Our world has been cornered into an ever-narrower path with limited options, as a result of the macro excess that has been built up over decades.
I have been reading Asimov’s Foundation series during house quarantine. At the central of the story is the academic discipline of “psychohistory,” through which actions and subsequent future of a civilization can be projected using psychology of the mass, like how the flow of water can be calculated in physics with great accuracy. People think they have a choice, but ultimately the wheel of history is simply forced actions driven by factors known and unknown.
Our world has been cornered into an ever-narrower path with limited options, as a result of the macro excess that has been built up over decades. In fighting Covid-19, governments have no choice but to choke off economy via harsh social distancing measures. In saving the economic and employment impacts from such virus-fighting measures, governments have no choice but to resort to fiscal stimulus. As the bill for bailouts and stimulus racks up rapidly, on top of the prospect of a global recession that will trigger system-wide deleveraging, central banks have no choice but to print astronomical amounts of money. These are all logical but narrow sets of chain events based on crisis fighting playbooks from the past, however, we seem to have reached the qualitative and quantitative boundaries of such actions.
Quantitative limits—math is universal but cannot be cheated. When interest rates, in particular that of the reserve currency USD, came down to zero a couple of weeks ago, there comes the limit. Like particles that behave vastly differently in the nano-meter realm, so does economics in a zero/negative rate environment with which humanity doesn’t have many experiences. The stimulative nature of lowering interest rates, once in the negative territory, seems to vanish based on the limited experiences in Europe and Japan. The traditional capital conduit of the banking system simply ceases to work property.
Central banks also have been busy with quantitative easing (QE), the beautified term for money printing. This as well has a mathematical limit that is “infinite,” which we have effectively entered when Chairman Powell of the Federal Reserve pledged unlimited support. Thus far the Federal Reserve has been printing at a speed equivalent to one QE1 from the 2008 Global Financial Crisis every ten days. Humanities have more experiences with this—what the US is doing right now is similar to the Weimar Republic of Germany before World War 2, printing German Marks to repay debt/rebuilding costs. It brought about the complete collapse of the currency, and the rise to extremism in Europe. Granted the historical backgrounds are nowhere similar, and the US dollar is the reserve currency of the world, we still must not discount the potential detrimental effects of excess money printing. Nothing comes free.
Qualitative limits—the current monetary system since 1971 and its crisis-fighting methods have the side-effects of benefiting the rich and robbing the poor. Recently we saw the ever-increasing bailout and stimulus measures from the US government—so large the federal deficit will likely grow by 30% of GDP. Using the combined number of the announced first round $6 trillion from the Fed and the US Treasury (which likely is only the appetizer), it should translate to $18,348 per US person, but in effect the average person gets $1,200 only. The money overwhelmingly goes to large corporations. For example, when US airlines spent $45 billion in stock buyback since the Global Financial Crisis to benefit its shareholders but now receive $60bn in bailout—something is wrong with the system.
To put into perspective how large the stimulus is. The United States spent $4.1 trillion during World War 2 in today’s dollar, and Barack Obama spent $800 billion in stimulus during the 2008 Global Financial Crisis. The scale of the current bailout is truly unprecedented, but still not enough to make up for extreme excess we have built into the system that is in the process of unwinding. There are over $500 trillion in notional financial derivatives and over $190 trillion in global debt, not to mention unfunded liability (promised retirement payment of Social Security and Medicare/Medicaid) of the US alone stands at $132 trillion. All are due in the coming decade for intentional and unintentional reasons, some will not be honoured unless central banks come to the rescue. Covid-19 is simply the final straw that broke the camel’s back.
What does this all mean? The world could be on a brink to a new world order and moving away from the old. The transition could take a couple of decades. Like heated water molecules at the brink of going from liquid to gas, there will be a lot of violent movements under extreme stress. In our lifetime we could see the beginning of separation of the state and money, similar to the separation of religion from sovereign in the 16th century as the forefront cryptocurrency thinker Tuur Demeester pointed out. Certain countries will likely go back (or more accurately, go forward) to the gold standard to strengthen its own national currency. Many norms could be challenged—think of the irony of tax as an example. When central banks can conjure up unlimited amounts of money, tax becomes merely an industrial policy to favour one company over another, and to redistribute personal wealth at the discretion of the powerful.
Politics can also get on a slippery slope, if the Fed can print trillions to bail out corporations, why not grant student debt relief that is certainly more ethical, as the US congresswoman Alexandria Ocasio-Cortez has correctly pointed out? If we are doing $6 trillion of stimulus that doesn’t seem to have any precautions, why not do twelve? Sixty? How would a four-year term government have the discipline to resist such temptation—history says we as humans can’t once it is set in motion.
Lastly about the US. Coronavirus has exposed the weakness of its socioeconomic structure that most have taken as the norm. When 60% of working class are on hourly wage, who must show up for work to collect pay cheque; when 40% of adults have less than $400 in the bank and thus reducing any capacity to weather storms; when health insurance is tied to employment; and when “the greatest nation” has minimal manufacturing capability for providing the necessities of a country in times of crisis. That shows a system of fragility, and moreover, it seems to be a system of modern slavery. Americans pledge most of their living hours to a system with no recourse, in exchange for credit-fuelled consumerism that gives the illusion of wealth. This, I believe like all slavery, will also need to enter its last chapter.
Going back to Asimov’s Foundation series. Trantor, the shiny and glorious capital of the Galactic Empire, also relied on outer worlds for its supplies. Then, unable to reform or to cope with change, the Empire fell.
James Lee is the founder of New World Research and Analysis Institute.