By 2010 the world was expecting Barack Obama to start making a positive impact on their lives. He had said, “Yes we can!” and by 2010 the internet generation where asking “When?” Obama or not, there was an expectation for positive change, but growing uncertainty around how it was going to happen. This social and political frustration had economic consequences, not helped by a serious of environmental disasters. Europe was grounded by smoke and ash from an Icelandic volcano, while America watched an oil spill in the Gulf of Mexico go from bad to worse. The magical economic ingredient of ‘consumer confidence’ was in short supply. Only China and Australia appeared to be happy. The global village had become the grumpy village.
It is interesting to note that in 2008 when the global financial crisis stuck, there was a coordinated global response that resulted in governments bailing out private institutions and taking other measures to ensure financial liquidity. While nobody liked it, everybody knew it needed to be done. In 2010 cracks began to appear in this unity. It was as though everyone in the village had contributed something in response to a disaster and now they wanted their things back – with attitude. A particular favourite around this time was, ‘Why are we making sacrifices when the fat cats that got us into this mess are not even getting punished?’. It was clear that people really did not understand what needed to be done. Certainly each house in the global village took a different approach.
We will start with the house of the USA. It contributed the most to the GFC bailout, starting with a substantial $700 billion. It then added a further $3.2 Trillion in domestic spending in 2009. This was the biggest increase in Federal Government Debt ever, by anyone. It resulted in many commentators comparing it to a household with a small income and a large mortgage choosing to run up even more debt on the credit card. Certainly it was an approach to financial management that no other country in the world adopted. But no other country in the world has the advantage of having all their debt in their own currency. Remember how money is not real. This is especially true when you are the one that makes it. The US Treasury has been ‘printing’ money at a rate of $85 billion a month and paying off its debt with it. It is no secret, they just call it quantitative easing. So it took the USA around nine months to pay off their contribution to the GFC bailout – without calling on a single tax payer of any kind to do anything. The global market reaction to this was to devalue the $US dollar; a sensible reaction since if there are more dollars created each individual dollar is worth less. This also helped US businesses as it made them more competitive because their exports were cheaper and competitive imports were more expensive. It also helped keep the most dangerous of economic depression symptoms at bay – deflation.
The house of Europe took a different approach. It can easily be argued that it had to. A significant part of this is because it is more like a share-house than a household. Consequently its financial management is constrained by a constitution that was created by a committee for a different time and certainly different circumstances. At its core the constitution is inward looking, seeking to ensure that no member of the household takes undue advantage of any other member. In a paranoid house it has ensured there will be no winner, but unfortunately it does not ensure that they won’t all be losers. The fundamental flaw in 2010 was that the currency is too tightly tied to reality – there is not an option to simply make more Euros to get rid of the debt. As a result individual Governments are trying to pay off a debt with real money raised from real taxpayers. To do so they are taxing them more and spending less on them and trying to convince them that this is a good thing. Historically government austerity measures are more likely to lead to rebellion than recovery, and Europe should understand this better than anyone.
The house of Britain is different again. Having decided to retain their sovereign currency rather than join the Euro, they have so far failed to take maximum advantage of it. It is possibly a cultural thing that has them undecided on whether to follow the American or European example. Perhaps they are creating a ‘made in Britain’ version. Certainly the political debate on the subject is confused. In 2013, having implemented a £375bn quantitative easing program over 5 years (the USA generated more in just six months) they have chosen not to continue it due to concerns about inflation. They are also debating what to do with the financial institutions they invested in as part of the GFC bailout. Like their European counterparts they are failing to grasp the bigger picture.
The house of China is perhaps the most interesting. It had become the major trader in the global village and having earned more money than it spent, it had been banking it in America, specifically in American bonds. China’s response to America’s quantitative easing was to try to ‘bank’ its money elsewhere. It had two clear preferences, non-perishable commodities and domestic infrastructure. As major commodity exporters, Australia, Brazil and Russia were key beneficiaries of this decoupling between China and US Treasury bonds. China understood that the US dollar was not as real as it had been and found an alternative.
On the outskirts of the village, the house of Australia is another interesting example. With only limited exposure to the GFC it was still spooked by it, particularly as its housing market was inflationary. Hoping to avoid a similar housing market crash, its government embarked on a spending program that on a per head basis was not far behind the USA. It sent the government from a positive balance sheet to a negative one. To get a sense of the scale of this, it occurred at a time when the Chinese led commodity boom was generating record export revenue for Australia.
In another part of the global village, a new view was changing attitudes for a whole neighbourhood. The Arab Spring was beginning. While generally viewed as a social or political movement it is relevant to economics. As mentioned earlier, austerity measures are more likely to result in revolution rather the economic recovery. The Arab Spring is a warning to those in power north of the Mediterranean Sea and elsewhere in the global village that there are limits to what people will tolerate. Mass uprising against extreme wealth in the midst of rampant poverty has certainly happened before. The Arab Spring reminded the world that it can and will happen again. Unfortunately it rarely occurs without considerable pain for everyone involved.
Calm before the storm
In the second half of the 2010’s, at least five years after the global financial crisis the world economy was back on an even keel – even if it appears to be becalmed. Throughout the world people were hoping for the best and preparing for the worst. The overwhelming sentiment is to defend one’s own, although no one seems quite sure from what. Everyone appeared to be very keen not to create any enemies, and so matters of principal were hard to find.
Multi-national corporations are being treated very politely by governments. When they move parts of their business to other countries they are given understanding. When they arrive in a country they are treated generously with tax concessions and other financial incentives. They are able to use their multi-national presence to minimise the taxes and tariffs they pay. They are the teenagers of the global village moving from house to house feasting until they have overstayed their welcome then moving on before it is time to clean up the mess. Individual households (countries) in the global village hope the teenager they raised will grow up to be a major benefactor to them, but very few of them do.
The leaders of some households in the global village have watched this phenomenon and found a way to take advantage of it. They have created a Frankenstein version of the multi-national corporation in which the dominant shareholder, and sometimes the only shareholder, is a sovereign power. In this way they are able to extend their reach and influence into other countries in ways which would be unthinkable if they attempted it as a sovereign country.
It is a development that is very confronting to economic liberals and those who believe in free trade. We are at a point in time where some governments may be losing a battle they do not even know they are fighting. What happens next will depend on how they respond to this and several other major challenges confronting them in what I have dubbed the faceless economy.
Recap
- Reward for effort – reward for effort is very disparate
- Value is relative – governments are valuing ‘economic’ peace at any price
- Trade requires difference in value – trade slows when people change what they value
- Money is a catalyst – the US was able to ‘print’ its way out of debt
- Trade creates economic ecosystems – multi-national companies take advantage of being beyond the reach of individual governments
- Economic measurements are incomplete – because the money is the unit of measure for most economic measurements, currency volatility creates inaccuracies in economic measures