As a liberal art student, my understanding and knowledge about economy, finance and international trade against the backdrop of globalization is very very limited. My intention here into all related research is to provide you some references and arguments I feel valid and thought provoking in regards to the paths of inclusive economic recovery. My general feeling is that international cohort coordination is definitely needed. More fundamental structure changes are imperative. A broader scope of issues need to take into account rather than just the US-China trade war concerns. After all, we are looking for root cause solutions rather than another short term bandage cover of long entrenched fundamental global issues.
Andrew Sayer also rightly calls the crisis we are facing now “a diabolic double crisis – at once economic and environmental”. On the interface between the environment and inequality, Andrew quotes Pacala, saying that 7% of the world’s population is responsible for 50 percent of all greenhouse gas emissions. According to WHO figures, over 20% of the populations of the more unequal rich counties are likely to suffer forms of mental illness – such as depression, anxiety disorders, drug or alcohol addiction each year. Rates may be three times as high as in the most equal countries. Very large material inequalities mean that status becomes more important and social life is increasingly impoverished by status competition and status insecurities. Social anxieties and our worries about how we are seen and judged are exacerbated. The result is that people start to feel that social life is more of an ordeal than a pleasure and gradually withdraw from social life as the data show. By intensifying status insecurities, inequality also drives consumerism, which is the biggest obstacle to sustainability. Any idea that we should consume less will be opposed as if it were an assault on our social standing and quality of life. By reducing inequality, we not only reduce the importance of social status but, at the same time, we also improve social relations and the real quality of life. Reducing inequality is the first step towards combining sustainability with higher levels of well-being.
In the Age of Stagnation, Satyajit Das pinpoints one of the four factors eventually led to 2008 Financial Crisis is large global imbalances. Some countries over-consumed or overinvested relative to income, running up large foreign debts. Other countries consumed less and saved more, financing the shortfall. Americans bought more goods and services than anyone else, fueling demand for other nations’ products and keeping the world economy expanding. This process had operated since the 1960s, but it accelerated after the 1997-1998 Asian crises when the US stepped in to support global demand. High levels of savings and foreign exchange reserves in Germany, Japan, China, and other Asian economies were driven by traditional values of thrift, a lack of social welfare, or undervalued currencies. Irrespective of the rationale, the reserves and savings became a giant lending scheme that allowed countries with surplus to finance and boost trade, accelerating global growth.
With many of the goods they bought being imported, the US ran large trade deficits, exporting less than they imported. The US borrowed from overseas to finance the difference. Beginning in the 1990s, these imbalances grew rapidly, facilitated by increased capital mobility and highly integrated financial markets. By 2007 US was absorbing up to 85 percent of total global capital flows (US$500 billion each year). Asia and Europe were the world’s largest net suppliers of capital, followed by Russia and the Middle East. Cross-border debt flows funded the US government and a rapid expansion in US private debt. This global imbalance reduced interest rates, encouraging increased borrowing in USA. Ready availability of underpriced capital lessened the need for US to save or live within their means. This economic order is inherently unstable. During the 2008 financial crisis, the financial linkages helped transmit the problems across economies.
After the outbreak of 2008 crisis, Policymakers interrogate their models and torture data, failing to grasp that “many of the things you can count don’t count while many of the things you can’t count really count.” Successive nations cut their official interest rates well below zero. In reality, negative rates are a sign of policy failure. They punish savers and investors, and are unlikely to be effective in boosting growth or inflation. Negative rates lead to socially and economically unproductive strategies. Central bankers know, even if they are unwilling to publicly acknowledge it, that their tools are inadequate or exhausted, now possessing the potency of shamanic rain dances.
Satyajit Das argued that at a deeper level, 2008 Financial Crisis showed that perpetual growth and progress is an illusion. The siren is alarmingly loud to alert us that, the fortunate coincidence of factors that drove the unprecedented improvement in living standards following the Industrial Revolution, and especially in the period after World War II, is coming to an end. 2008 crisis coincided with an emerging scarcity of energy food, and water, and increasing evidence of the impact of climate change. The condition of excessive use of cheap resources and mispricing of environmental damage had boosted growth, raising living standards in the past, are increasingly unsustainable for further growth, and even reverse the gains.
Satyajit Das observed current human condition to the organisms responding to fecund conditions by over-reproducing and behaving in ways that can ultimately jeopardize their success. When conditions change, the population crashes in a process of natural regulations sometimes resulting in extinction. The human race faces similar dangers. Societies and individuals cannot expect to maintain high living standards and survive without a radical transformation in practices and more frugal living, perhaps following the advice of 19th century philosopher John Stuart Mill to “seek happiness by limiting…desires, rather than in attempting to satisfy them.”
While frugal living would result in an immediate sharp contraction in economic activity, over time the economy wills stabilize at lower levels of activity. John Stuart Mill anticipated this type of economy: “the increase in wealth is not boundless. The end of growth leads to a stationary state. The stationary state of capital and wealth… would be a very considerable improvement on our present condition.” The risk of not acting is significant. Shortages of water and food loom. If greenhouse gas emissions continue unabated, then according to research published in the journal Nature, a dramatic change in climate is inevitable, first affecting tropical countries around 2038. If emissions were to be stabilized in the coming decades, then the shift could be delayed by around 15-30 years depending on geography. Chinese proverb states, “to change from a thrifty lifestyle to one of luxury is easy, to shift from luxury back to thrift is hard.” Frugal living addresses economic and financial problems as well as conserving resources and environmental health, preserving both for future generations.
A parallel to the film The Matrix drew by Eclectica Hedge Fund founder, Hugh Hendry, cast light to our current economic reality: Morpheus offers Neo the choice of two pills: blue to forget about the Matrix and live in the world of illusion, or red to live in the painful world of reality. Most of the world, especially policymakers, is taking the blue pills. But taking the red pills will not help. Reality itself has become illusory in the euphoria of virtual prosperity driven by the flood of cheap, easy money.
Authorities cannot defer reality forever. Kicking the can down the road only shifts the responsibility for dealing with it onto others, especially future generations. Postponing the inevitable ensures that the adjustment will be even more painful, as the problems will have gotten larger. During the last half-century, each successive economic crisis has increased in severity, requiring progressively larger measures to ameliorate its effects. Over time, the policies have distorted the economy. The effectiveness of exiting instruments has diminished. With public finances weaken and interest rates at historic lows, there is little room of maneuver. A new crisis will be like a virulent infection, attracting a body whose immune system is already compromised.