarding coins. This was symptomatic behavior that had been noticed in other deep recessions in the USA.

One in five American workers lost their job to set a record for layoffs in the USA. You might say its another world record to the US economy. Not one you would want even in an Olympic year. Again, as a comparison to the 2006-2008 GFC ‘Great Recession’ in the USA, it is estimated that national output fell, in just over one month in 2020, by twenty percent of GDP. Only the 1930s Great Depression can compare to such a fall in GDP. But remember that historic fall happened over several years. This time it has occurred over five weeks.

Yet by May 2020 there seems to have been a “dead cat bounce’ for the US economy. As many as 2.5 million jobs were created. This surprised everyone. But it was only that one month. There were still 21 million American workers registered as unemployed. And this phantom recovery did not last into July of 2020. By the end of October 2020, eleven million Americans had stopped applying for unemployment insurance. This was seen by some as proof of an economic recovery. Yet it might also indicate a rise in discouraged job seekers.

The failure of the US Congress to pass any sort of effective stimulus package, right up until Christmas of 2020, summed up the ham fisted approach to avoiding any scaring from this massive unemployment. An opportunity was lost to relaunch the US economy using classical Keynesian policies. In this regard the government response to the 2020 pandemic has been much worse than the one achieved by both the President Bush and the President Obama administrations.

Australia has a small economy so its stimulus, whilst a record amount for that country, was modest by comparison. Like the USA, early government outlays went to businesses. Apart from an immediate increase in some social security payments, all the Australian government stimulus money flowed into the bank accounts of business owners. Even the banks themselves were given money to lend to these businesses. But outlays were not carefully controlled. Overall, there was under spending of proposed stimulus outlays up until the end of April 2020. By July 2020 the need to extend budget stimulus measures forced the government to declare a record budget surplus for calendar 2020.

By November 2020 the Australian economy was recovering. Both consumer confidence and business confidence lifted when the number of new COVID19 cases fell to almost zero daily. Only trade concerns, primarily with its largest trading partner China, were holding back optimism of a full recovery by early 2021.

Of course, in certain South American countries there was no stimulus package at all due to lack of surplus government revenue. Some Latin American countries were already heavily mired in excessive sovereign debts. Central American countries were no better off when it came to available funds. Even Mexico suffered substantial export revenue losses when the world price of oil plummeted in late April 2020. All this encouraged the IMF and the World Bank to provide additional support to these countries. By July 2020 there was signs of some renewed economic activity except in Brazil.

Middle Eastern countries were struggling badly by the end of April 2020. A few countries had large sovereign wealth funds so they coped better than others. But they too suffered revenue falls when the wholesale price of oil fell dramatically. The sharp instrument of a freely operating the price mechanism was active on global oil markets; when the spot price of American piped oil fell below zero.

In Western Asia, economies were suffering from the collapse of globalization. Iran was feeling the effects of economic austerity. Some of this was caused by the US embargo on financial funds transfers. But Iran had undergone a significant lock down so much economic damage was self-inflicted. Turkey also suffered substantial economic collapse but some of this was due to the millions of refugees in that country. Israel was handicapped by political infighting. Afghanistan, the Gaza strip and the West Bank were already in substantial economic difficulties so had little funds available for any stimulus. Lebanon was doing alright until the massive explosion in Beirut.

Central Asia was poor before the pandemic so there was little scope for improvement in those countries. Eastern Asia did better mainly because of its tight social containment agendas. In the Northeast, the economic superpowers of China, Japan and South Korea did best after their periods of economic hiatus. China was first into the lock down of its citizen and then first out from social isolation restrictions. Their economic recovery was rapid but halting. South Korea was able to get back to positive growth by October 2020.

This only left Africa. Now sub-Saharan Africa felt the economic collapse the worst. South Africa and Zimbabwe were short of stimulus funds. Botswana was also struggling to kick start its economy. The forty-six countries listed by the UN as sub-Saharan must all hope that globalization will reboot globalisation some time in 2021. Again these countries will rely strongly on the IMF and World Bank special loan provisions for less developed countries.

In Australia’s own region of Oceania only the big two economies (relative to the other member states of that region) of Australia and New Zealand have announced substantial stimulus packages. With global tourism virtually at a standstill after March of 2020, these member sates faced significant falls in their money GDP. Unemployment became widespread all over the region in April of 2020. But by October 2020 some of these smaller economies announced an opening of their international borders. There was some hoping that the travel ‘bubble’ with Australia and New Zealand would further stimulate both economies. These two countries will have to increase their foreign aid commitments to the poorer countries in their region.

END NOTES:

1 “Number of employed people in Vietnam in 2018, by industry”StatistaJune 2019www.statista.com/

2 Daniel Workman “Vietnam’s Top 10 Exports”September 24, 2020www.worldstopexports.com/

3 “The take-off is the interval when the old blocks and resistances to steady growth are finally overcome. The forces making for economic progress, which yielded limited bursts and enclaves of modern activity, expand and come to dominate the society. Growth becomes its normal condition. Compound interest becomes built, as it were, into its habits and institutional structure.”Walt Whitman Rostow The Stages of Economic Growth: A Non-Communist Manifesto1960 (pages 4-16)

4 Anne-Sophie Robilliard "WHAT'S NEW ABOUT INCOME INEQUALITY IN AFRICA?"WID.WORLD articlewww.wid.world/news-article

5 “From an already shocking record low of 29.7 in March, the composite PMI slumped to 13.5, which forecaster Capital Economics said would equate to a 5 per cent quarterly drop in GDP.”Hans van Leeuwen “EU skirts crisis with $1.7trn rescue deal”The Australian Financial ReviewApril 25-26, 2020 (page 11)

6 Silvia Aloisi “No tourist a drain for luxury shops.”The Australian Financial ReviewJune 2, 2020 (page 33)

7 Hans van Leeuwen “Another dump truck of dosh for gasping euro zone”The Australian Financial ReviewJune 2, 2020 (page 26)

8 Michael Smith “China goes for tech autonomy'The Australian Financial ReviewOctober 31, 2020 (page 12)

9 The Economist “The Fruits of Growth” January 2-8, 2021 (pages 20 and 21)

10 George Soros "An effective response to Europe's fiscal paralysis"The GuardianDecember 1, 2020www.theguardian.com/business/

11 Garcia Cano “US jobless claims reach 26m”The Australian Financial ReviewApril 2020 (page 10)

12 Andrew Sheng and Xiao Geng “China’s more bankable in a crisis."The Australian Financial ReviewApril 25-26, 2020 (page 38)

13 THE WALL STREET JOURNAL “Resilient US economy rises from the near-dead”June 8, 2020

14 Karen Maley “The weak link in China’s recovery plan.”The Australian Financial ReviewJune 22, 2020 (page 28)

15 History of Basel Committeeswww.bis.org

16 Martin Wolf “What the world can learn from pandemic”FINANCIAL TIMESNovember 26, 2020www.ft.com

17 “About 30 Million Workers Are Collecting Jobless Benefits”The New York Times July 24, 2020www.nytimes.com