Economies & The Illusion of Sustainability (#63)

For obvious reasons, all governments want to maintain sustainable and possibly endless growth in their economies as their political fortunes are in a large measure attached directly to the economy’s well-being; and in democratic countries, to the government’s re-electability. In that mission, to seek endless economic growth, the governments have increasingly corralled their Central Banks to assist materially by injecting direct doses of stimulus into the financial veins of their economic systems.

This is now the ‘new normal’, direct intervention by Central Banks to either prop-up a sagging economy, or, to try and prevent a downturn altogether. This ‘lazy man’s’ way to grow an economy has worked the past 4 decades or so, interspersed with regular recessions, and at least two spectacular market crashes (2000 & 2008).

This growing reliance on almost constant Central Bank stimulus has not only made most major economies addicted to regular doses of stimulus, but also created growing abnormalities and the suppression of economic fundamentals, such as, market based ‘price discovery’ of assets, and the ‘natural cycles’ of supply and demand that culled waste, deflated over-bloat, and reinvigorated competition.

Artificial stimulus also resulted in less focus on fundamental requirements of a national economy by the policy makers, such as the need for critical and long-term planning, productive investments, structural changes required due to the changing global environment of shifting supply and demand, the emergence of low-cost economies, and robotic jobs replacing technologies.

Through repeated ‘stimulus’, the economies are being sustained for the last few years in a lazier and ultimately more dangerous way; with growing national, corporate and personal debt, excessive speculation in assets markets, over reliance on Central Bank interventions to bail-out the speculators and their sponsors, the shortsighted policy makers, and the inevitable probabilities of potentially damaging resets.

In the US, Trump has thrown a spanner in the works of an otherwise growing economy with his multi-fronted trade wars and tariff impositions, on friends and foes alike, which destroyed decades of stable trade relationships between countries, and more importantly, he destroyed everyone’s trust in America.

Plus, the global disruption in trade that Trump caused, came in the teeth of a slowing global economy, which gave the deceleration some added impetus. The signs of a weakening economy are being recognized by almost everyone, especially by the Federal Reserve, which signalled its reversal in position from a tightening stance from just months ago, to a more accommodative one now.

Of course, never one to admit the damage he is responsible for, Trump is now desperate for massive interest rate cuts by the Fed to support the weaknesses he himself created, so much so that he threatening to ‘fire or demote’ the Fed Chair, Jerome Powell. But what he does not seem to understand is that the US cannot by itself escape the coming recession, as the global economies collectively continue to succumb to the downward drag, and no amount of ‘zero bound’ interest rates are going to be able to turn the global recessionary tide, to which the US will be a party.

Contributing to this general downward slide is the inexorable drag of China’s slowing economy, which is getting increasingly regular injections of liquidity from its Central Bank to little effect, as it continues its downward drift. The official GDP growth of China is stated at above 6%, but many who keep a closer tab on China, declare it to be at just above 3%, which for China is a huge problem, as it potentially triggers a host of other financial and social problems.

Collectively, the slowing Europe (including the Brexit battered Briton), and Asia, with much more subdued China and India, are in themselves too much weight for the US economy to resist single-handedly, and this is not including the political and economic disasters that are some of the major South American economies of Brazil, Argentina and of course Venezuela. So, a US recession seems almost a certainty regardless of the coming Fed interest rate cuts, and the accusatory, self-indulgent and counterproductive temper tantrums of Trump, against the Fed Chairman.

Perhaps a graphic image of what’s coming is Morgan Stanley’s ‘Business Conditions Index’ which fell 32 points last month, its sharpest drop since the Index was formed.

In spite of hype to the contrary, all is not right with the economy. The past months of deteriorating labor conditions portended the downturn that is now here, and the subsequent months are only going to confirm the onset of recession.

There have been many who have argued that ‘this time is different’, because of the unprecedented use of Central Banks to unleash ‘Quantitative Easing’, repeatedly, to stave off downturns. But the inevitable, such as economic downturns, can only be postponed indefinitely, they certainly cannot be eliminated altogether, even with the might of all the major Central Banks opening their collective spigots.

The reason being, ultimately, flagging demand from over burdened nations, corporations and consumers will result in the ‘Japan syndrome’ which no amount of out-of-the-ballpark stimulus has been able to reverse, in any sustainable way.

Some have pointed to the almost unbroken past-two-plus decades of Australia’s GDP growth, to argue that it is quite possible for the United States’ economy to also grow indefinitely. The difference there they are not taking into account is that due to the proximity to an emerging Asia (particularly China) two plus decades ago, Australia was the greatest beneficiary of the voracious appetites of Asia’s economies for resources.

China, and some of the other countries of Asia, devoured Australia’s resources, and in turn poured Billions back in investment dollars into Australia’s economy, real estate and the stock markets. Those exceptional conditions led to one of the longest unbroken expansions of economic growth of any country in the World.

The recent slowdown of China and Asia has broken that growth trend, and now Australia is experiencing the aftermath of an exceptional run-up, with falling asset markets, especially its red-hot real estate markets, and a slowing economy.

America’s situation is quite different, and while its real estate and stock markets have benefited from steady influx of foreign funds looking for returns and political safety, over the past decades, which contributed to the increase in asset prices, along with the Fed’s ultra-accommodating ‘creating the wealth effect’ policies, its economy could not possibly derive the same long term benefits as Australia’s.

And now, with Trump having created great angst and mistrust with friend and foe, along with material disruption in America’s trading relationships with its biggest trading partners, which is materially and very negatively effecting American businesses big and small (including agriculture), the US is in the exact opposite position of Australia, with retreating trading partners shrinking market share of their purchase of American goods and services, as countries scramble to wean themselves away from an antagonistic and unreliable America, while looking for other alternative suppliers.

China is the prime example of just such a strategy, as it cultivates other countries for trade in goods that it previously bought freely from America (soy beans from Brazil being just one example).

So while the Fed, the European, Japanese, Chinese and other major Central Banks re-prime the pump of Quantitative Easing, and some have already been pumping, the possibility of entirely dodging the next downturn is quite improbable, as the downturn is already here, assisted and accelerated quite ably by Trump himself, who took a steadily growing US economy and turned it into an unsustainable one.

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