Correction or Crisis?

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After almost seven years of relative calm and stability, a stock market crash is finally upon us.

This is a very predictable crash stemming from a very widely known cause. Hundreds of analysts including myself — following the trail illuminated by Michael Pettis — have for a long time been banging on about a Chinese slowdown gathering an uncontrollable momentum, sending China into a panic, and infecting global markets.

What’s less clear yet is whether this is a correction or a crisis. My view is toward the latter, simply because confidence is fragile.  Once the animal spirits of the market turn negative, it takes a heck of a lot to soothe them. And the markets look increasingly spooked. The fear is rising. Last week I tweeted that I felt the risks of a new financial crisis are greater than ever.

The reasons why are simple: Western central banks have gone a bit nuts, and are trying to hike rates even though inflation is close to zero even after interest rates being at zero for seven years. And Western governments have gone a bit nuts (especially in the eurozone and Britain but also to a lesser extent in the United States) and are trying to encourage growth with austerity even though all the evidence illustrates that austerity is only a helpful policy in a booming economy, not in a slack one.

Those two factors weren’t too destructive in an economic situation where there was moderate economic growth. More like a minor brake on growth. Keep swimming forward, and sooner or later inflation will rear its head, and rates will have to be raised. But with a stock market crash and a growth downturn, and an unemployment spike, and deflation, things get very problematic very fast.

Let me explain how I think this plays out: interest rates are at zero. Inflation is almost at zero, and a stock market crash will only push that lower. Simply, this is the bottom falling out of the bottom. A crash here is like falling off the bicycle in spite of the Fed’s training wheels. Unconventional monetary policy has already been exhaustively tried, and central bank balance sheets are already heavily loaded with assets purchased in quantitative easing programs. Now the Fed’s balance sheet does not excessively concern me — central banks can print all the money they like to buy assets up to the point of excessive inflation. But will that be enough to reverse a new crash?

Personally, my doubts are growing. At the zero bound, I believe Keynes was right, and fiscal policy is the best answer. The post-2008 economic landscape has been defined by monetarists trying desperately to perfect new tools like quantitative easing to avoid outright debt-financed fiscal policy. But there have been problems upon problems with the transmission mechanisms. Central banks have succeeded at getting new money into the banking system. But the drip of that money into the real economy where it can do its good work and create growth, employment and prosperity has been slow and uneven. The recovery is real, but weak, even after all the trillions of QE. And it has left us vulnerable to a new downturn.

If the effects of the crash cannot be reversed with monetary policy, that leaves fiscal policy — that old, neglected, unpopular tool — to fight any breakouts of deflation or mass unemployment.

Or it leaves central banks to try really radical policies that emulate the directness of fiscal policy, like literally throwing money out of helicopters or OMFG.

Is Jeremy Corbyn The Answer?

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Labour’s defeat in the 2015 election may have been as much of a function of demographics as anything much else. As I wrote earlier this week: “Britain is greying, and older people tend to be more conservative.”

If that’s the case, then the deck will be stacked against Labour in 2020, and even more so after constituency boundary changes that will help the Tories and hurt Labour.

Still, the question that Labour members and supporters should be asking themselves is: which one of the candidates can beat the Tories in 2020?

As a political movement, only in power can you wield power. In opposition, you — and your supporters — are the earth in front of the steamroller of power.

That’s not necessarily a call to reject Jeremy Corbyn, though. There are legitimate reasons to think that he might be the best choice on these terms.

My doubts about Corbyn begin with his portrayal as overly leftish. If Ed Miliband was perceived as too left wing for the British electorate in 2015, why would Corbyn — who is a good few swathes of territory to the left of Miliband — be right for an even greyer and more conservative Britain in 2020?

A second factor is that Corbyn is already on the defensive over alleged associations with anti-Semitic figures. I’m not in any way suggesting Corbyn is an anti-Semite — or wilfully associated with anti-Semites — but the tone of the conversation makes it look like a troubling factor in winning a general election against a hostile Tory press.

Furthermore, his conciliatory language toward such groups as Hezbollah, Hamas, Maduro’s Venezuela and Vladimir Putin’s Russia offers even more ammunition for the Tory press to use against him to portray as a dangerous choice for prime minister, just as they did to Ed Miliband. And that is the case even if his words were meant to open dialogue rather than endorse a particular set of views or policies.

And further, it would seem to split the Labour parliamentary bloc. The Tory press will ask the question: how can we expect him to lead the country when he can’t even lead his own party?

Still, it is hard to ignore what Corbyn has stirred up in the leadership battle. It looks increasingly like what the SNP has managed to stir up in Scotland. Hundreds of thousands flocking to register as supporters. A genuinely optimistic alternative vision of the future. As George Monbiot writes in The Guardian: “Labour’s inability to provide a loud and proud alternative to Conservative policies explains why so much of its base switched to Ukip at the last election. Corbyn’s political clarity explains why the same people are flocking back to him.”

Monbiot quotes openDemocracy‘s Ian Sinclair comparing Corbyn to Margaret Thatcher, noting she was: “Divisive, hated by the press, seen by her own party as an extremist… [and] widely dismissed as unelectable. The Tory establishment, convinced that the party could win only from the centre, did everything it could to stop her.”

Corbyn is a conviction politician like Thatcher, with a vision of radical change. Corbyn’s leadership election opponents aren’t. They tend to advocate chasing after the electorate. That is not necessarily a stupid thing to do. It worked to get Blair and Cameron elected. But times change. Chasing after the electorate — and reinforcing Tory myths about the necessity of slashing the deficit, reducing immigration and reducing public spending — didn’t work in 2015 for Labour. It just helped the Tories portray Labour as incompetent on their own terms. Corbyn won’t re-inforce deficitphobe myths. He is a principled anti-austerian in a field that otherwise concedes the narrative almost entirely to the Tories. And his economic views have a good deal of credibility and support from economists.

In the end, I chose not to back Corbyn as Labour leader. It just looks to me like too much of an uphill struggle to win in 2020 — or earlier should Cameron’s majority of twelve fall — from Corbyn’s position. But I might be wrong. And I will be happy to see him elected Labour leader and given a chance to change the narrative.

On the Dehumanization of Immigrants

Britain is in the grip of a worrying trend.

Our own Prime Minister compared migrants in Calais to insects when he called them a “swarm”.

Meanwhile, internet comment sections relating to the refugees are filled with hatred and venom. Asylum seekers are referred to as “invaders”, and the trolls encourage the British authorities to shoot them, to machine gun them, and hang them on meat hooks.

This dehumanization of immigrants frightens me. Not simply because dehumanization of large groups of people often foreshadows violence. It frightens me because this is just the tip of the iceberg. There is a lot more of this hateful stuff bubbling beneath the surface of our society. Anti-immigrant sentiment has been swelling in Britain for the last two decades, gently encouraged by tabloid journalists and other intellectually lazy people looking for an easy scapegoat for the economic and social problems of the age. As Richard Seymour noted last year in The Guardian, “77% of people in the UK want immigration reduced, and 56% want it ‘reduced a lot‘”.

Britain has been subject to soaring inflows of immigration in the past twenty years. This has meant large-scale changes to the fabric of society, some of which people may like, but many of which they may not. And there is an additional burden on public services. IPSOS-Mori, for instance, found that there is a strong correlation across Europe between anti-immigrant sentiment and people’s perception of strain on public services. In that sense, anti-immigration sentiment in itself may not be entirely irrational.

Still, it does ignore the fact that there may be cleaner solutions to Britain’s problems than simplistically blaming immigration, and trying to clamp down on human movement. None of the strains on public services, health care and infrastructure would exist if only the government would properly scale investment in infrastructure and public services to demand. Immigrants pay more taxes than they draw out in services, so immigration has hardly made such investment unaffordable. Not to mention the billions of pounds in cheap lending that the private market made available to the government at negative real rates during the last parliament — money that could have been invested in infrastructure and public services — but which the government passed on.

As America — with its millions of undocumented migrants — is discovering, trying to stem flows of humans is very hard. People are slippy, and they go where they wish. Walls and fences are impediments, but they are not absolutes. People can be incredibly singleminded. The stories of the migrants in Calais who have escaped warzones, famines and despots in Africa and the middle east to slip into Europe, and across the Channel are a testament to the resilience of the human will. That resilience is why the anti-immigration internet trolls are setting their sights upon machine guns and meathooks and other such savagery. Walls and barbed wire and officers with searchlights and sniffer dogs isn’t working.

In the bigger picture, as anti-immigrant sentiment has swelled, there may be an overflow into the demonization and ostracization of ethnic minorities, even those who are here legally. Even those who were born here. Even those such as myself who were born here and are the children of white, English mothers. Even, perhaps, to white Britons who favour multiculturalism and immigration. The data shows that Britain is getting more racist, with 1 in 3 admitting to racial prejudice, up from 25 percent in 2001.

In the long run, I have no doubt that the economic benefits of migration — it’s estimated that completely open borders would roughly double global GDP via more efficient matching of workers and firms — will win out and that humanity will become increasingly transnational, and postnational, and ultimately interplanetary.

But for now, with this tidal wave of anti-immigrant and increasingly racist sentiment, I feel frightened at what my own country — a country that I have lived in my entire life — might be becoming.

Don’t Mention The War

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It is wrong to suggest that people should be held accountable for the actions of their ancestors. Blaming each other for the deeds of our ancestors is the cause of vast tracts of human suffering and conflict. Tribes and nations have fought each others for centuries — and, in some places, continue to do so — based on the actions of that tribe or nation’s forefathers. This is irrational. We cannot change the actions of our ancestors. That is perhaps one reason why John Cleese’s portrayal of an idiot hotelier beating down his German guests with a spiel of cringe-inducing World War 2 and Nazi clichés is so absurdly funny.

That being said, we do have a responsibility to learn from and not repeat the mistakes of our ancestors. Failure to learn from the mistakes of one’s ancestors is the point at which the actions of past generations become relevant in a discussion of the present.

There is a line of reasoning that suggests that the first person to compare their opponent to Adolf Hitler or Nazism in an argument on the internet just lost the argument. I tend to see this view as generally correct. The acts and beliefs of the Nazis were unusually horrific, and comparing your opponent or the person or group you are criticizing to the Nazis is often an act of rhetorical desperation, and often a symptom of a lack of imagination. However, what is generally correct is often locally wrong. Sometimes, a Nazi or World War 2 analogy really cuts to the core of a problem.

This, I believe, is one of those times. Having the German government and its allies trying to dictate to the Greek people the terms of Greece’s euro membership, the standards by which they should run their government, and economy, and civil service, and welfare state must feel painfully close to a new German occupation. Greece is a country, we should not forget, that suffered greatly under a German military occupation less than a lifetime ago. It is now experiencing a brutal and prolonged economic depression at the hands of a new generation of austerity obsessed Germans.

Greece has been a willing victim for German austerity. The Greeks have taken Merkel’s medicine. Greece has done a huge amount of spending cuts, so many in fact that by 2012 they had a primary surplus.

Unfortunately, Merkel’s and the Troika’s medicine was a load of horse shit. Instead of recovering, the Greek economy just got even more depressed. Unemployment has been at Great Depression levels ever since Merkel and the Troika began dictating how the Greeks ran their economy. Greek real GDP continues to trend downward. Indeed, Europe itself remains in an epic depression. The austerians keep making it worse.

Now, nobody is saying that the Greeks are blameless. Obviously, they took on a load of relatively unproductive debt they couldn’t afford, and they colluded with financiers to falsify economic data to get into the eurozone. But the country has already suffered massively as a result of those decisions (which of course were not Greece’s alone — the creditors clearly did not do their homework).

The goal now should be getting Greece — and the wider continent and world, which would also suffer greatly from a default cascade or economic slump as a result of the Greek crisis — out of the mess they are in. What Greece really needs is debt forgiveness. Even the IMF recognizes that Greece’s debts are unrepayable. But that is not Merkel and Schaüble’s goal. Instead of recognizing that their policies have failed, and that a change in course is necessary, their goal for Greece is complete capitulation to the stormtroopers. Their goal for Greece is punishment, in order to set an example to other euro members who might get into fiscal trouble.

The great irony — and the thing that makes the Nazi references really begin to stick — is that earlier German governments received massive debt relief. Indeed, after Germany started the Second World War — which killed 50 million people, including 6 million who died in the holocaust — it had its war debt written off, allowing the West German economy to begin to recover and rebuild. Indeed, Germany was the biggest defaulter of the 20th century. Yet now the very descendants of those Germans refuse the same treatment for today’s Greeks, whose troubles pale against the crimes of Germany’s Nazi past.

This is sickening. Not only are they shredding to pieces the European unity and the European Union that has kept war-torn Europe at piece with itself for the past seventy years, they are doing it in the name of an ignorant program of austerity that does nothing other than punish and degrade. And they are doing it in complete ignorance of how their own ancestors benefited from others’ forgiveness. Do they not understand the value of European unity? Of economic growth? Of peace or prosperity?

In choosing the path of sadomasochism, punishment and German supremacism, Schaüble and Merkel and their allies are risking turning what is already a terrible depression for the continent — and a ravaging for Greece — into something deeper, gloomier and more painful.

Deflation is Here — And The Government is Poised to Make it Worse

Consumer prices may not be deflating as quickly as Labour’s electoral chances did earlier this month, but — even after £300 billion of quantitative easing — price deflation for the first time in more than half a century is finally here. The Bank of England continues to throw everything at keeping prices rising at close to their 2 percent target. Yet it’s not working. And this is not just about cheaper oil. Core inflation has also been dropping like a rock.

I argued that “deflation was looming” for Britain last year, and feel a little vindicated that it has come to pass. But I don’t feel at all gratified about the thing itself.

In a highly indebted economy such as Britain’s — where private debt dwarfs government debt — deflation is a dangerous thing. Past debts — and the interest rates paid on those debts — are nominally rigid. Unless specifically stipulated as being inflation-adjusted (like TIPS) they don’t scale to price changes in the broader economy.

Under positive rates of inflation, inflation assists in keeping debt under control, by shrinking the present amount of goods and services and labour that equate to a nominal amount of currency. Under deflation, the opposite process occurs, and the nominal value of currency — as well as that of historical debt — rises, making the debt harder to service and pay down, especially with the ongoing accumulation of interest.

On the face of it, that is good news for net savers and bad news for net debtors. But raising the difficulty of deleveraging and debt service can often be bad for both, because debtors who cannot pay default, bankrupting themselves and injuring their creditors. It can also depress the economy, as individuals and firms are forced to stop spending and investing and start devoting more and more of their income to the rising real cost of deleveraging.

With growth last quarter dropping to 0.3 percent from 0.6 percent, this process might very well already be under way. This raises the prospect of the nightmarish debt-deflationary spiral above.

The last thing that the economy needs under that circumstance is more money being sucked out of it through slashing public spending. Sucking money out of the economy will make deleveraging even more difficult for debtors, and slow growth further as individuals and firms adjust their spending plans to lower levels of national and individual income. Yet that is the manifesto that the country elected to power in the election earlier this month. And although Osborne and Cameron can get out of it — via offsetting cuts in spending with tax cuts — if they go through with their election promises, the prospect of recession, continued deflation and rising levels of unemployment loom clearly.

What the economy really needed in 2010 was a deep and long commitment to public stimulus to provide the economic growth needed to let the private sector deleverage. Unlike the public sector, which is a sovereign creditor borrowing in its own currency — the private sector is far from a secure debtor. Private borrowers can — unlike the central government — “become the next Greece” and run out of money.

With interest rates in the last parliament having sunk down to new historic lows, such a thing was affordable and achievable. Instead, by trying to do public deleveraging at the same time as the private sector was deleveraging Osborne, Cameron and Clegg chose a much rockier path, one in which private deleveraging and public deleveraging are slow and grinding. With private debt levels still very high, the country remains vulnerable to another deleveraging-driven recession.

Confessions of a 21st Century Lionel Robbins

Marx said that history does not repeat itself.

But sometimes, history does. This may be particularly true in the domain of economics and economic knowledge.

Economics is a complex subject. It is the study of a series of abstractions (markets, firms, governments) built upon abstractions (money) built upon abstractions (value), a great metaphysical muddle stacked up to the sky like a wobbly Jenga tower.

At a simpler level, economics is the study of human behaviour, or as von Mises put it, human action. Business cycles from the boom to the bust are a great cavalcade of individual human action and individual decisions. The sum of individual decisions manifests itself as the market. And the behaviour of the market informs future individual decisions, in a great self-reinforcing spiral of feedback.

The question of what the government should do in a bust is one particular realm where little progress has been made since the Great Depression. Indeed, perhaps future historians will refer to the current economic malaise as Great Depression II, given that in various polities including Britain and the eurozone the depth of the slump in gross domestic product has been greater and longer than that in the 1930s.

Why? Well, the urge to purge is strong. And I say that as a former austerian — someone who has done a good deal of urging for purging.

The logic goes that a crashed market is a sick market. A corrupted market. So let the sickness kill off the weakness. Let bad firms fail. Let the bad investments fuelled by false expectations fail. Let resources be reallocated from the unproductive to the productive. Then — through harsh market discipline — market participants will learn lessons that set the stage for abundant new economic growth. As Paul Krugman notes, Friedrich Hayek called for: “the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending.”

It’s a simple call: no bailouts, no stimulus spending. In fact, cut government spending to balance the budget. Stop subsidising the unproductive. Let the voluntary market of savers, investors and spenders sort itself out.

The trouble is that it doesn’t really sort itself out. And we have a good deal of empirical evidence to back up that idea. The more austerity, the deeper the slump.

Lionel Robbins — who went on a similar journey away from austerianism, only eighty years earlier — reached this conclusion:

Whatever the genetic factors of the pre-1929 boom, their sequelae, in the sense of inappropriate investments fostered by wrong expectations, were completely swamped by vast deflationary forces sweeping away all those elements of constancy in the situation which otherwise might have provided a framework for an explanation in my terms. The theory was inadequate to the facts. Nor was this approach any more adequate as a guide to policy. Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and the easing of capital markets by fostering the disposition to save and reducing the pressure on consumption was completely inappropriate.

To treat what developed subsequently in the way which I then thought valid was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.

This is a powerful debunking of David Cameron’s confidence fairy logic. The idea that the answer to an economic malaise is to slash spending, slash welfare and let the market sort itself out is a bit ridiculous. It is very much denying blankets and stimulants to people who have been thrown into an icy pond. The great irony is that the brunt of the cuts are falling not upon the drunk market speculators who caused the financial crisis, but vast swathes of disabled and poor who had nothing to do with it.

In the face of Cameron’s austerity policy, the UK had the slowest recovery since the South Sea bubble in the 18th century. And the UK’s recovery only really began when Cameron paused the austerity. With more austerity now, we risk another recession.

The trouble, I think, is that government austerity looks very superficially plausible. It looks the responsible thing to do.

For an individual or as a firm, austerity in a slump can be a very sensible choice. For an individual or firm, getting into an unsustainable level of debt risks going bankrupt. And while it is not incoherent to suggest that someone in debt trouble take on more debt as a means to dramatically increasing their income — for instance, through entrepreneurship — it is undoubtedly a major gamble.

But for government, it’s very much the other way round. As Keynes noted, government spending is an awful lot of people’s incomes. Even if some businesses are cheered by the “fiscal responsibility” shown by a government willing to slash spending, many other businesses are going to be less cheered as their revenue falls due to the falling incomes of the individuals and firms who rely on government spending for a portion of their income.

That’s not to say that it is impossible that slashing spending in the middle of a recession may under some theoretical circumstances be consistent with a fast-recovering economy. But in the overwhelming majority of cases, it is a very, very major gamble that does not pay off. It hasn’t paid of in the eurozone since 2008, it didn’t pay off during the Brüning years in Germany, and it didn’t pay off for Cameron and Osborne, who were forced to pause austerity in 2013 with the economy flatlining. And in a very major vindication for Keynesian thinking, not only did that precede a recovery but it was also the turning point on the government deficit as a percentage of GDP. Once the slashing stopped, the deficit began to fall fast. So the responsible thing to do was to rack up government debt, allow the government to channel resources back into the economy, and let the economy recover.

This is all very counterintuitive stuff. It is hard for its discoverers to spread, which is why it has to keep being rediscovered again and again and again. I am sure there will be people in the 22nd Century who have to learn this lesson, too.

Tesla & The New Economics Of The Coming Renewable Energy Boom

I don’t need to tell anyone of the importance of Tesla’s expansion into home battery technology. A home battery lets you store solar energy to use when the sun isn’t shining, which is a really, really major thing in terms of power distribution. As I’ve been pointing out for years, this is the crucial missing link between photovoltaic cells being a rapidly, rapidly cheapening technology with a lot of rollout potential, and photovoltaic cells being the major source for the world’s power. As I predicted in The Week in 2013:

The promising trends in technology and cost suggest much more than renewable energy becoming the fastest growing energy source in the next 30 years. They suggest that renewables will grow to be the number one energy source in the United States and the world in the next 30 or 40 years.

I’d say that that was actually an overly conservative projection. I now foresee solar to be number one in the next twenty, if not the next ten years.

It’s nice to live in the knowledge that renewable energy will overcome problems posed by diminishing oil reserves and (at least) mitigate anthropogenic climate change. It’s nice to know that as solar efficiencies continue to increase and solar manufacturing costs continue to fall that the long term trend for energy costs is down.

And you can do a heck of a lot of cool things with cheap, decentralized energy, like heating and lighting your home, manufacturing goods and technology and food and tools, and powering computers and artificial intelligence.

This, in my view, is the furnace to power the next fifty or a hundred years of soaring mid-20th century style economic growth. This is the beginning of an energy-driven economic supercycle — which takes us from the era of handheld computing to the era of building asteroid mining space stations and extraterrestrial colonies and maybe even interstellar spacecraft. It’s the main reason why I switched from bearish to bullish in 2013.

But what I really want to know is how to make money out of this trend. If photovoltaic cells and batteries are the new crude oil, coal, gasoline and natural gas (etc), does that mean Musk’s firms (Tesla, SolarCity, SpaceX, etc) are going to be the next Exxon-Mobil or Shell or Gazprom?

Maybe. But I’d tend to see renewable energy and emerging tech index funds as a slightly smarter bet. The trouble is that we’re at a very early stage in the supercycle.

An imperfect analogy: Xerox made an operating system akin to Windows years before Microsoft and Apple did, but Microsoft and Apple were the ones who reaped the bigger rewards. There are a whole load of factors that could dramatically affect which renewable energy systems are the ones that dominate the market: interface, battery-photovoltaic cell integration, price per unit of energy, price per unit of storage, durability and probably some others. And also a slew of more superficial factors such as marketing. If this is going to be as big as I think it is there will be a lot of competition from outside the renewables sector not least from firms like Google, and Apple and Facebook and Samsung as well as from older energy giants like BP, Shell and Exxon-Mobil.

For now, of course, Musk does seem to be establishing himself as the market leader and trendsetter in much the way Steve Jobs once did. But that could all change. It’s even not just a matter of competing firms. Just as the internet decentralized information distribution, and solar is on the cusp of decentralizing energy production, the whole manufacturing and (I’d argue) product design paradigm is edging closer to being transformed by another set of emergent technologies: 3-D printers and home manufacturing. Maybe as home manufacturing begins to become more prominent, open-source collaborative product and component design will beat out the current proprietary model.

The main takeaway here seems to be that this is an incredibly exciting time to be alive. We’re all set to get a lot richer from this, whether or not we bought Tesla at an early stage, just as people in the early 20th century didn’t have to buy Standard Oil shares to do well from that other energy revolution.