The Global West Reaches Economic Adulthood

Jay OwenTrendspotting, Ethical Markets Review

mastheadThe Global West Reaches Economic Adulthood

By Gijs Graafland, Planck Foundation, Amsterdam, NL


The Global West matures. Not only in demographics. Also in economics. Growth is over. Decline is knocking on the door. This reality is far from acceptance. The current mood is still the narrative of the past: growth.

But this narrative lacks an analysis of the main driver of economic ‘growth’ in the Global West the last 30 years: that was less rise of productivity (as everybody still thinks), but that was credit growth. Of course a rise in productivity had something to do with it. Of course there was a peace/détente dividend. Of course globalization contributed. But the main driver was credit. Credit is pulling consumption from the future to the past. Meaning credit is over emphasizing of consumption today at the cost of decline payment power tomorrow.

When an economy is 75% based on consumption and only 25% based on production (like the US economy), you know that this is not economically sustainable and will derail sooner or later. Only nations that have been able to promote their currency as the global reserve currency can operate such a non-balanced economic model. By the grace of the acceptance of the world of their currency as global reserve currency. Quite a fragile foundation for a nation. Too much monetary tail wind doesn’t guarantee a good/solid/sustainable economic future.

This monetary advantage applies only to the USA, for as long as it lasts (as bilateral currency swaps that bypasses the $ are getting mainstream at fast pace). When this advantage disappears, the US economy will decline as a mathematical certainty: retracting to normal currency driven levels. It will lead to hyper-inflation of the $. Why? As the government a) has budget deficits that must be financed and foreign demand is dead, plus b) has financed most of its long-term federal debt (stupidly) in short term loans which need to be refinanced very quickly. Endless QE is then the only option (as is done as we speak: as foreign demand for US debt has fallen to almost zero). The problem is that this monetary change and the hyperinflation in the USD it delivers (in a running for the exit scenario or in a gradual decline scenario) will erase all financial assets denominated in $ (making them worthless) pulling both the European as well as Japanese and Middle Eastern financial system with it down.

This is why the USA response will be ‘pre-emptive’ (does this word ring a bell?) and try a) to let some other nation default (triggering a huge rise of interest levels in the Global West).  Risk suddenly becomes a debt pricing facet again before they hit hyperinflation.  Risk probability shifts toward Japan, as getting a European nation defaulting was not possible by EU/ECB intervention.  The USA might use this “other party default” to design a new financial system in the US advantage again (as was done in 1944, 1971-1973 and in 2000-1014). The EU and Japan will accept that US leadership (as their financial systems are undermined by $ exposure). The BRICS and the rest of the Global East and Global South will not accept this; neither Russia and China consider the Global West as their friends anymore, a huge foreign policy debacle of the Global West. The US, the EU and Japan will form a new monetary union with erasing all state debt and by that all pensions. It will be a monetary union with no political union and therefore built on quick sand. Efforts to make it a political union will succeed, but will also be built on quick sand. At the end, the USA will dissolve in separate states, as will Europe reshuffled along the language lines. Social security nets will have been abolished along this road. City nations will emerge/thrive.

To get back to the ‘developed world’ (nations with well-developed large economies) at large: Credit is not that innocent as it is sold/marketed/advertised by its industry. Not for the EU and Japan and the other nations of the world. Credit for production equipment is mainly good. Credit for maintaining consumption is mainly bad. It’s about living today and to hell with tomorrow. Fogged by the myth of endless economic growth (trees that grow into the heavens). Amortization-free credit for housing is a prevention system for saving money out of the financial system. The financial industry not only wants to issue credit to people, they also want the savings of people. Eating out their margins on both sides. Holland is an example of a nation where the population has a ‘long balance sheet’: on the one side house prices are very high and people can’t invest their pensions into their houses, on the other side there are very high mortgages ratios. Add to consumption credit, car credit and the coming student loan credit boom and people’s life and purchase/spending power is largely seized by the financial industry (reducing spending significantly). Add to this a retracting government that demands from people more savings as the social security safety nets are rolled up more and more.

To conclude this analysis: there is too much debt, too much future consumption has been pulled to the front earlier by credit. This all went well as long as credit could grow. The music stopped when that was no longer possible in 2007/2008. Now the debts have to been paid/amortized with interests on top of it. That eats out consumption big time. Add to this higher income taxes and higher sales taxes that both eat out even more payment/purchase/spending/saving power. Add to this that people wisely start to build reserves again. Add to this the aging demographics (with most of their pension eggs in the $ basket, a basket that could be lost as described above very soon). Add to this that when money is created by the banks, only the principle is created, not the interest, the interest had to come from growth, growth that’s no longer there: the financial system is a soufflé in the oven and the oven is turned off: guess what the soufflé will do now: most of the financial assets will vaporize.

 

Add to this the neo-imperial wars the Global West is fighting around the world (damaging the trade relations they need to solve the problems). This marks the end of Global West driven globalization and the rise of bilateral development by bilateral currency swaps and bilateral trade partnerships. Add to this the fact that the economic sun is no longer shining at full strength in the Global West. Other parts of the world now enjoy 5-10% economic growth; the Global West has no economic growth anymore. Forget all the cooked statistics on western economic growth: it’s plain propaganda: there is no real economic growth since 2007 in the Global West.

To wrap all this up: the Global West is toast. The credit bubble is going to haunt the Global West. Mortgaging the future was not a too wise concept. But what about the golden future promised by the ‘knowledge driven economy’? That’s a rainbow, too. The whole concept is based on the false thesis that the people of the Global West were smarert than the rest. That thesis is not only racial bias, it’s also just not true. Smartness has no geographical boundaries. The middle class in the Global East and Global South could even prove the opposite; they want some piece of the global action too, and are more strict parents/educators than those in the Global West. But the Global West is better organized right? Maybe, but Singapore is not organized? But the Global West is more creative right? Never seen the rebellious/creative youth of China or Russia or Iran?

How to go from here? The Global West has to grow up. That’s a different concept than growth. We have to cope with the effects of the last 30 years of irresponsible adolescence and face the above described facts. We didn’t use the credit growth for realizing energy independence: we just consumed it. The party is over. The paradigmatic moment requires us to sober up and start to behave as adults. From now on it’s not about growth, but about preventing decline. We must learn to appreciate/treasure/value, not reason. Not from a green mind set, but just from our economic reality.

What are the solutions? 1) Taking the license for money creation away from the banks: financial capitalism has proven to be parasitic and wealth concentrating: fair market based productive capitalism produces and distributes wealth by the market by wages. 2) Stop any neo-imperial war waged by the Global West: aside from the moral issues: we can’t afford them anymore, and we need not to grow enemies but develop trade relations: not out of ideology, but out of need for preserving what we have and prevent further decline. 3) Eliminate all labor taxation (which will make the Global West comparable on the global market), and we could do that as the money creation has been taken away from the states. 4) Redirect the money creation away from real estate towards building more energy independence by non-harming technologies (like solar) on the skin of each manmade object and energy conservation.  Energy imports are monetary drains that harm economies structurally. 5) Develop bilateral relations with each and any nation where there would be a mutual interest to maintain and serve the relation as well as possible. 6) Stimulate open technology for all sectors the same way as open source thrived the software sector: it will compensate a lot of decline by progress: patents deliver innovation dead ended streets: open technology makes building innovation on innovation possible. These six simple steps will deliver the Global West a bright future for the 21st century.