The economic forces – those post war strong tailwinds – that have shaped the last 35 years, and which accelerated gilded journeys through the western ‘plentiful era’, are no longer blowing in a favourable direction. They were already slowing, but now are reversing.
The winds now have shifted 180° in direction – they are gusting headwinds. This is a structural shift within a long cycle. There are no quick ‘silver bullet’ solutions. The ‘Cabaret’ good-time years are gone. We will have to ‘make do’ with less; and consequent political volatility is inevitable.
China had earlier industrialized, giving us inflation-killing, cheap manufactures; Russia gave us the cheap energy that kept western economies (just) competitive, and (almost) inflation free. A ‘Frictionless Ease’ at that point characterised the movements of goods, capital, people – everything. Today however, it is Friction and Impediment that is prevalent.
The ‘turn’ began with the US determination to not allow an Asian ‘heartland’ to supplant it. But the shift has acquired its own powerful momentum, now generating severed trading blocs that are determined to shake free from ‘old hegemonies’.
In place of ‘Frictionless Ease’, we have economic de-coupling: sanctions, asset seizures, legal protection degradation, regulatory discrimination; Green Agenda and ESG discrimination; national security ‘ring fences’, and narratives that cast swathes of hitherto mundane economic activity into borderline ‘treachery’.
Simply put, there is friction … everywhere.
On top of this general transition to friction, there are distinct dynamics that are turning a frictional base into raging headwinds.
The first is geo-politics. The multi-polar sphere is rising. But it’s ‘pull’ is not just for multi-polarity, per se; it is essentially about the re-appropriation of national autonomies; of state sovereignties and the recovery of discrete civilisational ways of being and values by aspirant multi-polar states.
As Ted Snider has succinctly puts it:
“The monopoly of the dollar has not just assured US wealth: it has assured US power. Most international trade is conducted in dollars, and most foreign exchange reserves are held in dollars. That dollar dominance has often allowed the US to dictate ideological alignment or to impose economic and political structural adjustments on other countries. It has also allowed the US to become the only country in the world that can effectively sanction its opponents. Emancipation from the hegemony of the dollar – is emancipation from US hegemony”.
The flight from using the US dollar in trade therefore becomes the key mechanism to replacing the US-led unipolar world with a multipolar world. Plainly put: the US has over-used its weaponization of the dollar, and the tide of world opinion (even that of President Macron and some other EU states) has turned against it.
Why is this so important? Simply, it has begun a global ‘run on the dollar’ – rather like a ‘run on a bank’, as confidence ebbs.
The second dynamic is the inflation ‘virus’ – the historic scourge of all economies. The latter has quietly accumulated strength during the ‘golden era’ of zero-cost credit, but then became turbo-charged with tariffs for China – with the EU self-electing to forego cheap energy in the hope that its boycott would implode Russia financially. And with the West’s widening ‘war’ for the on-shoring of an ever-ballooning range of supply lines, to be ring-fenced under national-security designation.
Essentially, the West embraced economic self-harm, “from an underlying mood of existential dread, a nagging suspicion that our civilisation may destroy itself, as so many others have done in the past”. (Hence the impulse to reassert a civilisational primacy, even at the price of accelerating a possible western economic self-suicide).
Billionaire fund manager, Stan Druckenmuller, caustically notes the inherent tail risks – knowingly run – during the tailwind era of zero inflation/zero interest/abundant liquidity era:
“[But] … when you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things. So there’s stuff under the hood, it’s starting to emerge. Obviously, the regional banks recently … But I would assume there’s a lot more bodies coming … It’s a scary cocktail that we’re being presented with”.
Well, who wants to be the party-pooper? Not the élite 1% certainly, who were doing very nicely from this paradigm. The Federal Reserve kept interest rates low, and government auditors encouraged banks to buy long-dated US Treasury bonds and mortgages through giving them favourable accounting treatment. (The banks didn’t have to value them at their current market value in accounts so long as they could pretend they would hold them to maturity).
Then the scourge of Inflation and interest rate hikes arrived – shredding the value of such assets. That has left liabilities uncovered and exposed.
The authorities contrived at the building of this ‘free money’ house of cards by letting it rip for so long. It was a gamble that inevitably would have its ‘ceiling’, a limit beyond which it could not be sustained further. By then, decades later, people had come to believe it could be extended – forever. Many still do. They fail to notice that the tailwind had turned 180°, and had become a strong inflationary headwind.
Then arrived the truly extraordinary ‘Big Gamble’: Europe decided that it could ‘do’ without cheap energy and natural resources (out of pique at Russia over Ukraine). It decided to bet big on new technology (technology that is yet to be evolved, or proven) arriving, and arriving in time, and at a cost that could sustain a competitive modern economy – in the absence of fossil fuel pump-priming for an infrastructure originally built that way.
There is no assurance at all that this tech prospect will materialise. It may, but it may not. And that is a huge gamble.
European states primordially fought wars in the 19th Century precisely to secure energy or resources such as oil, coal and iron ore. In WW1, Britain fought in the Middle East to secure the bunker fuel-oil that would allow British warships to be converted from coal to oil. The conversion to oil gave the UK navy the competitive edge over the coal-fired German fleet. But today’s EU has decided to eschew 19th Century fossil resources in a Panglossian bet on human ingenuity producing a technical revolution – to timetable – and on cost.
“But missing is the fact that technology cannot create energy [at least of the type that modern society needs]. This human agency conviction has long proved overly-sanguine. Those who assume that the political world can be reconstructed by the efforts of human Will, have never before had to bet so heavily on technology over [fossil] energy – as the driver of our material advancement”, Helen Thomson writes.
Betting on technology over fossil energy, however, is but half of the Big Gamble. The other half of it consists of the western economy being founded and constructed around cheap energy. That is its’ ‘business model’: It is hard to conceive of another. Will Europe spend the coming decades scrapping and replacing efficient energy infrastructure with new sources of energy, that for the main are no more than a ‘gleam in the eye’ of an innovator?
If so, it will be the first time in history that anyone has bet so heavily on tech, over energy. Never before has such redundancy of the existing energy infrastructure (and its loss of value) been seriously contemplated. And – never before – has efficient energy infrastructure been scrapped, to be replaced with new Green structures that are less efficient (see here and here as two examples), less reliable, and more expensive.
It is the first time in history that such an investment has been made at this scale. That makes everything more expensive, harder, and less efficient. It is a recipe for further embedding inflation and economic degradation.
Truly, it is to sail against howling headwinds. How will this infrastructure be financed? The Free Money era is behind us; fiscal cost is now REAL cost. Degraded efficiency, reliability and friction will then meet and contend with upcoming EU Net Zero ideology, with Climate becoming the pretext for introducing radical restrictions on ways of living.
In the US, financialisation of the economy was supposed to extend western economic primacy. It did for a while, but ultimately financialised products ballooned, sucking dry the real economy that produced things, and employed people productively.
These money-like derivative products (displacing the real economy) have tended more to the realm of the unreal. It is hard now to tell between money-things that are ‘real and unreal’. The FXT saga (for those who followed it) illustrated this precisely: How real, and in what way was the FXT ‘token’?
The Green, ESG ‘products’ fad sounds remarkably like a derivative idea descending out from the financialised product world: i.e promoting technological bling that attracts investment, but which becomes more and more detached from the real makings-and-doings of a classic economy – more abstract, more based on promises, hopes, and wishes than on things derived from nature.
For the ordinary European, it is indeed “a scary cocktail that they’re being presented with”, one BBC document predicts. “The Net Zero objective cannot allow for “personal choice”: “What do truly low-carbon lifestyles look like – and can they really be achieved by personal choice alone?”, the article laments. Well, if the answer is ‘no’ then that means the ultra-low CO2 lifestyle has to be for everybody. How we do that is a matter of “both individual and systems change”.
Looking ahead, what does this ‘cocktail’ portend? Political turbulence, probably. To paraphrase Churchill’s bluntness: ‘This is the sort of bloody nonsense up with which they [the people] will not put’.
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