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Bracing for a big-bubbles burst

Key takeouts as we move from one defining decade to the next.
With global debt ballooning and Moody’s issuing a downgrade warning to the entire world, those at Davos need to focus on the industrial economy more than the financial economy, argues the author. Image: Dimas Ardian, Bloomberg

Last year produced more than its fair share of cliffhangers, both globally and domestically.

Globally, it was the year of big bubbles in the key equity, bond and property markets concentrated mainly in the developed economies. Paradoxically, for South Africa it was the opposite: a mostly underperforming stock market, falling property prices and pedestrian economic growth – all of which have been well covered elsewhere and the causes well-known.

Global bubbles have been underpinned mainly by record levels – and continued expansion – of debt and low levels of interest rates.

Where there has been economic growth, it has been stimulated primarily and continuously by central bank manipulation of financial markets and constantly declining interest rates.

Global debt now exceeds $250 trillion, with government debt alone exceeding 100% of gross world product.

In November, credit rating agency Moody’s issued an unprecedented debt downgrade warning to the entire world and US Federal Reserve board chair Jerome Powell, who can only be described as the greatest ditherer the board has had, has finally admitted that “… debt is growing faster than the economy and that is unsustainable”.

Some $20 trillion in bonds, some even of junk status, now have negative interest yields and it is only a matter of time until the pace-setting US bonds touch on zero to negative. In recent times, shortages in the US repo market have been filled by the Fed to the tune of up to $400 billion a quarter, effectively creating QE4 (the fourth round of quantitative easing), and at a much higher level than previous quantitative easing.

Largely as a spin-off:

  • Income and wealth inequalities are still very much a critical issue;
  • Geopolitical tensions have been rising, with open warfare threatened;
  • Trade wars continue unabated;
  • Frequent civil unrest and protests are widespread; and
  • Deglobalisation and dedollarisation are shaping a new financial world. 

All of these, most economists would agree, have put the global financial system and indeed economics as we know it, in totally uncharted waters and has challenged many assumptions held by orthodox economists.

It’s a moot point whether 2020 will see these issues come to a head and plunging off the cliff.

More certain is that the decade of the 2020s will be a defining one.

To confirm the awareness and concern of world decision makers, I looked at what’s on the agenda of that most august economic gathering – the World Economic Forum (WEF) in Davos from January 21. It is there as the second issue as: ‘How to remove the long-term debt burden and keep the economy working at a pace that allows higher inclusion’.

The significance of the growth of the financial economy to the extent of squeezing out the industrial economy, however, seems to have been missed.

Financial markets tend to be parasitic and create little value in their own right, thereby being a hindrance to full stakeholder inclusion. It’s what Bloomberg has referred to as “capitalists without capital ruining capitalism”.

Others again, have argued that socialism has been deployed for the super-rich. The industrial economy where goods and services are being produced, is now commonly called the ‘real’ economy and is the creator of tangible value involving stakeholders.

Inclusivity and stakeholder cohesion have been the foundation of the WEF and, long since Ed Friedman’s articulation of the ‘Stakeholder Theory’ in the 1980s, have been incorporated into organisational theory and management school text books. But like the triple bottom line, it has had little traction, receiving more lip service than changing the strategic intent of enterprise.

Redefining the way we see economics

For it to really take hold it has to redefine the way we see economics, shifting from an institutional and money perspective to a people and relationship perspective – and the final accounts have to be less focused on shareholder value and more on creating value for all.

This can be captured in some forms of stakeholder accounting such as the Contribution Account or the earlier forms such as the Value-added Statement. The Contribution Account format has been around since the early 1990s and many new consultancies have subsequently sprung up promoting the same or similar formats. I have been writing on this theme for many years, including in my last book – Common Purpose; Common Fate – a free copy of which can be downloaded here.

What should be discussed at Davos

What the WEF should be discussing is moving from a fake financial economy to the real economy – from financial capital to industrial capital, which attracts less than 20% of investment, the rest going to financial instruments. That will draw in to a far larger extent the ‘stakeholders’ of customers, suppliers, labour, capital and government, largely ignored or bypassed by a financial economy.

It is not however as simple as to assume that this can be done by “removing the long term debt burden”. That means increasing interest rates, which will plunge the world into a deep recession.

On the other hand, one could argue that at least some of the froth blown off the financial markets will transform into investment in income-earning, real-value-creating industrial and commercial enterprise.

In the longer term this should favour emerging and resource-based economies such as South Africa – if it can get the basics right!

That cannot happen without some pain, the extent of which will be dependent on the degree to which the underlying principle – that ultimately true value can only be created by making a contribution to others – is followed.

 

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For 3 1/2 years I have been saying buy physical gold!!! The U S is now buying their own debt. That means paying one credit card with another. That does not end well

20 year gold price growth 443% USD, 1183% ZAR

Funny how people choose stats that favour their point of view. This is known as confirmation bias. While gold outperformed shares over 20 years, as you state, it underperformed over 100 years, 80 years, 30 years, 10 years, 5 years, 3 years and 1 year. And, over 9 years, the gold return in USD is negative, while the S&P 500 would’ve given you over 170%. Gold has traditionally been a very poor investment, unless you happened to buy it at the exact right time and hold for the exact right period

“ultimately true value can only be created by making a contribution to others”

This is the seminal observation! And applies to every endeavour, and in every walk of life. And even more so in interconnected, mutually dependant societies.

Also explains the great disquiet arising amongst general populations around the world as they realise the social /capitalist systems are being massively gamed by “successful greed” to the selfish – and exclusive – advantage of ever smaller power cliques.

Not going to end well!

Great article, thank you.

SA Economists and Unions are complaining about high interest rates in SA. Seems the 0.25% reduction has already been priced into the USD ROE before the fact. Where will the ROE be if we have a 1.5% further reduction?

Excellent article Mr Schuitema, but unfortunately this isn’t going to happen: “What the WEF should be discussing is moving from a fake financial economy to the real economy – from financial capital to industrial capital, which attracts less than 20% of investment, the rest going to financial instruments.”

It’s the logical practical way out, but too much self-interest and easy money in the way of fund managers and global multinational boards are invested in the virtual world of banking and derivatives trading where it is far easier to create money out of thin air like the Fed does than actually open a factory, employ humans, develop products and get them sold in world markets – so much hard work! And dirty! Ugh!

Those offices in the sky designed by starchitects and fashionistas with clean air, art gallery style interiors and wonderful views over the city you control are so much more preferable.

Sigh …

@beachcomber…….well said !

I noticed that too……

No one wants to get their hands dirty anymore

But if you look back, the West was built on blue collar blood sweat and tears with everyone rolling up their sleeves creating a real nuts and bolts industry

Now instead everyone wants to be a ‘social media administrator’…..’financial trader’……’bachelor of the arts and political history majors’…..

Its all paper based now…the proverbial house built on cards !

Well if you are looking for a crash then look at gold and BTC. More bullish on BTC though…

1. Bitcoin hash rate currently at record highs
2. The halving in May
3. Massive quite institutional adoption last quarter, $600 million GBTC alone.

Thanks for the input and access to your book, Jerry. I’m excited to learn more about “fortune sharing” and “contribution accounting”!

The “future shock” and “information overload” phenomena have been compounding the SA economy into the ground this last while.

Migration to the 4th industrial economy, with cornerstones of technology, “gig” skills, and organics/ biotech set to accelerate us onto the path of Higher Value. This should hopefully mean the same to everyone.

Money is a very poor form of valuation…meaning very different things to different people. It is one metric to use in determining the worthiness of a project, event or action. Very little to determine the value of a woman/ man/ rain forest/ ocean/ atmosphere/ Universe etc.

Other values, such as a positive attitude, physical health, freedom from fear, a willingness to share our God-given blessings with others (etc)- these are values that mean the same to most of us.

In a sense, these represent the Higher Nature that surrounds us.

Hopefully we will also see the return of the ability to separate sentient relations from material relations and gain some respite from the age of the death of permanence, at least in our relations with fellow creatures.

The shift from the financial economy to this evolved 4th industrial economy could well be viewed as a necessary evolution from more primitive financial valuations to those values which enable the quantum flow in a Higher Nature and at the natural levels of population equilibrium, the World seems set to reach within the next century, if not before…

An entirely new level of diversity and sustainability and humanity reveals. Look forward to further higher interactions. Thanks again!

The most beneficial attitude is available in condensed form, in the Ten Commandments. This is the humanitarian version, the benevolent interpretation, of free-market capitalism. For nations to avoid starvation, they have to live by the rules that govern property rights, as presented by the Ten Commandments. When society lives by these rules, they enjoy peace and harmony. When they don’t, they suffer financial turmoil and famine.

Circumstances did not change an iota over the past 2 thousand years. Societies merely neglect the teachings and forget to live by the rules.

Socialism violates at least four of the Ten Commandments:

Thou shalt not steal (even if you get the state to do so on your behalf).
Thou shalt not covert thy neighbours ass. Socialism is the politics of envy. One always reads about inequality, not poverty. Socialism makes you covert the ass and then promises it to you.
Though shalt not have any other gods before me. Socialism make the state god.

Socialism cannot exist without compulsion. This is why the death toll from this vile left wing experiment is in the hundreds of millions. How many hundred is academic. Though shalt not kill.

Thank you for this great comment, Richard! True to form!

Yes !….and communism, socialism’s ugly cousin, is one of the greatest threats to the West right now

Maybe Hitler was right after all ???

Great article Sensei. If only people recognised the condensed truth when they saw it, instead of confusing themselves with wordy dissertations.

Is the world experiencing shortage of capital goods supply?

All this capitalist alarmist about socialism…

Capitalism is premised on the world doubling its output every 30-odd years…

Can’t you see that there’s a problem with this?

We need a rethink…

Absolutely. The current models are unsustainable. We are already consuming the resources of about 2 earths and, as you point out, this must double in the next 30 years to keep business as usual on track.

But socialism has to do the same, except that it is far more likely to radically shrink economies as it has done everywhere it’s been applied. This is also no answer to the problem.

It’s clear that for now, money printing and financial repression is the only answer we have to keep the show on the road.

It won’t end well and it will crash in the end, but it’s better than crashing now

End of comments.

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