Will emerging markets come back?

I don’t often make reference to these kinds of things in my blog, but Saturday’s terrorist attack in the Kunming train station – in which 29 innocent people were hacked to death (the toll was especially high among the elderly who were unable to run away quickly enough from the killers) – fills me with dread and dismay. This kind of brutal massacre is not about sending a message to Beijing or to the world but is rather aimed at getting the authorities to overreact so as to create hatred within the country.

I truly hope it does not succeed. There is a great deal of anger here in China but so far, I am glad to say, excluding some over-the-top responses in the internet world the authorities and Chinese people generally seem not to be overreacting. I wish there were some way that we as individuals could of respond to the Kunming train station massacre but what is among the most awful aspects of this kind of insane event is the feeling of helplessness it creates. As individuals there seems to be so little we can do either to prevent this kind of behavior or to console the victims.

And it is not just in Kunming that things seem unsettled. Recent events in the Ukraine have capped several years of social unrest, revolution, and war around the world, and these seem to have intensified since the beginning of the global crisis of 2007-08. This should not have surprised us, and we should probably brace ourselves for several more years of political uncertainty. In late 2001 I published an article with Foreign Policy discussing what I expected the world to look like following the global crisis that I, perhaps a little prematurely, was expecting imminently.

In the article I pointed out that in the past 200 years we had experienced a number of globalization cycles, driven largely by deep changes in monetary conditions, that followed a pattern regular enough to allow us to make some fairly confident predictions. We were, I argued, living towards the end of one such cycle, and when underlying liquidity conditions changed, we were likely to see the same sort of things that we had seen in previous cycles. Among these, I wrote:

Following most such market crashes, the public comes to see prevalent financial market practices as more sinister, and criticism of the excesses of bankers becomes a popular sport among politicians and the press in the advanced economies. Once capital stops flowing into the less developed, capital-hungry countries, the domestic consensus in favor of economic reform and international integration begins to disintegrate. When capital inflows no longer suffice to cover the short-term costs to the local elites and middle classes of increased international integration – including psychic costs such as feelings of wounded national pride – support for globalization quickly wanes. Populist movements, never completely dormant, become reinvigorated. Countries turn inward. Arguments in favor of protectionism suddenly start to sound appealing. Investment flows quickly become capital flight.

These predictions about what the world was going to look like in the next several years were easy to make, I argued, because they occurred so regularly. One of the predictions that I should have made, but didn’t, was that after the globalization process had been reversed we were likely to see an upsurge in war, revolution, conflict and social unrest. These, after all, were events we usually associated with the end of previous globalization cycles, but at the time I wrote the article (published less than two weeks before the 9/11 terrorist attack) it really seemed that the world had changed in some subtle but profound way and that we had become too sophisticated to engage in such disruptive behavior.

I should have known better. I have spend much of the past two decades trying to show how persistently historical patterns reemerge, and why the claim that “this time is different” is almost always wrong, and yet I believed that when it came to revolution and war perhaps this time really was a little different. International institutions were strong enough, I believed, to manage the kinds of pressures that normally emerged from a reversal of many years of globalization.

This turns out perhaps not to be the case. Watching the news on television, especially events unfolding in the Ukraine, leaves me with a sense that we haven’t figured out how to manage these pressures. The recent rout in emerging markets has left a lot of people very confused about the direction in which the global economy, and developing countries more specifically, are going, but it turns out that once again we should not have found recent events at all surprising. They are part of the globalization cycle.

There was no “decoupling”

But once again we wanted to argue that this time was different. For several years we had been hearing that the global crisis of 2007-08 marked some kind of inflection point that signaled the decoupling of developing countries from the advanced countries of North America and Europe. The argument, as I understand it, was that the developed countries of Europe and North America had got themselves caught up in a debt-fueled consumption boom, of which the crisis was the culmination and the beginning of the process of reversal.

The developing world had, according to this argument, managed to untie itself from developed-country demand and its growth was now more likely to be driven by domestic demand arising at least in part from the more favorable demographics of the developing world. The growing middle classes, especially in China and India, were emerging to become a major focus of demand, and not only were other developed countries benefiting from this new source of demand, but eventually all countries would benefit from demand generated in the developing world.

I never found this thesis very convincing and completely rejected the “decoupling” argument. As I see, it the decade before the crisis was characterized by a series of unsustainable processes driven largely by structural changes in the global economy that tended to force up savings rates globally. In my view, the 2007-08 crisis was just the first stage of the rebalancing process, in which overconsumption in the developed world was forced by rising debt to reverse itself. But of course this couldn’t happen without equivalent adjustments elsewhere. The crisis now affecting developing countries is, as I see it, simply the second stage of the global rebalancing, or the third if you think of the sub-prime crisis in the US as the first stage and the euro crisis in Europe as the second stage.

To understand the link, we need to go back to the pre-crisis period. Ever since the 2007-08 global crisis, the world has suffered from weak global demand. Demand had been strong before the crisis, but this largely reflected the credit-fueled consumption binge, combined with a huge amount of what proved to be wasteful real estate development, unleashed as a consequence of soaring stock and real estate markets that were themselves the consequences of speculative capital pouring into countries like the United States and peripheral Europe.

The crisis put an end to this. After stock and real estate markets in the United States and Europe collapsed, and once financial distress worries constrained the ability of households to borrow for additional consumption, the great consumption and real estate boom in many parts of the world also ended.

Normally slowing consumption growth should also cause slowing investment. The purpose of productive investment today, after all, is to serve consumption tomorrow, but at first this didn’t happen. Instead we saw an intensification in 2009-10 of the credit-fueled investment binge in China, as well as in developing countries that produced the hard commodities China needed. This increase in investment was supposed to offset the impact of declining consumption in the west, and it certainly had that effect. The collapse in China’s current account surplus, for example, had almost no impact on domestic employment because it was offset by an astonishing surge in domestic investment.

This is what set off talk of “decoupling”. As weaker consumption and real estate investment in Europe and the US forced down growth in global demand, it was counterbalanced by greater demand in the developing world, driven in large part by China. Not surprisingly this meant that a larger share of total demand accrued to poor countries at the expense of rich countries.

Decoupling in the 1970s

But the process was not sustainable. In China well before the crisis we were already experiencing the problem of excess investment in manufacturing capacity, real estate and infrastructure. In developing countries like Brazil this was matched by investment in hard-commodity production based on unrealistic growth assumptions in China. Weaker demand in the rich countries, especially weaker consumption, should have reduced whatever the optimal amount of global investment might have been, especially as we already suffered from excess capacity. To put it schematically:

  1. Before the crisis the world had already over-invested in real estate and manufacturing capacity based on unrealistic expectations of consumption growth.
  2. The global crisis forced consumption growth to drop. This should have meant that if investment levels were too high before the crisis, they were even more so after the crisis.
  3. Instead of cutting back on investment, however, the developing world reacted to the drop in rich-country demand by significantly increasing investment, driven at least in part by worries that the consumption adjustment in Europe and the US would cause a collapse in export growth which would itself force unemployment up to dangerous levels. 

Clearly this wasn’t sustainable, and not surprisingly soaring debt is now forcing this investment surge to end. As a result, we are now going to experience the full impact of slower consumption growth in the rich countries, but instead of this being mitigated by higher investment growth in the developing countries, it will now be reinforced by slower investment growth in the developing world. Over the next few years demand will revive slowly in the US, not at all in Europe, and it will weaken in the developing world.

We’ve seen this movie before. In the mid-1970s the US and Europe were mired in recession as loose monetary policy in the 1960s, soaring oil prices, and many years of US spending on both the Great Society and the Vietnam War forced the US into an ugly adjustment. Instead of succumbing to reduced global demand, however, developing countries, flush with cheap capital driven by international banks eager to recycle burgeoning petrodollar deposits, intensified a developing-country investment binge that had already driven a decade of high growth for many countries. While the West suffered, they continued to grow, and for perhaps the first time in modern history excited bankers and businessmen spoke ecstatically about the decoupling of the developing world from growth problems in the US and Europe.

But the end result should have been predictable. Developing-country debt levels soared throughout the late 1970s, and once the Fed, concerned with US inflation, turned off the liquidity tap, excessive debt forced much of the developing world, and all of Latin America, into a “lost decade” of low growth, high unemployment, political turmoil and financial distress. In the 1970s of course the big capital push behind the surge in investment was driven by soaring savings in the Middle East, as oil revenues rose much faster than the ability of Middle-Easterners to increase consumption. Today the big capital push is driven by soaring savings in China, as structural constraints cause China’s production of goods and services to rise much faster than China’s ability to consume them.

The result is that over the next few years global demand will be even weaker than it has been since the crisis. Consumers in North America, peripheral Europe, and the newly rich middle classes around the world are still cutting back on consumption to pay down debt. Investors in China, Latin America and Asia are finally responding to overcapacity and soaring debt by themselves cutting back on investment. But if we all cut back our spending to service our debts, paradoxically, our debt burdens will only rise, and the great danger is that rising debt burdens will force us to cut back even more, thus making the debt burden worse (and, by the way, forcing at least some countries, in both the developing world and in Europe, to default).

Nothing fundamental has changed. Demand is weak because the global economy suffers from excessively strong structural tendencies to force up global savings, or, which is the same thing, to force down global consumption. Lower future consumption makes investment today less profitable, so that consumption and investment, which together comprise total demand, are likely to stagnate for many more years.

Squeezing out median households

Two processes bear most of the blame for weak demand. First, because the rich consume less of their income than do the poor, rising income inequality in countries like the US – and indeed in much of the world – automatically force up savings rates. Second, policies that forced down the household income share of GDP, most noticeably in countries like China and Germany, had the unintended consequence of also forcing down the household consumption share of GDP. This income imbalance automatically forced up savings rates in these countries to unprecedented levels.

For many years the excess savings of the rich and of countries with income imbalances, in the form of capital exports in the latter case, funded a consumption binge among the global middle classes, especially in the US and peripheral Europe, letting us pretend that there was not a problem of excess savings. The 2007-08 crisis, however, put an end to what was anyway an unsustainable process.

It is worth remembering that a structural tendency to force up the savings rate can be temporarily sidestepped by a credit-fueled consumption binge or by a surge in non-productive investment, both of which happened around the world in the past decade and more, but ultimately neither is sustainable. As I will show in my next blog entry in two weeks, in a closed economy, and the world is a closed economy, there are only two sustainable consequences of forcing up the savings rate. Either there must be a commensurate increase in productive investment, or there must be a rise in global unemployment.

These are the two paths the world faces today. As the developing world cuts back on wasted investment spending, the world’s excess manufacturing capacity and weak consumption growth means that the only way to increase productive investment is for countries that are seriously underinvested in infrastructure – most obviously the US but also India and other countries that have neglected domestic investment – to embark on a global New Deal.

Otherwise the world has no choice but to accept high unemployment for many more years until countries like the US redistribute income downwards and countries like China increase the household share of GDP, neither of which is likely to be politically easy. But until ordinary households around the world regain the share of global GDP that they lost in the past two decades, the world will continue to face the same choices: an unsustainable increase in debt, an increase in productive investment, or higher global unemployment, that latter of which will be distributed through trade conflict.

Emerging markets may well rebound strongly in the coming months, but any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.


This is an abbreviated version of the newsletter that went out three weeks ago.  Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me at [email protected], stating your affiliation, please.  Investors who want to buy a subscription should write to me, also at that address.


 Add your comment
  1. Because I have already received three comments that were about political issues relating to the terrorist attack, I should warn readers that I will not approve comments unless they refer specifically to the economic issues brought up in this post — specifically about global demand and the impact on emerging markets. Sorry, but this is not the right forum on which to discuss or debate terrorism.

    • Ok so a real question then.

      Assuming that the theorem Savings=Investment is true, then when you write:
      “Demand is weak because the global economy suffers from excessively strong structural tendencies to force up global savings, or, which is the same thing, to force down global consumption.”

      Am I right to understand this to be identical to saying:
      “Demand is weak because the global economy suffers from excessively strong structural tendencies to force up global INVESTMENTS, or, which is the same thing, to force down global consumption.”

      This does not seem to square with your next sentence:
      “Lower future consumption makes investment today less profitable, so that consumption and investment, which together comprise total demand, are likely to stagnate for many more years.”

      In one paragraph you seem to be saying both that investment is being forced down and up. Please help clarifying this. Thank you.

      • No, savings and investments are determined separately, although they are always equal to each other. Savings are determined by the amount of income that is not currently consumed. Investment is driven by a number of things, including the cost of capital and the perception of profit. Because the two always balance to zero, if something forces up the savings rate in one part of the economy, either the investment rate must rise or the savings rate must be forced down in another part of the economy (or, of course, some combination of both). My next entry will explain exactly how this happens.

  2. As I see it the investment environment in far too countries around the world is not conducive to an investment led New Deal. Reform is needed on land ownership, on education, on female participation, on basic legal system and rule of law, on acceptance of different peoples, on immigration, etc, etc.

    I struggle to see how an investment led New Deal could be productive and return money to the investors. All I can see is that a lot of infrastructure would be built for sectional interests, sectional interests that have had opportunity to reform but for what ever reason haven’t taken important reform steps.

    • You may be right (although I am not convinced you are) but that is not really the point. I am only trying to show logically how the system must balance. The claim that it is impossible to find productive investment in infrastructure is hard to substantiate, I think, but whether or not there is, demand and supply must balance one way or the other.

  3. The new bubble is the influence bubble. As income disparity rises, fewer and fewer persons have the influence capital valuable enough to effect policy. Those that do are trying to consolidate it. Recent comments in the US from the 1% include having those whom do not pay taxes not being able to vote, or voting power proportional to taxes paid. In light of this, it is hard to retain any sort of optimism that things will get better before getting much much worse.

    Michael, what the world is really needs is a person like you political office. I don’t care which country you would run in, but I would contribute all I could to support you.

    • Glen, there is no movement to limit democratic participation in the U.S. Sure the Democrats hate identification cards and anything that requires any effort to demonstrate that you are indeed the person registered to vote, but these proposed laws operate around the fringe.

      The current debate on increasing the minimum wage has a lot of empathy from the public. Although Obamacare might be a tactical failure in the short run, politically it has pushed the debate to how do we provide the low wage uninsured healthcare.

    • Ha ha thanks, Glen, but I am delighted I do not have to make policy choices. I would find the political constraints extremely frustrating.

  4. Dear Professor Pettis:

    Thank you so much for your eye opening piece, I am curious regarding what your views on what will happen to Chinese outbound investment (especially in other emerging markets such as Africa) as the country continues to rebalance? Will it dry up (e.g. drop in demand in natural resources); transform significantly in nature (invoking the trend of Japanese firms which moved offshore following that bubble), or would you expect the size and nature of these investments to remain relatively constant?

    Thank you!

    • I suspect outbound investment will increase for reasons too complicated to discuss here, but that might be the subject of a longer piece.

  5. I’m not understanding what you mean by the term New Deal. Is that like a global version of FDR’s WPA?

    • In the context Mr. Pettis uses the term New Deal, the answer is basically yes. Besides investing in infrastructure spending to raise employment levels, FDR’s New Deal encompassed many reforms and regulation in banking, finance and other areas of the economy.

  6. Professor Pettis,

    It seems that the U.S. has already experienced most of the hangover from the consumption binge, and as the developing countries retrench and suffer from exporting demand abroad to us and overinvestment in productive capacity and their economies falter, the U.S., with its enormous consumer economy and demand which should be stimulated by the recovery and the shale gas/oil revolution could stand to gain with production continuing to increase at home to serve the domestic market, but I am worried about inequality stultifying the recovery and what could be twin problems of Dutch Disease in the U.S economy driving up the value of the dollar and the Chinese doubling down on beggar thy neighbor trade policies to try to prop up their staggering economy. That is certainly a recipe for conflict and a bad omen for the U.S. It is hard to make economic forecasts with so much up in the air. What do you think is the most likely outcome for the U.S economy in the next few years?

    • Just to move things around, the US has been exporting demand to emerging markets, and advanced countries (for decades).

      You won’t see a problem with Dutch Disease because of resources; although arguably the role the US plays, and misunderstanding of Americans regarding a strong USD is of concern for the debate, which is part of the obfuscation of the financial narrative, part of the confusion of social critics who lump together big business, and the part of normal people who think that rises in the cost of goods is related to news of dollar weakening, where the dollar is stronger against 90% or more of the currencies in the world than it was 20 years ago.

      OK, but Dutch Disease would be less of a likelihood in a large diversified economy like the US, even were we to pump oil like Russia and Saudi Arabia combined, it would be unlikely we would suffer from Dutch Disease because our exports would be moderate, even at that level.

      But in a way the US does suffer from Dutch Disease because of the use of its currency in international trade, the use of its “highly liquid” markets in assets, and then exports, were the US a much larger trading country, than Dutch Disease might be a problem.

      This points to the Buffet plan, conceptually to lessen those problems.

      China can not double down. I suspect its wealth to income levels to be at, or higher than Japans when they burst, and higher than Europe’s, which is having problems deleveraging their banks, and are 1.5 times the US’s.

      So, Michael might be right, in that there is room for the New deal in the US, if done right, because, contrary to the US just prints money thesis, its wealth to income ratio’s are on par with Germany, and there is room to pump it up a bit, as the rest of the world delevarages.

      China doesnt prompt up its economy by beggar thy neighbor policies, it diverts trade and investment by them, on a mass and scale that can’t be matched anywhere in the developing world, thus it limits the developing worlds trajectory, outside of commodity producers, China’s economy is by and large investing for energy, infrastructure, more manufacturing, and commercial and real estate development. The real question, is as it can’t do that for much longer, what will happen to all the workers in construction..

      • I agree that we will not see any kind of Dutch Disease in the US, but inequality is very important and has huge implications for demand. Please see my next entry, where I try to work them out.

  7. It has been chosen over the past decades to liberalize global trade between countries with salary costs ranging from 1 to 10. Under such a framework, it seems inevitable that relatively more developped – hence higher cost – countries should try to lower their household share of GDP to defend their competitiveness. But only a few did, like Germany for instance. Now that many of them are forced to do it, either through internal devaluation like Southern Europe or through currency depreciation like the US and Japan, because they have reached their debt limit hence their import limit, it seems clear that the export- driven model of many developping countries will have to adjust so that growth is more driven by internal consumption than by external demand and investment geared towards export. But, instead, it seems that many emerging markets are also trying to regain competitiveness through currency devaluation. Perhaps, because excessively cheap capital led them to over-invest in 2009-2010 and that they have also deteriorated their debt burden and are therefore under the same pressure to generate income to deleverage than many developped countries. At this stage, it seems to me that we have reached an impossibility: it is not possible for everybody to devaluate against everybody else simultaneously. So, now what? Is it up to the IMF to enforce a fixed but adjustable exchange rate regime that will compensate salary and productivity level across countries and therefore force down these stubborn imbalances? Or do we reach the conclusion that free trade is only possible between countries of similar living standards, otherwise it leads to global labor arbitrage and declining labor share globally. That was Maurice Allais conclusion.

    • I think we need to do a lot more thinking about globalized free trade and the way in which it may force countries to compete by reducing demand, which of course is not possible if we all do it. It will only result in higher unemployment. Unfortunately both proponents and opponents of free trade treat it as a revealed truth, and do not consider that under certain conditions it is wealth enhancing and under others, not. That is really how we need to think about it.

      • Over the past few decades, the successive rounds of trade liberalization through the WTO have been sold to the public with the promise, based on Ricardo’s theory of comparative advantages, that free trade would be mutually beneficial and wealth enhancing for all participating nations. That was the economic theory and the political promise.

        Sadly, the results are a little different. Let’s take a real example: at end 2000, just prior to joining the WTO, China had total-debt-to-GDP of 131%. At that time, the US had total-debt-to-GDP of 174%. Thirteen years later, at end 2013, China has 201% debt-to-GDP and the US 246%. Irrespective of the fact that one country (China) was consistently a net beneficiary of global trade over that 13 year period and one country (the US) was consistently in net deficit, both countries end up materially more in debt. That’s quite remarkable. Net worth is what is left once debt has been deducted, so if relative debt has increased, relative wealth has decreased. It looks like free trade has been mutually wealth destructive for both countries.

        Again, huge gap between the dominant economic doctrine – taken for established truth and repeated over and over again everyday and everywhere – and the actual evidence.

        Indeed, a lot more thinking to do. Thank you for your contribution to this fact-based economic thinking. We need it pretty badly.

  8. Something I don’t understand about all this is that, at some point, certain countries cross over the threshold from being developing to developed. The U.S. obviously had to go through this at some point, as did Japan, etc. On the surface of it though it looks like since the Asian ‘tiger’ countries made the crossing, not very many countries have changed status, and a few European countries almost look in danger of sliding across the divide in the reverse direction. Is this just a kind of nation-level consequence of worsening income inequality?

    • I find it remarkable at how few countries have made this transition. Outside of the traditional developed world, which I label as Western Europe, North America, Australia, New Zealand etc only to my mind have Japan, the entrepôt economies of Singapore and Hong Kong and possibly Chile, made this move. For me one of the best posts on here was a piece Michael did on social capital, which I think explains a lot of this.

      • ….and Korea and Taiwan. I think some Eastern European countries will join this group in the foreseeable future.

        I agree, though, that this is a limited group with the right social capital. As Mitt Romney said in the midst of the 2012 U.S. Presidential campaign when visiting the Mideast, “Culture Does Matter” in creating prosperity. Believe it or not, the U.S. press tried to attack him for saying this. As if national prosperity was a complete matter of luck, the press and the U.S. Left like to play the moral equivalency game.

        • Uruguay, GCC, Israel, Maldives

          Slovakia, Slovenia, Estonia ?!?!?!

          • not Maldives, but Czech

          • It’s hard to see countries making the transition into “developed countries” with the current global economic conditions. Presuming the global economy eventually redresses the current imbalances and begins a sustained period of global growth, I can see several countries making this transition in our lifetime.

            Poland, Czech Republic and Hungary all have strong cultural factors including proximity to Germany. This depends on Germany and the rest of the Euro Zone getting their act together. Yes, I heard Slovakia and Estonia were emerging economies.

            I also think Vietnam and Thailand are good longer-term candidates in Asia.

            Yes, Israel is probably already in the club. I’m not sure about Uruguay. I have to presume you are joking with Turkey, Mexico and Botswana.

          • Middle Income Curse: Middle Income = 1 -15,000 USD (Nominal)
            1-5 = low middle
            5-10 = middle Middle (middle income curse is traditionally in the 5-6K region, although some like Stephen Roach, are using far higher numbers, I assume he is talking of PPP)
            10-15 = High Middle Income

            Above 15k, advanced wealthy country.

            On PPP measures,
            Botswana is 17K (PPP), so an advanced economy, 7.6k (Nominal USD), still above traditional 5-6k range that is the number associated with middle income curses

            (but perhaps these need to be altered due to 2000’s and doubling of GDP, where a fair is bit is bloat)

            turkey is 18.3K (PPP), 10.3 K nominal

            Mexico is 15.6 (PPP), 11.2 K nominal

            Vietnam is far lower, and 73% of population is still rural, where incomes are very low, only recently reached the middle income status, surpassing 1,000 USD (Nominal)

            Thailand 10.8 (PPP), 6.5 nominal

            Israel @ 36K on both

            Uruguay @ 17k on both

            Malaysia 18.5 k (PPP), 12.2 K nominal

            Of course percentage of GDP that is consumption would matter.
            GINI would matter.
            Trade dependency ratio’s would matter.
            Composition of trade would matter.

            But the typical transition point as I remember is suppose to be around 5-6K USD nominal.

        • Not Japan. It was already an advanced economy well before the 1920s. Also I don’t really think of Israel as an example of an undeveloped economy becoming a developed one. Its history is too idiosyncratic for it really to have been “underdeveloped”. I am basically stuck with Singapore and HK, which as small, trading entrepots are irrelevant as models, some OPEC sheikdoms, which are rich but not developed, South Korea, Taiwan and perhaps Chile, with the former two having succeeded only under the very special conditions of the Cold War. Overall it is not a pretty picture. Poor countries can reach middle-income status, after much struggle, but they rarely go the next step.

  9. Excellent article Michael. The G20 has indeed already signaled that a global New Deal is in the works with their target of two trillion in infrastructure spending over the next few years. The major developed nations have already acknowledged that slow growth as a result of excess capacity in China and falling consumption in the developed markets will conclude with a long period of poor employment numbers. It is why we are going to see fiscal initiatives taking the place of monetary retooling to correct the imbalances of the past. The burden will fall on taxpayers and I anticipate that the highest income earners will be paying heaviest at the tolls as countries seek to ameliorate both a disenchanted public suffering high unemployment while taking steps to balance the wide gulf in income equity. I appreciated your observations of the interplay between savings rates, consumption, investments, the globalization cycle and why governments are keen to get a global New Deal underway. This is well worth the time you might have to expand on the ideas presented especially as we are entering a period when some countries will seek to be cannibalizing each others trade to maintain employment numbers and export advantages at home. I also foresee sovereign defaults as an outcome. We cannot all devalue our currencies together after all. Certainly not if the expected outcome is going to be genuine growth. I am looking forward to your next installment.

    • It would seem to me, what I suggested back in 2008, that Asia, should collectively revalue upwards, together, say 25%…..it would also be a test of their ability to contribute, a la greater voice and inclusion regarding global governance, such could have a number of benefits, better were it to have happened in 2008, but:

      ability to refocus to domestic demand
      they are the man competitors of each other, so, a mutual rise would nullify impacts
      where their policies have been trade diversionary, rather than trade creative, the movement of small amounts of production would have beneficial expectational impacts on other developing regions, the developed world and global growth, even supporting their Asian exports in the process.

      the developed world would shrink as a percentage of global GDP marginally, but the benefits could reinvigorate others, push consensus toward raising domestic consumtion in Asia, and support dynamics more broadly.

      Yet, while free traders and global fiannce is singing the tune of comparative advantage, where many have gotten used to the engineering of GDP, many might not see the dire necessity of the transformation, and where the world is filled with paranoia, some might see it as the nefarious plan of the external other, rather than a way to get to the light at the end of the tunnell

    • Thnaks, Farmer, again I urge you to read the next posting.

  10. Prof. Pettis,

    I want to get your take on the geopoltical implications of the world’s demand shortage and where the demand is going to come from. In the developed world, we have the largest level of public debt ever seen in peacetime. It also seems like we’re heading for a more turbulent world for the reasons you point out in your blog post. That being said, is it a good decision to run larger deficits to fix a demand shortage in a situation where war and civil unrest could become a serious problem? Is it worth running larger deficits in such a situation or would it be a better situation to take some austerity, cut some social welfare spending, and use the revenue from higher taxes to fund infrastructure?

    I also want to get your take on the impact of civil unrest on the price of food, oil, and natural gas. In many parts of the poorer world, it’s common to see 50% of their income go towards food and in similar places, they spend lots for energy as well. If we do see wars and civil unrest break out, isn’t there a significant risk of a sharp rise in the prices for food and energy? In the developed world, we may be rich enough to absorb such a rise, although it may come at a high cost. However, the developing world would be hit very hard by such a scenario. What are the risks of something crazy like this happening?

    • A lot of questions, Suvy, but in my 2002 Foreign Affairs piece about what the world would look like after the next global crisis, I suggested that the historical precedents suggested a surge in political turmoil, both internal and external. That seemed then like a pretty safe bet. If policymakers understood this they might want to be extra cautious on these issues.

  11. Michael,

    Is there any known correlation between protectionism and income equality? The 1920s-30s US seemed to be a high point of global trade, and also high income inequality. In the 50s and 60s, global trade faded as there weren’t many factories left in Europe, and income inequality seemed to subside. Now we are at a new globalization peak.

    Although it’s an anathema to most economists, is it possible a dollop of protectionism would help lessen income inequality, and the instability caused by this inequality?

    • Ralph Gomory, an economist that I hold in as high esteem as Michael, has written about this before.


    • It might, Andao, and if it does I think it would because it would create “traction” for the demand impact of demand-stimulating polices, including income redistribution. The worry is that if any country acts to stimulate demand, and especially if this entailed a rise in debt, part of the demand consequences would flow abroad while all the costs would stay at home.
      Again, we really need to figure this out in a non-ideological way. Free trade was revealed neither by god nor satan. It is simply a policy, and like all policies it is wealth enhancing under certain conditions and wealth destroying under others. It would be helpful if we could figure out those conditions.

      • The conditions would imply political choices in addition to evolution’s in economics.

        I believe that you have addressed this, or it might be another, or synthesis of many other and you, but, it seems that your model addressing construction of GDP, consumption and Savings (investment), is a big part. I think, like anything, a certain inertia of actors eventuates. Can be assumed the prerogative of rentiers, and that is a large part, but then also the, rather than groupthink, system-sustain, where this is what people know, what seems to have worked, not to rock-the-boat, it has worked so far, etc….

        I think that institutions, and enlightened self-interest need progress concurrently.

        As economies progress through modernization, inevitably they have to build out the institutions, that enables society to progress as the economy progresses.

        But, alas, with the movement, evolution, and advancement of the world (economics, technology, production, standards of living, population, etc…etc…etc…), I think that countries are moving into post-industrial societies, far sooner than in the past. The fact is, more and more, countries will have to derive their GDP internally, and from Services.

        While many can build out productive capability, more are expectant of the same, and such is necessary due to demographic trends, but, productive capacity is advanced globally, over-capacity.

        Then, there is the problem, that much of the world has asset bloat, out-sized relative to the real economy, largely poor, lower income societies, with very expensive assets.

        Not dissimilar to some small city in China, a few hour plane ride from Shanghai, building 40% more houses than people need, and hoping that people from Shanghai and Beijing will buy the weekend home there. But, then there are dozens of such cities, and thousands of locales globally.

        So these lessons will be built in as economics, and the lessons of economics, advance.

        Of course, one would want market forces to prevail, rather than planning, to lesson the prerogatives of elites and rentiers, where society advances, but some level of moderation of expectations needs to accompany useful economic decision-making.

        Problem is, most people, many people, even at the lower strata of global society, are able to meet more of their needs, more and more easily, that moves people further toward “remote control”, impulsive, masters of my universe thinking, where things are hope to be had, ever and ever more easily, and quickly, and within my lifetime, of course.

        Inevitably, much will change, because, from MENA to LatAm, from South Asia to Africa, people will need, due to demographic trends, produce more within their borders, and GDP, will inevitably come from this, but have to come, more and more from intangibles, which aren’t as valued as tangibles, by most people. Intangibles, self-empowerment and intrinsic motivation, outside of acquisitiveness of physical objects, must rise.

      • I don’t have anything of value to add to this discussion. I just wanted to say that I am encouraged by this comment about trying to evaluate different policy approaches from a non-ideological standpoint.

        I just started learning about this thing called “economy,” and with all the lingo and ideology flying around, I quickly decided I wanted to view different policy approaches as strategies and try to see under what conditions it is a good strategy, that it could be central planning is a useful strategy under certain conditions, that it could be deregulating markets is a useful strategy under certain conditions, etc. instead of pinholing myself in one ideology from the beginning.

        Thanks for making some of the information necessary for that available.

  12. With so many words about reform, 2014 GPD is still forecast at 7.5%. Debt rolling over until burst?

    • It seems the emerging markets are still (kind of) being held up by credit expansions in China and to a lesser extent loose money in the US and Europe. When one (or all) of these comes to an end the hammer will fall on the rest.

  13. Emerging markets are due for a lot more pain. The recent U.S. taper-induced selling was limited to retail investors mostly. As this crisis and the current geopolitical issues worsen, we will also see institutional investors exit emerging markets. With europe and the euro at their peak, the U.S. is the only market to absorb this capital and a subsequent dollar rally will squeeze emerging nations further.

  14. Dear Prof.,

    1. You have mentioned Japam, Taiwan and South Korea, what about Israel? It’s a new country which seems to have successfully transitioned, what about their model?

    2. I’ve been reading your last two books and having some difficulties understanding, is there any forum where your students are present and could answer some silly questions?


    • I know the books are being used in a lot of classes at a wide range of universities, but I really don’t know of any forum except this one. Ask away. As you can see there are a lot of very smart and helpful people commenting on this blog.

  15. P.S. What’s going on in Ukraine now started long time ago with the fall of the Sovier Union and so far there is no fighting, perhaps thanks to soft power push from the west — so, perhaps there IS truth to your first impression that things have changed.

    • I’m not sure the Ukraine is a good example of the challenges facing the global economy and global politics. After all, it had a very corrupt government and it does not have any of the “social capital” of which the Professor has discussed. Crimea is not Ukrainian other than an administrative determination made by Khrushchev in 1954. These post-USSR borders are very arbitrary just like some of the country boundaries drawn from fallen empires by the Treaty of Versailles. The Ukraine itself did not exist as an independent nation from the 17th century to 1991.

      • up until 1896 it was ukrainian, then transferred to Russia, and returned in 1954, if it had been initially taken by Russia from the Ottomans, but administered by a friendly ukraine.

        • Friendly Ukraine? Ukraine was a part of Russia/Soviet Union for three hundred years whether it was friendly or not.

          I don’t think most Americans care about Crimea and maybe even not an independent Ukraine. While we might be very uneasy about Russia trying to redraw borders by military force, most of us grew up with the Russians dominating most of Eastern Europe.

  16. Prof Pettis,
    It will take probably 20 years for the US young middle class to payoff the student loans. The federal debt 16 trillion prevents increasing substantially interest on deposits to transfer savings to the middle class. In addition, consumer debt is about 15 trillion. As the US failed to enact substantial consumption tax as it ran trade deficits ,from where the money will come from for the “New DEAL”? Besides construction investment is very inefficient way to transfer monies to the new middle class. So how the monies will be transferred to the US new middle class to create world demand.

    • Most US middle class savings would be in the form of 401K’s or pensions.
      US wealth to income ratio’s are significantly below other countries; similar to Germany’s, implying ability for movement in such, US debt is not 16 trillion, because a large portion of that is held by the Fed, which returns the interest the Treasury pays back to the Treasury, so its ownership, outside marginal costs of running the Fed is not a burden on the budget, same for other federal Vehicles for holding debt (or they buy new with interest, or others sales)

      Raise wages, eliminate tax expenditures that benefit higher incomes and corporate returning rates to what is in legal statutes without amendments, refocus grants to lower incomes, raise mortgage interest allowances for some income groups , on 1st mortgages above payments to encourage home ownership after people on mortgages for people in the same house for 5 years up to median house value prices for regions, provide more funds to the SBA, Create pools of challenge funds to foster innovation in government services that make government more efficient over the medium to long-term focused on small business start-ups,

      As the government assisted American companies in locating offshore, they can design support for them to re-shore; along SEZ models.

      Leverage fed assets into Public Private partnership for useful, productive infrastructure, (Broadband through natural gas pipes, and bridges, waster water treatment),

  17. Prof. Pettis,

    O/T: I’m a person that’s really interested in economics and finance, but I’m dismayed that much of what’s taught in modern day economics doesn’t really translate very well to what’s going on. We’re taught theories like the efficient markets hypothesis, we’re taught the reserve ratio on how banks lend from reserves, and stuff like that which doesn’t compare or work in the world we live in. What do you recommend that a student who has a strong interest in economics and finance take a look at and study? Most of the accounting aspects of economics along with money and banking are completely ignored in economics.

    My background is primarily in probability with a strong understand of statistics and I’m afraid to say that much of the econometric usage of mathematics in economics and finance just doesn’t work or apply. I do think it’s legitimate to use modern mathematical and statistical tools in understanding economics and finance, but the discussion of human behavior and uncertainty is fundamentally different from the physical sciences. On top of this, we’re dealing with evolving capital markets, which is a complete game changer. What do you recommend a student like me do?

    • Part of the problem is that too often economics behaves less like a science and more like a political ideology. The most recent Nobel Prize awards in Economics, where one person got a prize for one thing but another also got a prize that said exactly the opposite, is a symptom of this problem.

      That being said, the current situations is where theories go to die.

      • One would think that if it were too much dependent upon political ideology, where Nobel has long provided prizes, that it would be the opposite as what you state, not two, but merely one.

        With that said, I agree with you, broadly. It is too much the ideology of certain groups, their narratives, based in their interests, and then the ideology of some untested economic philosophies, based on an unreal suspended from philosophy, believed observation of what is, has been, the reasons why things have occurred, etc…

        theories are useful attempts to explain the world we observe, academics understand the limit of theories, problem is, lay people, believe that theories are “true” where they are only hoped to explain more, and usually only under very limited conditions, that do not obtain in the complex world we inhabit.

        Analyzing systems is far more useful to economics, than mere reliance on theories, but at many times, even under complex conditions, theories are very useful. Inevitably, they will be as limited as the humans that develop them.

    • I have always thought that probability was the most beautiful branch of math, but basically I don’t think you need much more than algebra and a little probability to figure out anything truly useful in economics. It has been pointed out again and again that the really complex math in economics goes largely to proving things that are either obvious or irrelevant. If you can add up enough to make the balance of payments balance, you are already half-way there. And I say this as a former physics student who loves math — it is not much needed in economics.

  18. Why another New Deal isn’t a viable solution in the US:

    1.) The New Deal generated huge amounts of government debt.

    2.) The US federal government is already deeply in debt and has huge unfunded future liabilities in Social Security and Medicare. According to the Congressional Budget Office we’re on the hook for more than $100 trillion. Just dealing with that will be a handful. It’s not likely it can continue to run up huge deficits, if anything we’re going to see a big reduction in federal government spending.

    3.) According to a UCLA study the New Deal actually prolonged the Great Depression by 7 years. http://newsroom.ucla.edu/portal/ucla/fdr-s-policies-prolonged-depression-5409.aspx

    Add to that we still had a 15%+ unemployment rate in 1939, how anyone can look at that and say the New Deal was a success is a complete mystery to me.

    4.) Even if it did happen it’s almost certain to be wasted on “green elephants” like lightrail for Detroit, a city that never has a traffic problem because it’s population is half what it was 50 years ago, building wind turbines and solar plants that don’t generate power when you need them, unviable green companies, etc. It’s no different from building things for the sake of building things.

    5.) China has already done a New Deal in 2008 and, as you have pointed out many times, it’s hugely exacerbated the imbalances instead of curing them. Japan has also done it’s fair share of New Deal spending in the 1990’s, and it’s still stagnant 20 years later and in a seriously deteriorating fiscal situation.

    In every case we’ve seen New Deal policies it always ended up delaying the inevitable downturn and left the government with huge debts. Japan was the Great Experiment in this kind of statist policies, and the results have been a failure. Instead of another New Deal, why not do something different?

    • Illumined,

      Liabilities, you are not using the recent data, but a worst case scenario from a decade ago, and these are 75 years in the future. It is IRRESPONSIBLE for you not to write without noting 75 years in the future; assuming nothing changes.

      economics is Ideology, but 75 year projections are assumed “real”, seems but another ideological perspective, then the rest of your writing, libertarian claptrap

      • Right now nearly half of the budget goes towards Medicare and Social Security. If anything history suggests governments hugely underestimate future demand for such programs.

        Since when was pointing out inconvenient facts “libertarian claptrap”? It’s really hard to have an intellectually honest discussion when people refuse to address real problems. It is irresponsible to ignore the fact that debt matters, that so many politicians do is how so many countries end up with huge fiscal crises (Sweden and Canada in the early 1990’s). Rest assured, this WILL come back to haunt us. Taxes will increase (which they should) and programs will be reformed/cut (which they should). But look at the bright side, at least we aren’t Japan yet.

    • This strikes me as an argument culled together to prove an ideological point. It is not at all an established fact that the New deal either “prolonged” the Depression or failed to create wealth.

      • Well it wasn’t supposed to prove any sort of ideology, I wrote it that way to make it easier for you to address them. It was intended to point out that there are a number of pitfalls that such a policy would have, one of these would be the explosion of government debt. As has been discussed right here by you on this blog, debt does matter, especially when it is spent on non-productive investments. We see this in China today that many of its infrastructure projects. We also saw this in Japan, and indeed still do with them building bridges to nowhere, highways that no one uses and even intersections that start and stop in the middle of a forested area with literally nothing else around for miles. My concern about another New Deal policy is that instead of spending more on needed maintenance (which is really what should be done) it will end up building bridges to nowhere, green elephants, and a variety of other non-productive investments. How is it ideological to point out these concerns?

        My question to you is, wouldn’t it be more effective to address the biggest root cause of the imbalance, our massive trade deficit with China with broad protectionist measures against their mercantilism?

        So what kind of a New Deal would I think is worthwhile? For one thing assuming we reformed entitlements to make them more fiscally sustainable, there’s a couple of things that would be good to pursue. One is increasing spending on maintaining existing infrastructure, not building anything new unless it is to replace what is already there. The other goal that should be pursued is to establish infrastructure in space and strongly encourage the private development there of. This might sound science fictiony but I assure you it’s not, space is to the Earth what the New World was Europe 500 years ago, a vast resource rich new frontier with massive untapped potential. Establishing ourselves there first is crucially important to our future and success as a nation. We should see the same kind of government effort and initiative as Europe took to settle the Americas.

        And as for the New Deal itself, how should we gauge the success of the policy? Wouldn’t returning unemployment to about it’s pre-depression levels (without drafting large numbers of men into the army) within a decade be a reasonable expectation and metric to determine whether or not it was successful?

  19. Let me answer my own questions to see if I learned from Prof Pettis books. Unemployment in the US will decrease regardless of economic conditions because of “baby boom” retiring which is larger than the new young generation. This will put pressure on some corporations to slowly increase salaries to compete for the workforce and some increases in minimum wage will help.

    The US economy will grow turtle pace for years because fast increase in GDP will appreciate $ and create conditions for assets skyrocketing because of influx of world monies as the only safe investment.

  20. Pettis Sir, Excellent as usual. A consumption driven growth in low demography dividend economies (US, EU) and export driven growth in high demographic dividend economy like China shall always end up in crisis.

    I had presentation titled “Global Linkages- Past, Present and Future” on similar lines few days back for my firm which I had uploaded on my blog

  21. Sir, would like to hear from you on the issue of internationalization of Yuan. there is buzz around that Yuan would eventually replace US Dollar as global reserve.

    Personally, I feel Yuan wont be able to replace USD, as China lacks geopolitical strength in Asia. Unlike US which simply rules the American continent.

    Furthermore, once China becomes a consumption driven economy it would turn into high retail inflation current account deficit economy like India. Usually currencies of such nations are not stable owing to high inflation.

    I would rather put my money on German currency to replace USD in future..High CAD, anti inflationary and leader in EU area

    Would love to hear your expert comments on this

    • This has been covered by Michael before. Check out the posts “It ain’t easy being green” and “the dollar the RMB and the euro” (among others) and the FT alphaville podcast “up shibor creek”.

      I think it’s more likely that the world turns to transnational SDRs of some kind than another currency replacing the dollar. Sadly for the US that’s probably sometime away and I cannot see any other alternative, euro, d-mark, yuan or otherwise.

      • The Euro is the most viable transnational currency, yes it has problems, but then IMF SDR will have the same problems (global fiscal union?)

  22. Seriously, it’s time to start printing money in the developed world, spend it on renewable energy, public transport

  23. M ,

    I have to admit that you are right. This is the only way fast to change the existing conditions. There is no other ways to control the GDP growth besides printing money under existing conditions. Increasing taxes on skyrocketing assets will never pass Congress. Prof. Pettis made clear you cannot stop bubble once it started. Increasing interest rates will skyrocket federal interest payments and kill the economy.

    Besides, there is no better miracle to stop economic malaise like a economic growth.

    • Doing as M suggests doesn’t deliver real growth, it delivers fake growth while setting us up for a bigger bust.

      1.) Printing money has a lot of negative consequences. Either you’ll end up with asset inflation like what we have now, or you’ll end up with high CPI inflation like what we had in the 70’s. In the first case the 1% benefit greatly as their net worth gets artificially inflated while the rest of us suffer through a “jobless recovery”. In the second case you end up with stagflation, which benefits no one.

      2.) Renewable energy has largely demonstrated to be the biggest bait and switch scam in history. The poster child is Germany, whose switch from nuclear to renewables has lead to skyrocketing electricity prices, an unstable grid, and an even greater dependence on coal and natural gas than ever.

      3.) Having excellent public transport is great, but we have to be careful with what we spend. Too often we end up falling in love with hugely expensive projects that deliver questionable benefits. Where I live we have this problem with the transit authority insisting on rolling out a new light rail line, which costs more than $1 billion, which will take the place of a frequent service bus line that goes along the same route, and which will saddle it with huge maintenance, debt servicing and depreciation expenses. This at a time when TriMet is saying they will have to cut bus service by 70% by 2025 in order to meet future pension and healthcare liabilities. While it is true the lightrail didn’t cause this problem, the added expense has hugely exacerbated it. People here are figuring out we can either have an excellent bus service or the light rail system, but not both.


  24. Weak aggregate demand, falling labor share of GDP globally, rising debt load, rising inequalities and global currency war are all the inevitable outcomes of globalisation as implemented for the past couple of decades.

    According to the International Labor Organization, there were 1.56bn people working in industry and services in the world in 2000 (i leave agricultural employement aside voluntarily). In 2013, they were 2.14bn people employed globally.

    Of the 1.56bn global workers in 2000, 424m were in developped countries and 1.13bn in developping countries
    World population was 6.1bn in 2000 so 26% employment to population ratio
    Say the 424m workers in developped countries earned an annual wage of $35k on average in 2000. That’s an annual income of $14.8 Tr
    Say the 1.13bn workers in developping countries earned an annual wage of $5.5k on average in 2000. That’s an annual income of $6.2 Tr
    That’s a global wage income of $21 Tr compared to world nominal GDP of $33.3 Tr, ie. a labor share of 63%

    Of the 2.14bn global workers in 2013, 458m were in developped countries and 1.68bn in developping countries
    World population is estimated at 7.1bn in 2013 so 30% employment / population ratio, higher than in 2000
    Say the 458m workers in developped countries earned an annual wage of $45k on average in 2013 (+2% p.a. since 2000). That’s an annual income of $20.6 Tr
    Say the 1.68bn workers in developping countries earned an annual wage of $11.7k on average in 2013 (+6% p.a. since 2000). That’s an annual income of $19.7 Tr
    That’s a global wage income of $40.3 Tr compared to world nominal GDP of $75 Tr, ie. a labor share of 54%

    I should make it clear that i don’t have exact statistics for median wage level for all countries, i’m simply using realistic orders of magnitude derived from individual countries wage level for illustration purposes. Certainly, the above back of the envelope calculation is consistent with the observation of declining labor share globally. Please let me know if you have more reliable median wage numbers.

    So, in the last 13 years, labor share of GDP has shrunk materially despite higher employment / population ratio. This is due to labor arbitrage by corporations, which have pocketed the difference. Profit share of GDP has increased by the same extent as labor share has decreased. That’s where wealth inequality come from. The 1% of people in the world indexed on the profits of the top 2000 global companies are doing very well. This is amplified by the policy response consisting of offsetting lagging wage income by financial and residential asset price inflation through artificially low interest rates (the infamous “wealth effect”). So the higher corporate profits as a share of GDP are valued at a higher multiple thanks to a lower cost of capital. Home owners are richer in money terms, even though they live in exactly the same home in real terms.

    If labor (consumption) share is decreasing, capex share must increase, which it has in developped countries in 2003-2006 and in developping countries in 2009-2011, resulting in overcapacity and pricing pressure in many industries globally. Now, we are at the point where capex share can’t increase much more, so net exports share must increase, which explains the on-going currency war as everybody scrambles for export surplus against everybody else. Of course, net exports add up to zero globally, by definition. If neither consumption share, nor capex share, nor net exports share can increase, then growth must slow.

    Decreasing labor share, industrial overcapacities and competitive devaluations are combining into global deflationary pressures.

    Meanwhile, global debt is exploding. Developped countries consumers make more purchases on credit because of lagging income. Governments in most places try to stimulate spending by infrastructure programs. Governments in developped countries have to provide social safety nets to the unemployed and the poor. Corporates in emerging markets have financed large capex progams by debt, which has been greatly facilitated by easy credit in surplus countries able to redeploy their reserves (developped countries Sovereign debt) through their own domestic fractional reserve banking system in a piling up of debt upon debt (literally speaking). Households in developping markets are borrowing more to buy real estate, often at rapidely inflating prices. Corporates in developped markets have found it a good idea to leverage high operating profits with cheap debt so as to further enhance return on equity. Finally, margin debt, carry trades and derivatives are used everywhere to fund positions in financial risk assets as the central banks put make it seem safe to pursue inherently risky yield enhancement strategies. Large financial players can anyway count on a bailout come the next crisis so they may as well enjoy the asymetric risk / reward (head, i win ; tail, taxpayer lose).

    More wealth for the few, more debt for everybody else as the concentration of economic profits and the socialization of economic losses go to extremes. The wealth divide is reaching a point where it is now fueling tensions. Equity values are rising fast despite rising debt in a very unstable equilibrium (equity being junior to all debt, rising debt should normally compress equity values). There is a global race to debase currencies all against the others to each defend / gain competitiveness to try to keep the domestic social situation under control.

    So, indeed it seems to me that globalization, as implemented over the past couple of decades, has reached a dangerous deadend. Monetary policies employed to extend that deadend a bit further are only making the situation more precarious as financial instability risks coumpouding sluggish economic developments.

    The G20 is nowhere on these issues. It is not surprising as most officials from the G20 and related multilateral institutions are the same guys who pushed for and implemented globalization and financial liberalization over recent decades. They will be the last ones to admit it has not worked out as expected. Remember, trade liberalization was supposed to be mutually beneficial as per Ricardo comparative advantages theory ; financial liberalization was supposed to be advantageous as capital would be free to invest in the best projects. Actual developments are contradicting these well-meaning theories, to say the least as unemployment increase globally (6% in 2013 accoding to the ILO), debt load increase exponentially and a huge amount of investment turns out wasted. So, unable or unwilling to comprehend the huge gap between the ideals of their globalization agenda and the actual experience, the G20 is left with using the right words in their communiques to reassure the people and the markets while no changes whatsoever are contemplated to the dysfunctional world trade and monetary system.

    One idea proposed already in the 1990’s by French Nobel Economic Laureate Maurice Allais to avoid such a situation would be to radically reform the current WTO framework and have free trade within regions large enough so as to ensure competitive markets but of similar living standards so as to avoid labor arbritrage and its weakening impact on aggregate demand. This is taboo as systematic propaganda has ensured that groupethink associates free trade with growth and protectionism with recession, despite the evidence of a weakening growth trend and the occurence of ever more severe economic and financial crisis since over the past 17 years as globalization accelerated.

    • DvD

      Could you provide a direct link to your ILO data?
      Great stuff, insofar as the info, but there might be measurement (definition) issues, i would say.
      From looking around the world, developing and developed.


      • Your discussion is compelling, with a few caveats,……

        Industrial Capacity has been in overcapacity throughout the 2000’s

        Developing Countries have seen inflated real estate prices over most of that period, as well.
        From the GCC, to Central Europe, Central Asia to South Asia, and South Eastern Asia, that is what I witnessed over the last decade.

        Otherwise I agree with your perspective, and your note on regionalization is important.

        Something along FDR’s Civic Conservation Corp, with emphasis on community resiliency, cross-training in skills for innovation and better living, entrepreneurship and financial literacy, basic health and wellness, basic mechanical skills, would be useful toward mitigating problems, and a slow movement toward integrating principles of “Natural Capitalism”.

        I believe the world still requires notions of growth, if only to service the actuarial necessities of social systems as they exist, and to promote extrinsic motivation, but more intrinsic motivators need to be built into our consciousness.

        Lastly, in regard to the US, I am generally quite confused by the free-traders and financial narrative people who think that the skills for production aren’t existent in the US, having lived in many places in the world, and watched the ingenuity of poor people in creating hand-made solutions to their material needs, I would say, this is a human characteristic, and it is alive and well in the US, if some financial people are used to having their Fiji water bottles opened for them. It seems that this is a tenant of the disempowerment memes that link to the narrative.

        Your data clearly shows, that more needs to be done to foster opportunity globally, such was the reason behind the Arab Spring, It starts with stopping to pussyfoot around many of these issues:

        some countries have to give up on the infantilization of their people through nationalistic dialogues, on colonial and anti-imperial principles (to post-modernists, Marx, Freud and Said are dead)

        People are born free, might assume equality, need to be responsible, held responsible, and have duties to themselves and their communities. Along Harm principles.

        While the Washington Consensus has become loaded with ideological imagery, many aspects such as rule of law and property rights (and human rights) are sacrosanct, and trade should be based on their existence, too much understanding and patience cycles the world lower.

        We cannot stifle the systems that bring higher standards of living, increased lifespans, caloric intake, taller, fatter people, more able to survive in environments, who are ever more able to get care, manage their life’s, for either the desires of the 1%, which will have to reverse of actuarial necessity, nor for the preferences and desires of Marxians, Libertarians, Anti-Imperialists,Autocrats, Anocrats, or Freudians.

      • Taken from the various annual Global Employment Trends. Here is the link to the most recent one.


  25. Income inequality, debt fueled consumption and debt fueled mal-investment all stem from the same source. The creation of money via debt. We pretend in economics that we track “real GDP” and thus back out ‘inflation’. However we do not. In 2013 the US money supply rose by 8% as noted in the Fed’s Z1. The GDP deflator was nowhere near 8%.

    Therefore this article reads a little off. The source of the problem is that in 2008 our bank leverage in the US was 66 to 1. I’m sure it was the same worldwide. We haven’t deflated the money supply, but from 2008-2013 net new debt grew at a much slower pace than the 8.5% 50 year average giving us ‘slower’ growth.

    Today however we are back at 8% in the US. I suspect Europe is the same, but I don’t have a source for total debt outstanding in Europe. What we need to know is total new debt outstanding worldwide.

    As for income inequality fixing the growth problem – you can’t fix income inequality without admitting the source of it. The Great Depression did a good job of reducing income inequality in the US (despite the efforts of the government). Precisely because income inequality derives directly from monetary inflation where all assets have increased in value by 8.5% exactly inline with money supply growth while wage have only increased by 4%. Graph that out over the last 50 years and there is your inequality. Falling interest rates can’t make up for that huge disparity in wealth in regards to income.

    Without negative interest rates in fact income inequality will be jumping ahead in the US over the next 5 years if we keep up the 8+% increases in the money supply. The government can’t even redistribute fast enough an exponential rise in inequality.

  26. illumined,

    You might label it a fake growth but it increases GDP value and taxes are collected on it and debt would decrease. I totally disagree with you about bigger bust. When you have inflation growth there are no busts, prices do not come down unless there is a deflation ,precisely opposite of the balloon type growth when prices bust 50-70%.

    You totally make no sense with statement “jobless recovery”.

    With inflation everyone pays including the rich. Precisely opposite of the deflation when rich sit on their money and purchasing power increases w/o any investments and unemployment skyrockets.

    In short you better read up on Prof Pettis books.

    • In the current world trade and monetary set up with systematic labor arbitrage, money printing is opening up a huge gap between inflationary financial assets and deflationary real life income backing them up.

      The purpose of money printing is to lower the cost of capital in order to justify making investments that would not otherwise be justified by the strength of aggregate demand. In other words, money printing facilitates a rising capex share of GDP as a way to maintain short term growth when labor hence consumption share of GDP is declining.
      Thus, it increases the excess of supply over demand and is therefore deflationary. This is why world inflation has slowed down sharply since 2011 despite money creation well in excess of economic activity expansion. See again the latest Chinese CPI coming at barely 2% on the back of incremental money creation of 320% of GDP in 2013. It also increases debt to GDP as capex is capital intensive (as the name suggests) and requires debt financing.

      Instead, excess money creation fuels financial asset price inflation through multiple expansion based on a below equilibrium level of the “risk free” rate.

      Rising equity values on top of rising debt values are in marked contrast with deflationary income backing these claims, making a crash inevitable as this divergence becomes too stretched.

      All these current features – low consumer price inflation, high asset price inflation due to long term interest rates below equilibrium level for prolonged period of time, rising capex share and declining labor share of GDP, rising debt load, rising equity values on top of rising debt values, widening wealth divide – are all exactly the same as in the late 1920’s. It should come as no surprise that throughout history the sames causes have a tendency to produce the sames consequences.

      • Once again, excellent, and exactly, this is why working on income inequality is necessary, it seems to me that all things tend to work on a pendelum, de-regulation and de-monopolization, banks and telecommunication, and then the slow re-construction, then the split up and then the re-construction, over and over. The key is that technology and science, advance, enabling ever better use of resources, and distribution of tools and techniques toward enhancing human life;
        the modern use of materials in the great reduction of finished goods despite high commodity prices, the 10 cent paper test that eliminates the thousand dollar machine test developed recently by a 15 year old boy, etc…etc…

        So, income inequality must reverse, if only most interested commentators would focus on the structural matters, rather than waste their time in dialogues unsettled since the 19th century, on which political dissension is based.

    • “You might label it a fake growth but it increases GDP value and taxes are collected on it and debt would decrease. I totally disagree with you about bigger bust. When you have inflation growth there are no busts, prices do not come down unless there is a deflation ,precisely opposite of the balloon type growth when prices bust 50-70%.”

      Inflation growth IS bubble growth. If you don’t believe me just take a good long look at the housing bubble and the current stock market bubble. Tax revenues and GDP numbers are increased during a bubble, but it isn’t sustainable. It always comes crashing down because it isn’t based on real things like

      Prices of goods do come down naturally through productivity increases and innovation. Prices of shares also go down when a company is sinking. Typically the price will hover around a Price to Earnings ratio band based on investor confidence in the company’s future, but it’s usually not much more than 40 at most. A good warning there is a bubble is when you get many stocks with huge P/E ratios, like during the Nasdaq bubble, the 2000’s asset price bubble, and today. LinkedIn for example has a P/E of 899, which means when you buy one share you are buying 899 years worth of earnings. There is no company in the history of the world that is genuinely worth that much.

      “You totally make no sense with statement “jobless recovery”.”

      Bubbles distort the economy and make it look like it’s performing better than it really is. If the GDP growth number is rising at a rapid clip, greater than 2% for a developed economy, but the job creation levels are sluggish, like it has been for most of the past 5 years, it means the growth isn’t real.

      “With inflation everyone pays including the rich.”

      The poor disproportionately pay for inflation. The rich can always invest a lot more of their income to increase returns to make up for it, but the poor struggle to make up the difference, especially because wages typically lag inflation. The middle class lose during asset inflation because their investments inevitably crash, causing huge loses in their portfolios.

      “Precisely opposite of the deflation when rich sit on their money and purchasing power increases w/o any investments and unemployment skyrockets.”

      We can empirically disprove this. In the 1880’s the US had mild CPI deflation and yet achieved growth rates of 6% and had an unemployment rate of merely 3% according to Friedman’s work. It’s true unemployment skyrockets during major deflationary shocks, but that’s because the massive writedowns and liquidations cause said deflationary shock. Causation does not equal correlation.

      “In short you better read up on Prof Pettis books.”

      They’re on my list. In the meantime you better read some history. Your line of thinking is exactly what has got is into this mess. To prevent that much feared “deflation”, the Fed bailed out LTCM and then injected funds to keep the music going. The result? The Dot Com Bubble. To his credit Greenspan did recognize there was a bubble and caused it to burst. After which interest rates were slashed and funds were injected, causing the asset price bubble to form. Then they spent years denying there was a bubble, and after that burst they jumped in again with even more stimulus. And now we’re in yet another bubble. The point is, certain policy makers have been led to believe they can “manage” the economy to make the good times really good and the bad times not so bad. In reality they’ve created a series of bubbles, each one getting bigger and bigger. Because this bubble affects treasuries, the consequences of its bust could be disastrous.

  27. I don’t generally include comments to any sort of articles on-line, yet this
    article deserves my focus. For what it is worth, you’ve completed a brilliant
    work of getting across your points and I am with you.

  28. My advice to the super wealthy who abscond with outsized portions of income distribution is walk before they make you run. In other words, favor the New Deal and allow the New Deal to crowd out talk of redistribution or structural modifications that would redirect more GDP to median households.

    • Rather, reverse the dynamics that will destroy your asset values, before they are worth less than you imagined, and you start at a far lower position thatn you could have had you not helped influence movements in a positive direction.

      the income of the people in your geographies, supports the value of your assets, rather than turtles, in this, it is income all the way down.

  29. “face the same choices: an unsustainable increase in debt, an increase in productive investment, or higher global unemployment”

    Did you mean _un_productive investment?

    Also, the elephant in the room is the environment (energy is one aspect). The collapse of the Soviet Union gave us (the world) some breathing room. But the recent rise of the developing world has outpaced the ability of innovation to keep us away from a zero-sum conflict over environmental constraints to global growth. A New Deal would just make that zero-sum conflict happen at higher levels of consumption. In other words, it would just postpone the needed adjustment.

    • People have been predicting imminent doom from a Malthusian Catastrophe for 200 years and have been constantly wrong. The last time this was in vogue was the 1960’s and ’70’s. Remember when Limits to Growth said we would be out of petroleum by 1993? Whatever happened to the predicted mass famine that was supposed to happen in the 70’s and 80’s because of “overpopulation”? Well we still have plenty of oil and hundreds of millions of people did not die from famine in the 70’s and 80’s. With that kind of track record I find it hard to understand why these guys are still taken seriously.

      • I have some doubts about the nature of current warnings of overpopulation as well. I think that poisoning of the environment via nuclear accidents and plastic production and also topsoil depletion are very valid threats.

        • There is no perfect source of energy. Major nuclear accidents like Fukushima and Chernobyl are bad, but they’ve only happened twice in 60 years. Considering the hundreds of reactors around the world, that’s a really good track record. Now consider this, what happens if we tried to replace nuclear with wind and solar? The results from Germany show very clearly: More fossil fuels, especially from coal. Just last summer Germany test fired 5 brand new coal power plants with plans to build at least 2 dozen more plus a dozen natural gas power plants (powered by Russian gas of course). Coal always has a lot of trace heavy metals, especially mercury and even the best stack filters can only get 75%, so we’re talking about major increases in heavy metal pollution all because the fear of nuclear power has been hugely overblown.

          The energy debate is not really about energy, beware the hidden agenda. http://www.iaea.org/Publications/Magazines/Bulletin/Bull244/24404092832.pdf

  30. Prof. Pettis is a tad optimistic about the future.

    The crisis in Ukraine, the Sino/Japanese clash, the Syrian war, the Iranian conflict, etc., are not taking place in a vacuum. Global economic, financial, and trade issues feed these problems. At some point – quantity into quality, these issues will lead to a world war.

    What were the global economic/financial similarities that preceded WW I and WW II? Are we seeing them repeated?

    • I don’t know about world war, but they will lead to war. If we did see major wars, we’d see a spike in the price of food and energy, which would mean that the world’s poor populations would experience some serious problems. If we did see a world war, I think we’d have a profoundly different world though. I think the cultures of the world’s poorest populations would go extinct. Areas like the poor countries of Africa and some parts of the Middle East would be hit very, very hard. It will not be a pretty sight to say the least.

      • I think cold war constraints on all-out conventional warfare still exist as in

        all-out, conventional WW3 —> escalation to nuclear warfare —> human extinction

        which explains why these limited conflicts still exist. They are basically franchise wars over markets. Intelligence agencies working for deep state will continue to generate them.

  31. I know there is a huge amount to be bearish about, especially the implications of current economic theory and practice on the environment (countless negative externalities), but the past couple of days I am starting to feel a little more bullish and optimistic.

    Firstly, China has been moving gradually in the right direction and President Xi and his comrades should be commended for doing so. The 3 major distortions in China’s economy were (and still are)-

    1) depressed wages
    2) undervalued currency
    3) low domestic interest rates

    The last few years, wages have risen steadily and dramatically, especially amongst the middle class. Many low paid manufacturing jobs have already moved offshore where wages are lower.

    The exchange rate (until the last week) had been steadily rising against other major currencies, especially the USD. Whilst too little, it is still in the right direction and causing a lot of pain amongst many exporters.

    Interest rates and the bond markets are now being reformed. It seems as though the next step will be deposit insurance for savers of some sort, and then liberalisation of interest rates and the capital account. The Chinese government has shown far more determination to reform their economy than the American government has thus far. President Obama if you’re reading this, snort some Nestle instant coffee or drink an energy drink or something.

    The US jobless recovery is going to heal. The US is experiencing a rise in animal spirits. There are so many people there still willing to start a business. Some of them are brilliant. Many of them are immigrants. That’s not to say anything of the shale oil and gas boom and cheaper, more secure energy.

    The student debt is overblown. At least some of it is creating a more educated society that has the potential to be more productive. Even liberal arts degrees can teach things. There’s a reason why Hollywood is such big business.

    The biggest negative for the US at the moment is the lack of trust in government and sadly to say, of quality leadership. I was so happy the day Obama was elected, but where are all the speeches about hope now? Where is the vision and the inspiration that we saw when he was campaigning???!!!

    The US debt, while large is not insurmountable if a few more Googles, General Electrics and Apples are created.

    The fundamental problem for those that argue we shouldn’t try to decarbonise our economies because it costs money and hurts the economy must answer why negative externalities from the current model be allowed to continue.

    Overfishing, cancer, poisoned water, asthma show up as positive GDP. When you buy an air filter, spend money on chemo and radio-therapy, and buy an inhaler or sit in traffic gridlock, you are helping the economy by adding to GDP, but you are hurting/destroying both yours and our quality of life.

    Money must represent the value of the product or service being purchased. Printing it has consequences and they do not improve the quality of life.

    In Sydney, Hong Kong, Vancouver and London, the quality of life does not improve if house prices improve, it actually worsens for people who are trying to have a small family and make ends meet. It rewards people who have already saved a deposit and taken out a loan and hurts everyone who has not come of age or ability.

    The current system of the United Nations is broken. Whether or not you think climate change is caused by mankind, why would you honestly take the risk with something as serious as destroying ourselves by poisoning our environment???!!!

    How hard could it be for major economies to organise a global infrastructure deal?

    Where is it easy to identify where major hard infrastructure projects could be undertaken with positive IRRs and positive externalities? the US, India, Australia, Indonesia, Poland, Spain?

    What about a smart grid in the US? What about high speed rail? What about high speed internet? This sounds like the lyrics to a Michael Jackson song but I am optimistic

    If we could just take the focus off achieving economic growth for growth’s sake, that would be a great start. Many of our problems could be solved with better economic incentives in the short term, clever and reform of our education system for the long term. Where are our leaders????

  32. Ecologically sustainable growth is one more reason to stop global free trade and to replace it with free trade within regions of similar living standards. Not only this would stop systematic labor arbitrage on a worldwide scale and its weakening effect on aggregate demand but it would also move production geographically much closer to consumption, thus lowering materially the ecological footprint of economic activity.

    In short, global growth has not worked out at all as initially advertised and came with huge social, financial an environmental costs. We have to acknowledge those and pursue balanced regional / local growth instead.

    • There is no such thing as ecologically sustainable growth. Growing economies always use more resources, which is why the real goal of the sustainability movement is to use government policy destroy the economy and bludgeon everyone back to an early 1900’s lifestyle. You know, back when lived in harmony with nature, ate locally produced “organic” food, everyone rode bicycles, the bus, lightrail and trains because cars and airplanes were only for rich people. In their view the developed nations should be forced back into this way of life while the third world’s level of development should be frozen where it is now. After all, according to them only global poverty can save the planet.


      There is a good reason China, India, and the rest of the third world have consistently banded together to oppose this New Age narcissism.

      • Illumined, why don’t you tell that to Russia? There are costs to environmental degradation and the costs can be very severe.

        • Sure, which is why some reasonable environmental protection is fine, like not allowing industry to dump toxic waste into the water supply. But that’s not what the War on Carbon and other initiatives the Sustainability Movement proposes are really after, their policies are not supposed to lead to wealth creation, growth and material abundance, their policies are supposed to do the opposite.

          • No shit it’s not gonna lead to wealth creation, but is that the only thing that matters? Do we live for material things? That’s such a selfish and fucked up way to look at the world. No one goes anywhere by themselves; there were people before you and there will be people after you. The problem with environmental damage is that the effects are highly nonlinear. So you can do something and see no effect for a long time and then it just explodes and gets out of control very, very quickly. I think it’s very important to take care of your environment.

          • Pretty reactionary characterization of sustainability as most serious researchers think that economic profitability is a fundamental necessary for any endeavor calling itself sustainable…

      • Let´s not be caricatural.

        A same pace of economic growth (say +3% in volume terms) for the world can have quite different ecological footprint.

        The current globalized framework where products are made in one part of the world (say China) with materials, equipment and components coming from all over across many globally integrated value chains only to be shipped to a different place (say the US) where they are finally consumed has a certain ecological footprint.

        Another system where exactly the same goods are produced globally but the ones needed in China are made in China and the ones needed in the US are made in the US has a materially lower ecological footprint as countless shipments of primary, intermediary and finished products across the world are no longer required.

        Remember, apart from some raw materials that are where they are or grow where they grow and therefore needs to be traded globally, pretty much everything else can be made where it´s needed. And i’m not talking about bronze age objects.

        What did you think prevented Apple to produce the iphones in the US? Nothing. Why did they have them produce in China? Same selling price, cheaper cost, bigger profit. Do the unnecessary shipments of iphones from China to the US is damaging for the environment? You bet. Could Apple have produced those iphones destined to the Chinese market in China? Certainly. Multiply this example by billions of products every year and you see my point.

        Made in China at lower cost to be exported back to the US doesn’t benefit the US consumer through lower costs as the cost of unemployment benefits and retraining to these redundant US workers and the cost of debt arising from the trade deficit needs, not to mention the incremental corporate profit not passed through need to be added to the calculation.

        It doesn’t benefit either the Chinese people if productive and infrastructure capex for much more than the already considerable needs of the domestic markets, as well as huge logistical and transportation movements, cause environmental prejudice on a gigantic scale. It doesn’t help either if all the monetary reserves accumulated through trade surplus are then multiplied through the fractional reserve domestic credit system to also cause a debt crisis in China.

        I mean, when China joined the WTO in 2001, it had total debt of 90% of GDP and the US had 150%. Twelve years later, China has 210% and the US 250% debt to GDP. In 12 years, this dysfunctional trade and monetary system has managed to quasi bankrupt both countries and the trillions of tons of products transported back and forth during that period had a very degrading effect on the environment.

        I’m sure we can do much better without going all the way back to the Middle-Age.

  33. Many people say that the situation in Ukraine might mark the beginning of a new order of the world nod China may become the beneficiary of that. But I don’t think so. U.S. has gone into another cycle of economic growth and China’s economy is still weak and problematic so it does not have enough leverage to compete with U.S. I believe Chinese government never think themselves as U.S.’s competitor.

    • As an American, I kind of tire of all this talk about competition between China and the U.S. Britain and the U.S. have worked together for over 150 years. Throw France in there as well. Germany, Japan and Italy all former enemies have worked with the U.S. and Britain for seventy years.

      I don’t know what to think of Ukraine and the Crimea. I thought breaking the USSR in various pieces like cutting up a chicken was a bit premature in 1991. Belarus, Ukraine and other former Soviet states were a part of Russia for centuries with not just close economic and cultural ties, but had many ethnic Russians. The borders of these states, like many in history, were arbitrary.

      Getting back to China. I would like to see a world where the U.S, Western Europe, Japan and China can work together towards ensuring global stability and security. I am sure the U.S. is discussing the Ukrainian situation with China. Russia has a lot to fear from a China that shares such an enormous border near many of their precious natural resources. Unfortunately, it seems many times China and other countries challenge or refuse to cooperate with the West on global security matters just for the sake of competitive nature. I don’t know why this is so. There has always been a predisposition for non-Democratic countries to challenge or withhold cooperation from the West in foreign affairs even when the issue promoted global stability and growth.

      • I think part of the reason China and Russia refuse to cooperate with the West sometimes is just to be different. Think about it, if you cooperate with the US – regardless of whether the US is right on the issue – you’re seen as a stooge of the West. If you oppose them on something, it’s easy to get people riled up to support your cause. The smarter people in China probably realize that antagonizing Japan and supporting North Korea are bad ideas. But these ideas play so well to other constituencies, that they are too useful to ditch.

        Also, I think it is hard to compare the US relationship with other countries to the US relationship with a rising China. Britain, France, and Germany all had many immigrants move to the US, and so there was the cultural connection (not to mention common religions). The Japanese Meiji dynasty was obsessed with Westernizing Japan. So even if Japan was a radically different culture, it still admired many things about the West. China on the other hand is (at least on paper) radically opposed to the West and the idea of universal values, and wants to take an alternate path. Of course no one really knows what that alternate path is, but they sure don’t like the Western path.

        One thing that the professor has pointed out several times, the passing of one superpower to the next (in modern times) has always been from a more restrictive society to a more free one. For China to take on the mantle of world superpower would be a big step backwards towards a more restrictive world. I don’t think that type of society is attractive to many other countries, so China may exceed the US in GDP terms and military terms decades before it matches the US in overall power.

        • actually,….

          Armstrong, D. (1993). Revolution and World Order: The Revolutionary State in International Society. New York: Oxford University Press.

          (((((Right Wing elements in Japan at the time of the great depression reviewed Western Society as “decadent and potentially subversive of traditional Japanese values.”
          “general thesis: the international economic system was clearly structured so as to maintain Western dominance and Japanese subservience.400 Hence politically, culturally, and economically the West was seen as something to be comprehensively rejected. Those sharing this outlook were in no mood to make fine distinctions between different facets of what they perceived to be a uniform system of oppression. The Westphalian system of international relations, and its latter-day Wilsonian refinements, were part and parcel of a single hate-object: the West”))))))

          So China and Russia, might be doing as you first state, then the

          for post-modernists

          the Marxists, Freudian, and Anti Imperialists, everything is Money, Sex and Power (Ibn Warraq)

          Such that others, still bound up in revolutionary dialogues of the 1960’s, dependencia theory, still see the structure of the world ensuring poverty; a la imperialism. (Bolivarian Populists, Radical Islamicists, and Marxian Socialists)

          Where some of those memes still resonate, to amke action filled thrillers, movies, create scathing commentary, journalism, and to propel states interests, where the other is postulated as something we can be against, to window dress over internal problems and the prerogatives of authoritarians and anocrats, thus creating histories, mythologies and other constructs that can be used as a tool. That is a very dangerous step. China, it seems, made the decision, over a decade ago to support the Party over the People, the economy and development; thus movements toward more and more of the economy devoted toward investment; finance at any cost, enabling the top 50 Peoples Congress members to have 57 billion in assets, where the top 50 US congresspeople ahve 1.5 billion usd in assets.

          Russia, Putin, neo-imperialist project, simply to thwart to convince the people he is reinvigorating Russia, even talk in some circles that they should align with radical Islam among some Russian theorists, due to post-911 issues. Forgetting that Catherine and Alexander the 2nd conquered vast swathes of Muslim territory.

          So, I tend to think that, these are for Soft power, but perhaps aren’t Smart, as institutions take along time to build, and the ones that exist are only limited in impact. More, i believe the dialogue is, in some ways, forced on China by global commentary, and then the history the purvey to their people, necessitating responses and perspectives. otherwise, China would like to strengthen their position, and the position of the party. But they will not be successful, as their system, is such, that its success, relies on structures that deprive others of the same tools. Their mass is so great, and ability to direct in ways that no other developing country can match. SO inevitably it will have to change, and complaints come from everywhere across the developing world, from Africa to Brazil, if it is a Rise of Rest, West, or China-US, dichotomy.

          But for the segments of the global dialogue, still revolving around 1960’s memes, constructed of 19th century philosophy, dissenters can gain soft power, and seem to be doing something


        • I think it’s wary to go by current Chinese GDP figures. I’m sure GDP is overstated by at least 20-30% and current growth rates aren’t close to sustainable. China also has some of the worst demographics in the world due to the one child policy and China’s working age population peaks around 2015-2016. I think there’s no way China’s GDP calculated in a reasonable manner will touch the US GDP any time soon. The US is the pre-eminent power, but I think you could see Russia, China, India, and Brazil form an alliance to rule the world. I think it makes the most sense for the US to go non-interventionist and this is also what I suspect will happen in the end. The neoconservatives are a dying breed.

          • China is not xenophobic like Japan and they have ample supply of immigrants all around them. Besides as we move into the Knowledge Age, it is technical brain power that is most relevant and China has this in spades. And macro economically China doesn’t have this huge unfunded welfare state to support, as the West does, so it won’t need to stomp on its entrepreneurs with onerous taxes the way the West is and will. Thus the financial capital of the world will shift from the West to East.

          • China is still pretty xenophobic and I don’t think it’s the location where immigrants want to go. Just take a look at where a good portion of the best and brightest of China are doing. They all live in the West. I don’t think you can just overlook such a major demographic shift as you do. Demographics play a key factor. That being said, I think a country like India has a much better chance at become a huge power 50 years down the road than China simply because of the demographic issues. I do think that some of the world’s financial capital will shift from West to East, but I think the US probably still stays as the pre-eminent power. I do think we could see a “New World Order” where Russia, India, Brazil, and China form a global leadership that overrules the power of the West though.

  34. As I have said, I am not sure twenty years of Ukrainian independence and corruption is where anyone wants to draw a line in the sand. Some of this smells like a low boiling civil war that Russia feels they have a national interest. However, the Crimea and possibly Eastern Ukraine set up a dangerous precedence in the modern world where a large military power unilaterally exerts its force and annexes territory. (Anticipating people noting the US invasion of Iraq, mistake as it was the situation is very different as the U.S. has little influence in the new Iraq.)

    I agree with Andao on everything he stated. However, I think Russia and China have to realize global trade and global security are not mutually exclusive and more importantly they are not zero sum games. I believe some Russian and Chinese leaders view both as a zero sum game. Hopefully, most of Mr. Pettis readers view economics as an expanding pie. Expanding global trade has created incredible wealth for Russia and China. How this has been distributed across the society is a domestic issue and certainly not one to take lightly. Regardless, the middle class in both Russia and China have also expanded dramatically.

    It is obvious that in this century, global conflict will have an important economic factor with trade actions used more widely. Russia presents a unique situation. Can an aggressive country that has increasingly benefited from integrating with the world economy afford to ignore their trading partners? This is both a challenge and opportunity for global security and stability.

    • The issue for Russia and China is not really security, their aggressive behavior is about one thing and one thing only: Rebuilding their respective empires. Like most historical Russian autocrats Putin has been focusing on the western border and has been trying unsuccessfully to use Russia’s resource economy to undermine Poland, the Baltic nations and Ukraine. But in the long term Russia’s interests are not compatible with China’s, as “Greater China” includes the Russian Far East. A war between them is inevitable and regardless of what trouble Putin causes us in Europe, in the next decade when the Chinese come knocking they will come running to us for help.

      Anyway, historically economic interests have often died for dreams of imperial glory. As Michael has pointed out, every period of globalization has ended in war. I don’t think this time will be different. It’s just a question of when and against whom.

  35. WSJ blog says developed countries have debt that 376% of GDP and emerging markets 224%. But that doesn’t include China’s shadow banking.

    Also I read that Philippines claims an official $11.3b current account surplus, yet $19b a year of smuggling isn’t record. This is known based on exports from other countries to Philippines.

    • Even the IMF has admitted that global debt is at a 200 year high. Central bank was invented a the end of the Middle Ages, but it wasn’t ubiquitous until the 20th century. In addition to the $223 trillion debt which is 313% of global GDP, there is something on the order of $quadrillion of derivatives and another $quadrillion of actuarial promises to society which are unfunded. Central banking being the omnipresent lender of last resort is the cause of humongous monstrosity, because it prevented liquidation of TBTF throughout the 20th century.

      For example the emerging markets are heavily laden with corporate dollar bond debt because due to ZIRP the fixed income investments (e.g. pensions) were forced to seek higher returns abroad. Thus emerging markets are mathematically betting short the dollar. Thus as capital flees the peripheral (i.e. non-reserve currency) markets (to include Europe and Japan by next year), there will be massive strength in the value of the reserve currency (the dollar) in 2015 and concomitant doubling in the NYSE index. This would put a spiraling (the toilet bowl) pressure on emerging markets, because they will be repaying debt with weakening local currencies. This will spiral until they exhaust dollar reserves and default on external debt, because once you take away the bubble veneer, none of them have positive current accounts. Argentina is approaching default the earliest probably in 2016.

      Central banking is an abject failure.

      But there is currently no better solution on tap. The fundamental issue and potential solution is much deeper than I can insert into a blog comment.

      • Apologies for the triple post, but to give more authority to my prior post I note the Bank of England just admitted it.

        I do believe by discrediting nation-state central banking (which I’ve long anticipated was the plan), the BoE will favor a “solution” will be to double-down on top-down control by moving the control up to a higher level and arguing that it is a separation of money and state, wherein we move to a basket SDR on which national currencies will float against.

        I don’t believe this is the correct “solution”. I believe the hitech community will speak with technology and not politics on this matter. And I don’t mean precisely Bitcoin.

      • I agree. The purpose of central banks was to help governments fund wars for protection of sovereignty and imperialism, not to protect the financial system. The Fed needs to go.

        • What is a better solution? In the 1800s, we had unregulated private banks who took physical gold on deposit and created fractional reserves. This lead to frequent bank runs and depressions. It annealed better because the defaults were more often before growing too large, but unfortunately humanity loves debt so then eventually JP Morgan had to bail out the USA. And then they created the Fed, originally intended just to be a corporate backstop but over time it morphed into this monstrosity, because the people demand and love debt. We can’t change human nature.

          In 2009, Satoshi published a solution to the Byzantine General’s problem (unsolved since 1975) which enables decentralized consensus without requiring any reputation nor trust. This enables a decentralized ledger (a.k.a. “block chain”) of money accounts. If all transactions are done on this ledger, there can’t exist fractional reserves. But once again the people instead of favoring decentralized exchanges that work on the block chain, chose to trust centralized reputation that operates offchain, e.g. Mt.Gox and look what happened a repeat of the 1800s failure. So if the masses are not smart enough to use the technology correctly, then the government will be tasked with regulation of the offchain fractional reserves and thus once again we are back to fiat and central control.

          Also Bitcoin will end up losing its decentralized nature because it isn’t anonymous, and the masses will demand the government given them free services and debt is always future taxation, so the government can’t give up its demand for “transparency” in all financial transactions, i.e. they must know who we are at all times.

          So tell me what is the solution? I said the technologists will weigh in on this matter, and note I am one of (the most astute and prolific among) them. Stay tuned…

    • Apologies for so many posts. I will try to make this the last one.

      Can anyone help me on quantifying the Philippines’ total debt-to-GDP ratio?

      Note the breakdown from the WSJ blog for emerging markets, 14% public, 34% household & corporate, 43% financial sector, and 9% private-sector external, not including the underground (shadow banking) economy.

      I found the official government debt of the Philippines is 49% of GDP. External debt excluding government appears to be roughly $32 billion or 12% of GDP. Gross loans are 37% of GDP but I am not clear if that includes the 35% household debt share of GDP (that would leave only 2% for business? impossible) and the underground economy estimated at 20 – 30% of GDP. I see this underground economy, e.g. these private credit agencies that extend loans at exorbitant interest rates to those who have a vehicle or land title to provide as collateral.

      Thus I add it all up and get 133% x 1.3 for underground = 173% of GDP.

      The Banko Sentral link on gross loans shows 15% loan growth in 2011, 16% in 2012, and 18% in 2013, while the GDP has only been growing at 7% and that assumes the official 2.5% inflation figure is accurate which I doubt because minimum wage salaries have increased faster.

      Is it realistic to assume a -50% drop in GDP ahead for the Philippines when 50% of its OFWs lose their jobs, the credit and infrastructure bubble pops, and the global contagion ahead? That would increase the debt-to-GDP ratio to 300+% but since most of it is domestic if the central bank allows it to liquidate then we get that severe correction and then the debt level shrinks?

      I note Banko Sentral is now forced to start raising interest rates due to the new policy on QE and imminent end of ZIRP at the Fed. So the bubble here in Philippines should pop in 2015 when the QE is 0 and Fed starts raising rates.

  36. @Suvy:
    “No shit it’s not gonna lead to wealth creation, but is that the only thing that matters? Do we live for material things? That’s such a selfish and fucked up way to look at the world. No one goes anywhere by themselves; there were people before you and there will be people after you. The problem with environmental damage is that the effects are highly nonlinear. So you can do something and see no effect for a long time and then it just explodes and gets out of control very, very quickly. I think it’s very important to take care of your environment.”

    I point out that these policies destroy growth because they are telling us that it leads to growth. The sustainability movement doesn’t care about the environment, that’s my point. Considering how damaging extensive use of wind and solar actually are to the environment, why then would they support it? Because they view it as a means to destroy modern civilization, they have an idea of the perfect lifestyle and they are going to use government policy to force you to live that way, consequences to the environment (and your prosperity) be darned. Locking 4/5 of the human race into permanent poverty is not the answer to anything and I don’t think most people would accept it if they realized this was the real agenda.

    And as for this “things will get out of control very quickly” idea, we’ve been told this time and again. In the 1960’s and 70’s there was predictions of imminent doom because were about to “get out of control very quickly”, and it didn’t.

    • There were major environmental issues in the 70s dude. Just go to a large city in the third world and you’ll see how precious clean air is. Clean water is a major issue in the third world too. Smog can be a real problem as can be other issues like O-zone depletion. Again, I’m not arguing for certain environmental policies over others here, but you must take care of your environment. If you don’t, the costs start to pile up and all the risk is hidden in the tails.

      • Suvy you are too intelligent to have a closed-mind. Please educate yourself on the scientific facts before speaking further on this issue. I live in the third world and the environment is native, which I prefer. You may arrogantly worry your bicycle paths and manicured suburbia, but that gives you no right to tax the world into slavery because of illogical Malthusian fear which has never been correct not even once in the entire recorded history of modern man since Mesopotamia because it violates the Second Law of Thermodynamics. Man can muck up small patches of the earth’s surface for a brief moment, but he can’t destroy the earth’s self-correcting ecosystem. The Carbon Cycle is the life cycle of earth. All this propaganda (they are indoctrinating you with in school and the media) is about instituting a top-down control system for earth. It is indicative of the peaking collectivism (and thus debt) monstrosity.

        Please all check your emotions and first read the links and consider it rationally.

        • Shelby, I’ve lived in the third world and I visit the third world regularly. Every time I visit such places, smog is always an issue. Just look at the smog attacks in China or India. There are places in the countryside of the world where it’s difficult to get water. Do you know how the Arab Spring started? It started when we did our QE here and that caused food prices to skyrocket, creating political problems in other parts of the world.

          By the way, the problem of natural resource constraints and population exceeding capacity aren’t anything new. The main advantage of centralized control was for defeating enemies in war, not for economic policy; I agree with that. As for “global warming”, I don’t know if “global warming” is an issue per se, but the biggest problem is that we don’t know how our actions today affect the environment. Nobody knows how the environment is gonna respond to whatever we do, including the scientists.

          • I can keep this on topic about debt bubbles and emerging markets, because one of the reasons Rome collapsed is declining productivity of the farms, which was due to indiscriminate clearing, over intensive farming, etc which polluted and over taxed the irrigation, etc.. because there was a debt bubble that was causing too much oversupply in farming (as well as an ever increasing taxes forcing farmers to take on more debt and increase production to stay afloat). What you see in China’s large cities is the same effect of too much debt, causing a misallocation of priorities. One of Professor Pettis’s significant points has been the infrastructure exceeds the level of social capital development, i.e. they’ve moved too fast on industrialization and modern cities without first diversifying their education and skills. And now they will be forced to reprioritize, and then the environment will improve again too. I live in Davao and absolutely no problems with pollution here. I would guess most of China and developing countries are beautiful when you get outside the zones of too much debt infrastructure spending.

            We don’t need to invent Malthusian fiction and make plans for a global carbon tax in order to understand and fix the environment side-effects of the carry trade of ZIRP on the developing world.

            Man-made global warming (AGW) can’t be falsified, which is the fundamental requirement of the scientific method. Thus by definition it is not science. It is “pulling arbitrary models out of my arse” because there is no way to isolate all the variables and falsify the accusation of “man-made” global climate change. Btw, the warmers failed so miserably on their prediction of temperature rise, that they now changed the propaganda to “man-made made climate change” and trying to make models to show that our carbon emission are causing global cooling too. It is so ridiculous and obvious to see they are a fraud.

          • Add the environmental degradation due to overuse of debt leading to lower productivity is another symptom of the marginal-utility-of-debt going negative globally, which apparently occurred just recently or on tap for 2015 which is why the global economic implosion has begun with (initially retail to be followed by institutional) capital has started fleeing emerging markets (note there is a mini-deadcat bounce at the moment) rushing back into the safe haven currencies (of which they think Euro is still one, but this will be squashed when the IMF suggestion for 10% confiscation of EU deposits kicks in). In short, the global flash crash Minsky moment approaches 2016ish.

            P.S. on the overtaxing issue, remember most of the West taxes above the Laffer limit. Westerners will not be able to adjust their pre-programmed mindset away from their belief in top-down planning and big government, e.g. how you are programmed to believe in the lie of resource constraints (which violates the Second Law of Thermodynamics). It is never about resource constraints, all limitations are due to lack of fitness. Energy is never created nor destroyed, remember your Physics. Constraints are impedance mismatches. Thus Asia will rule the global economy going forward because they have less government interference with entrepreneurialism.

          • The problem with the climate change guys that say global temperatures will soar is that they don’t understand the issues with climate change and global warming. You don’t need the mean temperatures to change for anything crazy to happen. I suspect that the impact of increased CO2 won’t be on the mean temperatures, but on the variance of temperatures throughout the world. It could change the wind patterns. The real problem is that we don’t know what the consequences are. I’m also pretty sure we can build machines to simply suck CO2 out of the air if need be, but such projects could become very expensive. We’ve built algae lamps that can absorb 200 times the amount of CO2 of an average tree. So if CO2 does end up becoming a major problem, like I think it will (although I have no idea how such a problem will manifest itself), we can build stuff to simply suck CO2 out of the air. The question is what the collateral damage will be. The answer to that question is something no one knows.

            As for your optimism towards Asia, I think you’ve gotta be careful as to what parts. China’s working age population peaks in 2015-2016 while the population is set to keep growing until 2030 or so, where it falls off a cliff. Dependency ratios will start rising in China over the next 2-3 years and they will soon start to be a drag on growth, not a benefit like they once were. Prof. Pettis came up with 3-4% growth rates for China as the highest level over the next 10-15 years using very generous assumptions. If you include demographics, I think we’re talking about 2-3% growth rates on the high end. I think there’s a realistic chance the US has higher growth rates than China over the next 10-15 years.

            Also, many countries in Southeast Asia now have falling fertility rates and many of them are below replacement level. Initially, this will create a boom because the falling fertility rate results in a falling dependency ratio, but then the dependency ratio will surge. India’s population, on the other hand, is set to grow for the next century. The US is also expected to have a rising population over the course of the century.

          • Suvy I am saddened that after explaining to you that there is no falsifiable test that man’s CO2 output is doing anything, you still are worried about. Amazing the power of propaganda to control the otherwise rational mind. I guess I better just bow out of this discussion.

            China has no obligation to give lavish benefits to its elderly, that is the key reason Asia will outperform the West where socialism had committed it to stealing from the youth. Asia as abundant youth as well.

          • Just because pumping massive amounts of CO2 into the atmosphere isn’t falsifiable doesn’t mean that it won’t create issues. If you play around with things you don’t understand, you’re gonna fuck something up, you just don’t know what. It’s like giving a 7 year old kid a stick of dynamite to play with. Understand this very clearly, I’m not using “scientific arguments” in my point and if you think I’m using those arguments (like you clearly said), then you don’t understand my argument. You do not know the downside risk of such behavior–that’s the problem. CO2 is a key part of the air in our atmosphere. You can’t just keep pumping CO2 into the air at faster and faster rates without saying there’s absolutely no risk involved because we’ve never seen anything happen before. I think that’s equivalent to driving a racecar with the rear view mirror. I’m not saying that there will be a rise in global temperatures or something like that. I am saying that you’re gonna fuck something up, somewhere, somehow, and you won’t be able to predict what went wrong beforehand.

            As for Asia, I don’t know man. In many countries that don’t have large welfare states, you’re still seeing depopulation becoming a major factor (ex. Russia, Iran). Just look at worldwide fertility rates across many of these countries; they’re collapsing. In the cases where they’re not, it’s often some particular ethnic group that’s procreating much more than all of the others, which does create social tension and probably means war if the trend continues (ex. Turkey). I actually think the rich parts of the world have the productivity to actually take care of their older populations even though that will come at a horrible cost. In the case of youth with regards to a country like China, that youth turns into age and old people in the about 15-20 years. By the way, China’s working age population has already started falling (necessarily resulting in a rising dependency ratio). Another problem in China is that due to the one child policy, people had a tendency to abort more girls than boys.

            Again, I’m not saying that Asia is doomed. I’m just saying that certain parts of Asia will do much better than others, but I do believe that a good portion of Asia is fighting for its life. In the long run, I think China will do okay, but I’m not nearly as bullish as everyone else. The only way someone could make such an argument is if they started from a point where they completely ignore demographics, which is not a good long run model to use anywhere. By the way, note that as people and countries become rich and educated, they choose to have less children while fertility rates plummet. As China gets richer and the populace becomes more educated, the chance of seeing a sudden surge in fertility rates will not increase. Combine this with the fact that China is already seeing a drop in its working age population and also add in how the one child policy has skewed families to have more boys than girls and I don’t know how you can be that optimistic. By the way, last year in China, there were almost 20% more boys born than there were girls.

        • Anthroprogenic global warming is real and does have consequences, but the deniers are correct about the hidden agenda behind it. Contrary to what we have been told I don’t think billions of people are going to die from it and the costs of keeping most of the world impoverished (and impoverishing the first world as well) far exceed the costs of climate change.

          • Give me a falsifiable statement (that can be tested scientific method) to support your statement that AGW is real? You can’t, it is impossible, thus this is religion and not science. It is very similar to macro economics, which is very difficult to falsify. At least with macro economics we have the entire history of mankind to use as repeating patterns to support our arguments. AGW proponents ignore all the history of normal climate change and argue with non-falsifiable models (of which there are other choices for models which refute theirs) that every thing is suddenly different. And they’ve been caught fabricating data, and their predictions on temperature rise failed.

          • “AGW proponents ignore all the history of normal climate change and argue with non-falsifiable models”

            This is the problem right here. They’re using bullshit forecasting models rather than trying to look at, and develop, dose-response curves.

      • Sure there were, I never said I was opposed to clean air and clean water regulations, but as I’ve said many times, the sustainability movement (which IS the contemporary environmentalist movement) is not really about protecting the environment. Take for example genetically modified food, it’s possible to modify it to be resistant to certain pests (reducing need to use pesticides), modify it to be tolerant to glycophosphates (which are way way way less toxic to the environment than currently used herbicides), be resistant to drought (so less water needs to be used) and in some cases be tolerant to salt water flooding (a big problem in South Asia). As you can see it offers substantial environmental benefit by making food production more efficient, yet the sustainability movement opposes it. Instead they opt for so called “organic” food, which according to several studies produces far less food per acre than conventionally grown food and with amount of land utilized can only produce enough food for 4 billion people. So, they try to force us into a choice, either we increase the amount of land used to grow food by 75% (which requires us to bulldoze forested areas) or allow billions of people to die. Since they’ve already predicted billions of people will die, I think we know which way they will steer policy if they succeed. You see how this is a self-fulling prophecy? You see how this has nothing at all to do with environmental protection?

        I assure you, this is one of several issues such as energy, supposed resource depletion (which never happened either) that they are using mis-information and fear mongering to box us into how they think we should live, costs to the environment be damned. I also will point out that they see the economic development of the third world as something evil to be prevented. While it does have environmental costs in the short term, not developing their economies will lead to substantially more environmental problems in the long term. Take for example the extensive usage of charcoal in Africa for cooking. That is technically a renewable resource and “carbon neutral” but it is tremendously environmentally damaging because often times where they get the wood is from logging the bush, and when endangered species like gorillas get in the way they are poached. http://news.nationalgeographic.com/news/2007/08/070816-gorillas-congo_2.html

        Now, if they had a more developed economy they could use something like natural gas or propane which burn cleanly and have more limited impacts. But wait, those are evil fossil fuels, can’t have that. You see, the less developed parts of the third world already live the ideal lifestyle according to the sustainability movement. After all, only global poverty can save planet.

  37. @Daniel
    “Pretty reactionary characterization of sustainability as most serious researchers think that economic profitability is a fundamental necessary for any endeavor calling itself sustainable…”

    Interesting phrasing considering that the sustainability movement itself is reactionary. I’m not referring financial sustainability, I’m referring to the environmentalist movement. I like to make comparisons between them and Intelligent Design because even though their ideologies are different they operate in a shockingly similar manner. In retrospect it shouldn’t be too surprising as they are both de-centralized “denial movements”, ID is a movement to deny evolution while sustainability is a movement to deny modernity itself.

  38. The critical thing to understand is that global debt accumulation is not happening for some mysterious reasons. It is inherent to the world trade and monetary system in its current set up.

    Free trade at exchange rates that don’t compensate for differences in salary and productivity levels necessarily leads to trade imbalances and labor arbitrage. In the free trade / fiat money world that has developped since 1971, trade imbalances are settled by debt of debtors countries. Labor arbitrage at the expense of high cost countries is also forcing up their debt as the free cashflow generated by these developed economies (hence their self-financing capabilities) deteriorates while the cost of under-employment rises. Debt of debtor countries serves as monetary reserves of creditor countries, forming the base of their own domestic credit system. These monetary reserves are then multiplied through the domestic fractional reserve banking system of creditors countries. Again, this is the key aspect worth emphasising: monetary reserves, mostly in the form of Sovereign debt of debtors countries, are multiplied to become debt in creditors countries. Debt is piled upon debt with a multiplier effect. See how China accumulated trade surpluses and monetary reserves in excess of $3 Tr since joining the WTO in 2001 and how it used them from 2009 to kick start its own exuberant domestic credit cycle with the result that we know today.

    The current world trade and monetary system is inherently set up to generate exponential debt, which is exactly what it is doing. There is absolutely no magic here. It is not a coincidence that the dramatic rise in global debt starts from the late 1970’s when – after Nixon’s 1971 decision to suspend the $ convertibility into gold – the push for trade globalization starts with the Tokyo round of the GATT.

    Central banking can do nothing at all in this situation, except lowering the cost of the debt snowball, which it is doing. But this solution is also fuelling the problem as rising asset values act as an incentive for even more leverage in the financial / real estate / commodities sphere. Central banks are like pyromaniac firefighters.

    So, yes, there is a much better solution than central banking. It is precisely the solution that nobody has mentionned in the 6 years since the 2008 crisis, the solution that has been discussed in none of the countless G7, G20, WTO, WB, IMF, Jackson Hole, Davos, etc … meetings of the past few years: reform the current world trade and monetary system!

    Convene an international conference a la Bretton Woods. Decide that from now on, cross exchange rates will be fixed at levels that compensate for salary and productivity differences across countries and would be adjustable from time to time to keep up with how these relative differences evolve. This simple step will eliminate systematic labor arbitrage across the world and reveal true competitive advantages arising from know-how and expertise instead of competitive advantage arising from undervalued currency / labor cost given labor productivity. From that point, the growth engine of global debt will be desactivated. Aggregate demand will be able to recover gradually as labor share recovers globally. Excess industrial and real estate capacities would be gradually absorbed. Trade imbalances would gradually recede. Relative deleveraging will happen in a non-deflationary way.

    It should have been done in 2009. It can still be done. However, when the world would have grown into the maximum debt / income limit allowed by 0% interest rates (capital is not an infinite multiple of income, it has a finite limit even at 0% interest rate), then it would be too late. For the time being, central banks actions are conducive to this latter scenario.

    • This simple step will eliminate systematic labor arbitrage across the world and reveal true competitive advantages arising from know-how and expertise instead of competitive advantage arising from undervalued currency / labor cost given labor productivity.

      This assumes that labor (or exchange rate) arbitrage is the root of the problem. The problem is the lack of annealed fitness created by debt. Period. This is why debt can’t be written down painlessly because there are social capital costs to large debt that can’t be unwound quickly.

      And labor is going away, even Oxford University predicts 47% of all existing jobs will be replaced by automation.

      What all that debt did since the 1980s was allow people to sustain in jobs which had already become irrelevant because nerds like me were fooling around with this new toy called the personal computer since 1978. And while we changed the world by being a million times more productive, no one noticed because they didn’t need to because debt was there to hold their labor hand. So now they will pay for it with an abrupt collapse into technological unemployment, probably at 50% of the global population unemployable (uneconomic in their knowledge versus a computer or robot).

      So while those globalists will get together to fantasize about non-solutions, it is going to be up to us technologists to devise a way to keep us from spiraling into a Dark Age. And we will. Because we can.

      • If the problem is the lack of annealed fitness created by debt, then the solution is to stop the engine that propel global debt. I’m proposing one, which is obviously open to discussion. You say you can propose one but you propose none. It’s good to be astute and prolific (and modest). But it’s not of much use if you don’t spell it out.

        • I can dream about a solution to eliminate the ability of government to tax virtual knowledge. They would still be able to tax tangible commerce which is being replaced any way by virtual knowledge production.

          We are moving towards maximum division-of-labor wherein the individual is his own company and call sell his knowledge production anonymously. This requires a different implementation than Bitcoin’s design.

          The government won’t be able to tax that (if it comes to fruition and works as envisioned), thus the backstop for public debt won’t be possible. The tangible commerce world is orders-of-magnitude less productive than the intangible knowledge work, e.g. look what the laser printer did for decentralized publishing, then the internet did to decentralized publishing, and now the 3D printer will do to decentralized manufacturing.

          The key is the anonymous money has to become a unit-of-account via decentralized exchange and mining. This requires certain technical feats, which have yet to be demonstrated.

          P.S. I would have preferred to have written “one of the more prolific and astute”. There is no way to edit posts here and I’m in a rush and don’t proof read.

          • I know you’re in a rush, after all you have to keep up this order-of-magnitude higher productivity. Don’t worry, “more astute and prolific” and “more prolific and astute” make no difference. Both lacks modesty and both read odd versus your lack of practical proposal. Please let us know when your knowledge and productivity has delivered something workeable.

          • DVD, the keyword phrase that I wanted to changed was from “the most” to “one of the more”.

            My suggestion should be real before the end of 2014, then we can judge if it is practical and workeable.

            Note by definition, it is impossible to save that part of the economy which is uneconomic, i.e. all those who didn’t and won’t obtain the correct skills and who will fight for more government aid and debt instead. You proposal will simply allow them to continue longer.

            We stand at a crossroads. I chose to the individualism, decentralized, bottom-up fork in the road. You choose the double-down on more top-down management while stomping on decentralized annealing fork.

            Btw, I think both forks will be enacted and run in parallel. And I am confident which fork dominates over time as it gains size and the other withers.

  39. I wish to disagree with your conclusion that a New Deal is the only way to offset unemployment and make productive use of savings.

    To be clear, the New Deal did not ease unemployment or put income to productive use. Quite the opposite. It was mostly make work that was done inefficiently. It was WWII that reduced unemployment and the destruction and resultant total rebuilding of almost half of the developed world’s productive capacity and material goods that put savings to productive use.

    The US had a mini version of the New Deal in Obama’s “Stimulus” package. It was a total waste of debt that future generations are saddled with, going to the richest and most politically connected, producing nothing.

    More government spending on infrastructure will only waste more capital and debt with malinvestments made for political reasons as disposable income is siphoned from the current and future wage earners.

    I don’t disagree with building infrastructure but better that companies compete in the free market for renewable franchises to build and maintain toll roads and bridges than another government New Deal.

    Barring that, another World War would do the trick and the political elite are not unaware of this option.

  40. Aggregate spending will naturally restore by itself once the demand side of the economy – mainly households – has restored its cashflows. This will only happen when labor arbitrage on a global scale cease and when global labor share of production stop declining. Having a budget stimulus – a New Deal – as long as global labor aritrage opportunities are wide open is counter-productive: the benefits will leak outside while the stimulating government would be left with the debt, which then must be serviced, so the budget stimulus would promply be followed by austerity – government spending cuts and / or increased taxes – that depress domestic demand further.

    The key is to restore the self-financing capabilies of households globally in a sustainable way (ie. not by government transfer payment). This requires a complete change in the current world trade and monetary set up.

    Current policymakers are not the right persons to implement that change as they are personally and heavily invested in the current set up. As a matter of fact, all their actions for the past 6 years have been to preserve this dysfonctional system and making it even worse: For instance, in the US, QE transfers wealth from middle-income households with a high spending / income ratio via lower interest on their savings to top income households with a low spending / income ratio via higher risk asset values). In Europe, pressure on unit labor cost to restore competitiveness has depressed domestic demand while trying to engineer an export-led recovery. In China, the credit surge has driven capex share even higher and consumption share even lower with the resulting overcapacity and debt overhang. So, everywhere, the policy response to weakening agregate demand has been to … weaken aggregate demand further! The misguided attempt to “making sure deflation doesn’t happen here” has resulted in even more deflationary pressure. In short, the global policy response to 2008 has been totally counter-productive and can only be explained by the fact that current policymakers are ideologically committed to the current world trade and monetary set up.

    Yet, it would be infinitely better that the necessary change happen peacefully rather than through social unrest, protest, revolution or war.

    So, we don’t need a new New Deal but we need visionary and courageous new policymakers. Preferably in a peaceful way.

  41. More taper, more tantrum. I think the US Panic of 1837 has a lot of parallels with what is happening today in China. Big property bubble in China and rising interest rates in the US. Jackson used the species circular to raise interest rates in the US, and it looks like China is trying to stem the inflow of hot money.

  42. A person necessarily help to make critically articles I might state. This is the first time I frequented your web page and up to now? I amazed with the analysis you made to make this actual post amazing. Wonderful task!

  43. That is really interesting, You’re an overly professional blogger. I’ve joined your rss feed and look ahead to searching for more of your wonderful post. Also, I’ve shared your site in my social networks

Leave a Comment

Your email address will not be published.

5 Trackbacks

  1. Finance: What’s Going on with the RMB? | Bamboo Soapbox (Pingback)
  2. Emerging Markets Still Face The "Same Ugly Arithmetic" | FXCharter (Pingback)
  3. Michael Pettis: Will Emerging Markets Continue? « Economics Info (Pingback)
  4. Article Collection 03/10/14 | Moningtonomics (Pingback)
  5. China Article Collection | Moningtonomics (Pingback)