Factories even in India and China no longer require as many hands. Efficiency gains in processes and technology mean that fewer people can do more

Is global recession around the corner?

Markets have tumbled after the US Federal Reserve (Fed) decided not to raise interest rates on September 17. It declared that “recent global economic and financial developments may restrain economic activity.” This is code for Chinese economic woes that are making the global economy wobble. Compared to other major economies, the United States is currently the healthiest. Yet as Shakespeare once put it, “something is rotten” in the global economy and the Fed is caught in a bind. Raising rates may lead to recession. Keeping rates low might not help either. It is increasing asset prices and deepening inequality, without necessarily warding off recession.
Not too long ago, markets were all powerful. James Carville, the fellow who plotted Bill Clinton’s path to power, wanted to be reincarnated as the bond market instead of President, pope or baseball star. Today, Carville would like to be Janet Yellen, the chair of the Fed. Her power stems from the financial crisis of 2007-08. Markets and financial institutions have been propped up by the torrent of money released by central banks to stave off a worldwide depression. Central banks led by the Fed have certainly avoided economic disaster, but how long can they keep the party going? Like a spinning top losing momentum, the global economy faces the risk of tipping over into recession.
At the heart of the matter are three unresolved economic contradictions.
First, debts have grown much faster than GDP since the Great Recession. Global debt is now over $200 trillion, inching toward 300% of the world GDP. On July 4, this author pointed out that the Greek debt crisis marked the beginning of the end of debt-fueled global financial system. The fiction that all debts can be repaid cannot be regarded as truth anymore. Issuing new debts to pay back old debts as in the case of the Greek bailout will not work for much longer.
Second, the continuous devaluation of currencies is unsustainable. Historians observe that declining empires and crumbling economic systems tended to debase their currencies. The content of gold or silver in Roman or Mughal coins fell as the strains on public finances and the wider economy increased. The lowering of interest rates and quantitative easing is the equivalent of printing more money and is the de facto debasement of currencies. This debasement is competitive and is a de facto trade war as each country tries to outdo another in a desperate attempt to encourage bank lending, increase investment, stimulate consumption, boost exports and lower imports.
Devaluation has another consequence. The world is certainly not producing dramatically greater quantities of wheat or cars. The supply of services such as accounting or law have not increased much either. Yet there are more dollars, yuans, euros and other currencies sloshing around. This generally leads to inflation, but the global glut of labour has kept wages down. So, the prices of assets instead of bread or haircuts are going up. Those who own apartments in New York and shares of Facebook are laughing all the way to the bank. Those who serve as baristas are not so thrilled. This is creating a new society of masters and serfs, which is not quite as sustainable as it seems.
Third, the economy is suffering from a mismatch of supply and demand. There is no shortage of the supply of socks, iPhones and email accounts. Yet the US, still the richest country in the world, has crumbling infrastructure. Its roads, airports, ports, public transport and schooling system are in shambles. There is clearly an unmet demand for better infrastructure. In emerging economies, there is massive demand for drinking water, basic health care and primary schooling. Yet supply lags demand by a long way.
What is going on?
There are over 7 billion people on the planet. A vast majority of them are earning their living selling their labour. Factories even in India and China no longer require as many hands. Efficiency gains in processes and technology mean that fewer people can do more. With the emergence of artificial intelligence, which is worrying technology savants like Elon Musk, there will be even fewer jobs. In the global labour market, demand is decreasing while supply is still increasing. Some economists posit that the service sector shall step in to create new jobs. Yet there is a limit to the number of nannies, cleaners, yoga instructors, masseurs and bartenders that the economy can support.
Blind trust in markets and technology à la Marc Andreessen cannot solve the global jobs crisis. This in turn is leading to a demand crisis. If people find it harder to get jobs and jobs themselves pay less than before, then how will they keep consuming the stuff that the factories are geared to produce. Central banks are trying to get the butcher, the brewer and the baker to keep producing by printing money. Yet how long is this possible, and how can the global economy keep growing?
Voters are starting to grasp this conundrum and are reacting accordingly. Jeremy Corbyn, a bearded old-fashioned man of the Left, is the new leader of the Labour Party in the United Kingdom. Corbyn was an unknown entity until very recently, and he won because his party and his country are starting to chafe against privilege and inequality in a deeply divided society. The likes of Margaret Thatcher and John Major who came from humble roots are no longer in fashion, as Old Etonians like David Cameron and Boris Johnson strut the stage in a manner befitting the 1950s. Corbyn, a parsimonious chap, is a modern day Roundhead taking on Cavaliers.
Australia witnessed a coup too. Tony Abbott, the none too pleasant prime minister, has been ousted by Malcolm Turnbull, the brash former chairman of the Australian Republican Movement that aims to get rid of the British monarchy. One Catholic Rhodes Scholar has replaced another, but the new fellow has more progressive views on abortion, stem cell research and same-sex marriage. The reason Turnbull won, though, was because his party regards him as a safer steward of the economy.
After years of boom, Australia is stumbling after living off a commodity-driven export bonanza led by Chinese demand. Even in idyllic Australia, “the times they are a-changin” and the world is facing the spectre of a global recession again.
Livemint

Factories even in India and China no longer require as many hands. Efficiency gains in processes and technology mean that fewer people can do more

Is global recession around the corner?

Markets have tumbled after the US Federal Reserve (Fed) decided not to raise interest rates on September 17. It declared that recent global economic and financial developments may restrain economic activity. This is code for Chinese economic woes that are making the global economy wobble. Compared to other major economies, the United States is currently the healthiest. Yet as Shakespeare once put it, something is rotten in the global economy and the Fed is caught in a bind. Raising rates may lead to recession. Keeping rates low might not help either. It is increasing asset prices and deepening inequality, without necessarily warding off recession. Not too long ago, markets were all powerful. James Carville, the fellow who plotted Bill Clintons path to power, wanted to be reincarnated as the bond market instead of President, pope or baseball star. Today, Carville would like to be Janet Yellen, the chair of the Fed. Her power stems from the financial crisis of 2007-08. Markets and financial institutions have been propped up by the torrent of money released by central banks to stave off a worldwide depression. Central banks led by the Fed have certainly avoided economic disaster, but how long can they keep the party going? Like a spinning top losing momentum, the global economy faces the risk of tipping over into recession. At the heart of the matter are three unresolved economic contradictions. First, debts have grown much faster than GDP since the Great Recession. Global debt is now over $200 trillion, inching toward 300% of the world GDP. On July 4, this author pointed out that the Greek debt crisis marked the beginning of the end of debt-fueled global financial system. The fiction that all debts can be repaid cannot be regarded as truth anymore. Issuing new debts to pay back old debts as in the case of the Greek bailout will not work for much longer. Second, the continuous devaluation of currencies is unsustainable. Historians observe that declining empires and crumbling economic systems tended to debase their currencies. The content of gold or silver in Roman or Mughal coins fell as the strains on public finances and the wider economy increased. The lowering of interest rates and quantitative easing is the equivalent of printing more money and is the de facto debasement of currencies. This debasement is competitive and is a de facto trade war as each country tries to outdo another in a desperate attempt to encourage bank lending, increase investment, stimulate consumption, boost exports and lower imports. Devaluation has another consequence. The world is certainly not producing dramatically greater quantities of wheat or cars. The supply of services such as accounting or law have not increased much either. Yet there are more dollars, yuans, euros and other currencies sloshing around. This generally leads to inflation, but the global glut of labour has kept wages down. So, the prices of assets instead of bread or haircuts are going up. Those who own apartments in New York and shares of Facebook are laughing all the way to the bank. Those who serve as baristas are not so thrilled. This is creating a new society of masters and serfs, which is not quite as sustainable as it seems. Third, the economy is suffering from a mismatch of supply and demand. There is no shortage of the supply of socks, iPhones and email accounts. Yet the US, still the richest country in the world, has crumbling infrastructure. Its roads, airports, ports, public transport and schooling system are in shambles. There is clearly an unmet demand for better infrastructure. In emerging economies, there is massive demand for drinking water, basic health care and primary schooling. Yet supply lags demand by a long way. What is going on? There are over 7 billion people on the planet. A vast majority of them are earning their living selling their labour. Factories even in India and China no longer require as many hands. Efficiency gains in processes and technology mean that fewer people can do more. With the emergence of artificial intelligence, which is worrying technology savants like Elon Musk, there will be even fewer jobs. In the global labour market, demand is decreasing while supply is still increasing. Some economists posit that the service sector shall step in to create new jobs. Yet there is a limit to the number of nannies, cleaners, yoga instructors, masseurs and bartenders that the economy can support. Blind trust in markets and technology la Marc Andreessen cannot solve the global jobs crisis. This in turn is leading to a demand crisis. If people find it harder to get jobs and jobs themselves pay less than before, then how will they keep consuming the stuff that the factories are geared to produce. Central banks are trying to get the butcher, the brewer and the baker to keep producing by printing money. Yet how long is this possible, and how can the global economy keep growing? Voters are starting to grasp this conundrum and are reacting accordingly. Jeremy Corbyn, a bearded old-fashioned man of the Left, is the new leader of the Labour Party in the United Kingdom. Corbyn was an unknown entity until very recently, and he won because his party and his country are starting to chafe against privilege and inequality in a deeply divided society. The likes of Margaret Thatcher and John Major who came from humble roots are no longer in fashion, as Old Etonians like David Cameron and Boris Johnson strut the stage in a manner befitting the 1950s. Corbyn, a parsimonious chap, is a modern day Roundhead taking on Cavaliers. Australia witnessed a coup too. Tony Abbott, the none too pleasant prime minister, has been ousted by Malcolm Turnbull, the brash former chairman of the Australian Republican Movement that aims to get rid of the British monarchy. One Catholic Rhodes Scholar has replaced another, but the new fellow has more progressive views on abortion, stem cell research and same-sex marriage. The reason Turnbull won, though, was because his party regards him as a safer steward of the economy. After years of boom, Australia is stumbling after living off a commodity-driven export bonanza led by Chinese demand. Even in idyllic Australia, the times they are a-changin and the world is facing the spectre of a global recession again. Livemint