If I was a conventional economist this might leave me to feel pretty smug. All I would need to do to comfort myself that all was well would be to look at the growth data, admire the record highs in the most important global stock markets and conclude that the system was working pretty well.
Unfortunately, it isn’t remotely that simple. The growth is remarkably fragile and so is the system that produced it.
The evidence of a lack of stability is not hard to find. The cause of that negative growth rate in 2009 was a major crash in global financial systems that started in 2007 and continued right through 2008. Financial institutions became so remote from reality that they issued and sold complex financial products that were worth three times the economic output of the entire world. The panic that emerged when it was discovered how dodgy these financial derivatives were almost destroyed the entire economic system. Something that would have produced mass misery as cash machines and just in time delivery supermarkets ceased to function.
Instead of spending the last ten years systematically fixing this problem and making sure it could never happen again our world leaders have chosen to ignore the most significant causes and hope they will go away. On paper a lot has been done to require banks to hold higher levels of deposits and to try to separate ordinary banking from speculation. In reality nothing has been done to address the fundamental insecurity. Great walls of footloose money are still being moved around the globe in micro-seconds. Money has become genuinely global and free of all meaningful international guidance and control. This produces wild fluctuations. One minute the economy can be roaring ahead full of confidence. Then as investors realise that they have all bought in to the same illusion they shift into utter panic and the market crashes. Inflicting huge pain on ordinary people in the process.
There is no effective international system to manage and control these booms and busts. When the last bust happened, we escaped disaster because the national central bankers in a few key countries took the very hard decision to bail out the financial system by printing money and nationalising debt-ridden banks and companies. In the US $3 trillion of easy money was pumped into the banking system and in the UK £400 billion was created to shore it up. Governments took on huge debts in order to shore up the financial companies who had created the problem yet the asset managers kept their bonuses and profits. Savers put up with ten years of near zero interest rates so that a proportion of their savings was effectively stolen from them. Workers in several counties like the UK found that their wages were forced down in real terms so that they are poorer now than in 2008. People who depended on government services were told that they had to tighten their belts and accept austerity.
Incredibly the governments and the central banks that cobbled together that solution in a series of utterly panic driven meetings didn’t learn from the experience. Ask most politicians or economists what went on in 2008 and you will get one of two explanations. Either they will tell you that it was just bad luck. One of those things that happens every now and then and governments can’t do much about. Or they will tell you that we got into difficulties because of profligate governments giving too much money to the poor.
What actually happened in the last ten years was that government rescued the private sector by transferring the losses that had been made by wild speculations onto the books of governments and then inflicted the pain of dealing with those losses onto the backs of ordinary working people.
What needed to be done after the crisis was to create effective international controls over financial speculation. To make sure money couldn’t be hidden away in offshore tax dodging accounts. To tax financial transactions so that money was invested for the long term.
You cannot have a global economic system without effective global economic management. Yet even the best national leaders failed to recognise that glaringly obvious problem. Obama, for example, did a good job on a national level of restoring stability but seriously under-estimated the changes that are needed. He took over an economy in free fall losing hundreds of thousand jobs a week and handed to Trump an economy recovering fast and creating jobs. Yet many American people felt the pain he put them through in order to achieve this without spotting much sign of that same pain being inflicted on the people who caused their misery.
This made it easy for Trump to come along and offer a departure from reality and responsibility. Ignore the rest of the world and just focus on making America great again and all will be well was his fundamental message. The depth of anger and frustration within America was sufficient to bring him to power just as in the UK the same blind faith in an easy quick fix by shutting out the world gave us Brexit.
Trump is now trying to fix problems created by irresponsible capitalism by making it even more irresponsible. He has launched huge tax cuts, created a massive budget deficit and is systematically removing government controls over business practices.
This is exactly the right way to create a very large boom and an economy that roars forward. It is also exactly the right way to create an even bigger bust. This time onto a world where national governments are more divided and less capable of acting. They have already played all their cards and have little ability left to tackle a fresh crisis. You cannot easily lower interest rates when they are at near zero. You cannot easily print new money when inflation is starting up. You cannot easily inflict another ten years of austerity on populations that still have lower incomes than they did ten years ago and on government services which are creaking at the seams.
No one can date when the next bust will come. Few economists doubt that it will. For what it is worth, I expect Trump’s boom to roar away for all of 2018 and most of the following year and I expect that throughout that period we’ll be told what a genius he really is and how badly we all misjudged him. Then I expect a massive bust to occur. With an insecure irresponsible fantasist in charge of managing the consequences.
And that is only half of the problem. I want to use my next blog to look at the other huge instability at the core of our economic system. The impossibility of continuing to use our environmental capital as if it were revenue. And, of course, also the utter immorality of doing so.