Systemic Failure in the Global Economy

Systemic Failure in the Global Economy

Systemic Failure in the Global Economy

Systemic Failure in the Global Economy

Synopsis

Just as contemporary economics failed to predict the 2008-09 crash, and over-estimated the subsequent brief recovery that followed, economists today are again failing to accurately forecast the slowing global economic growth, the growing fragility, and therefore rising instability in the global economy.

This book offers a new approach to explaining why mainstream economic analyses have repeatedly failed and why fiscal and monetary policies have been incapable of producing a sustained recovery.

Expanding upon the early contributions of Keynes, Minsky and others, it offers an alternative explanation why the global economy is slowing long term and becoming more unstable, why policies to date have largely failed, and why the next crisis may therefore prove even worse than that of 2008- 09.

Systemic fragility is rooted in 9 key empirical trends: slowing real investment; a drift toward deflation; money, credit and liquidity explosion; rising levels of global debt; a shift to speculative financial investing; the restructuring of financial markets to reward capital incomes; the restricting of labor markets to lower wage incomes; the failure of Central Bank monetary policies; and the ineffectiveness of fiscal policies.

It results from financial, consumer, and government balance sheet fragilities exacerbating each other -- creating a massive centripetal force disaggregating and tearing apart the whole, untameable by either fiscal or monetary means.

This book clarifies how the price system in general, and financial asset prices in particular, transform into fundamentally destabilizing forces under conditions of systemic fragility. It explains why the global system has in recent decades become dependent upon, and even addicted to, massive liquidity injections, and how fiscal policies have been counterproductive, exacerbating fragility and instability.

Excerpt

Half way through the second decade of the 21st century, evidence is growing that the global economy is becoming increasingly fragile. Not just in fact, but in potential as well. And not just in the financial sector but in the nonfinancial sector—i.e. in the ‘real’ economy.

The notion that the global crash of 2008–09 is over, and that the conditions that led to that severe bout of financial instability and epic contraction of the real economy are somehow behind us, is simply incorrect. The global economic crisis that erupted in 2008–09 is not over; it is merely morphing into new forms and shifting in terms of its primary locus. Initially centered in the USA-UK economies, it shifted to the weak links in the advanced economies between 2010–2014—the Eurozone and Japan. Beginning in 2014, it shifted again, a third time, to China and emerging markets where it has continued to deepen and evolve.

It is true that the main sources of instability today are not located in the real estate sector—the subprime mortgage market—or the credit and derivatives markets that were deeply integrated with that market. Nor is the real economy in a rapid economic contraction. The problem in the real economy is the drift toward economic stagnation, with global trade and real investment slowing, deflation emerging, and more economies slipping in and out of recession—from Japan to Brazil, to Russia, to South Asia and Europe’s periphery, even to Canada and beyond. On the financial side, it’s the continued rise of excess liquidity and debt—corporate, government, and household— that is fueling new financial bubbles—in stocks in China, corporate junk bonds, leveraged loans, and exchange traded funds in the US, government bonds in Europe, in currency exchange and financial derivatives everywhere.

Financial instability events and crashes, and the real economic devastation that is typically wrought in their wake, do not necessarily occur in repeat fashion like some video rerun. The particulars and details are always different from one crisis to another. At times it’s real estate and property markets (USA 1980s, Japan 1990s, global 2007). Other times, stock markets . . .

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