Macro-Policy Chokehold - The World Braces for 2019-2020 Global Recession RL Vol XIII No 583 MMXIX

Macro-Policy Choke hold -

The World Braces for 2019-2020 Global Recession

Costantinos Berhutesfa Costantinos, PhD

Chairperson, Ethiopian Management Professionals Association

Former Chair AU Advisory Board on Anti-corruption &

Professor of Public Policy and Sustainable Institutional Reforms - https://addisababa.academia.edu/CostyCostantinos

On August 14, 2019, recession warning came from the bond

and stock markets. Stocks fell about 3% a day on bad economic news from Germany, China and bond markets. Europe's largest economy shrank by 0.1% in the second quarter as exports fell amid trade and Brexit uncertainty. Chinese measurements of factory production, consumption and employment also revealed a declining economy. China's 4.8% increase in industrial production was a low

period of 17 years. Investors saw all of this and headed

for the tall grass of US Treasury.

The yield on the 10-year note was 1.58%, dipping a period below the two-year bond yield. The 30-year Treasury reached a record low of 2.018% and closed at 2.02%. Returns at this low show that investors are moving out of risk weights, signalling slower growth ahead – perhaps even a recession with smaller events and better policies fostering more optimism (WSJ, 2019).

Germany, the world’s fourth-largest economy, contracted in the 2nd quarter, while China, the 2nd largest economy, came in lower than ex¬pected. It is almost like a textbook version of a pre-recessionary period” (Mitchell & Hilsenrath, 2019).

A recession is a period of declining economic performance across an entire economy, frequently measured as two consecutive quarters. Businesses, investors, and government officials track various economic indicators that can help predict or confirm the onset of recessions. Recessions are visible in industrial production, employment, real income, and wholesale-retail trade. The working definition of a recession is two consecutive quarters of negative economic growth as measured by a country's GDP.

An Inverted Yield Curve is an interest rate environment in which long-term

debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

A recession is a period of stagnant or declining economic performance across an entire economy. Businesses, investors, and government officials track various economic indicators that can help predict or confirm the onset of recessions. Economic theories have been developed to explain how and why recessions occur. A partial inversion occurs when only some of the short-term Treasuries (5 or 10 years) have higher yields than 30-year Treasuries. An inverted yield curve is sometimes referred to as a negative yield curve (Investopedia, 2019).

Eccentric policy responses that surpassed conventional dogma of an economic equilibrium rationale on the post-2008 crush recovery had led into a deceitful sense of retreat, fantasising that the economy is self-regulating in times of crises. Nevertheless, the financialisation of the global economy leaves domestic economic decision making susceptible to major adjustments, rendering debts unserviceable.

Striving to sculpt micro-economic behaviour constructed on an archetypal proxy has ignored variances in wealth vacillations among voters and treasury quantitative easing, where the few tech giants and ultra-rich inexplicably siphoned resources from the majority, has disputably been a drag on growth. Today, popular resentment against bad economic governance has mutated into a political fallout for established democracies.

The 2019 recession will be unlike 2008, in a deeply leveraged global economy with trade war zooming from the US now slowing trade where normal policy tools may no longer work. Post-recession, Asia in particular should expect to have to take sides as the US and China vie for ownership of a new global economic narrative. Global economic recession is no longer a threat but an inevitability.

The question economists should be asking is not whether or when a recession will strike but rather what can developed nations do once it does. Normal policy tools such as Quantitative / monetary easing and/or fiscal stimulus may be no more effective than pushing on the proverbial piece of string. This time, it will be different — as optimists like to say when trying to convince themselves that crises cannot happen again; though not for the reasons they think. The 2019 recession will be different from the Great Recession a decade ago, and indeed, from any slump since the Great Depression of the 1930s (Rowley, 2019).

It is easy to forget what caused global economy stagnate for a decade after the 2008 financial crisis was the secondary shock to trade. World trade only began to pick up again in 2016, to then clobber it with US/China tariffs.

Is Marx’s

critique of Capitalism worth Looking at?

Marx argued that this alienation of

human work (and resulting commodity fetishism) is precisely the defining feature of capitalism. Prior to capitalism, markets existed in Europe where producers & merchants bought and sold commodities. Capitalist mode of production developed in Europe when labour itself became a commodity. True, the capitalist mode of production is capable of tremendous growth because the capitalist can, and has an incentive to, reinvest profits in new technologies and hence the capitalist class to be the most revolutionary in history.

But he also argued that capitalism was prone to periodic crises -- over time, capitalists would invest more and more in new technologies, and less and less in labour. Since Marx believed that surplus value appropriated from labour is the source of profits, he concluded that the rate of profit would fall even as the economy grew.

When the rate of profit falls

below a certain point, it would be a recession or depression in which certain sectors of the economy would collapse. Marx believed that this cycle of

growth, collapse and growth would be punctuated by increasingly severe crises. Moreover, he believed that

the consequence of this process was necessarily the enrichment and empowerment of the capitalist class

and the impoverishment of the proletariat.

Quo Vadis Economics in 2019-2020

What does the last Recession tell us

In July, central bankers from around the world met in Paris to mark the 75th anniversary of Bretton Woods. In his remarks at the conference, Jerome Powell, the chair of the U.S. Federal Reserve, noted the progress made over the last several decades but also the ways in which the last financial crisis fundamentally altered the global economy—and changed the toolkit for dealing with the next recession. A transcript of his remarks… (FP Editors, 2019).

Gone are the days when the Federal Reserve chair could joke, as my predecessor Alan Greenspan did, “If I turn out to be particularly clear, you’ve probably misunderstood what I said.” Central banks must speak to Main Street, as well as Wall Street, in ways we have not in the past, and Main Street is listening and engaged. Where does this leave us, and how should policymakers adapt to this new environment? Recognizing challenges posed by the changing structure of the economy, the need for effective policy responses and the importance of clear communication, central banks are taking a closer look at their strategies and the range of tools currently at their disposal

U.S. Federal Reserve Chairman Jerome Powell

Markets going Whacky!

Banks are now paying people to borrow money!!!

Banks are now paying people to borrow money

Danish Jyske Bank is offering mortgages at -0.5%. For Americans accustomed to paying 4-5% mortgage rates, let alone the double-digit figures consumers endured in the early 1980s, the new loan from Jyske Bank might seem inconceivable. It started offering home buyers 10-year mortgages at an interest rate of -0.5%. That means borrowers over a decade will pay back a little less than the amount borrowed, not including one-time fees. This highly unusual condition may be good for Danish home buyers, but it is an alarming sign for the global economy (Lynch, 2019).

How world leaders ruined the Global Economy

They took the best growth picture in a decade and put us in danger of recession. Why are so many key global leaders pursuing so many stupid economic policies? As recently as January 2018, the IMF issued one of its most upbeat economic forecasts in recent years, extolling “broad based” growth, with “notable upside surprises.” By last month, the fund had sliced its forecast for expansion this year to 3.2%— a significant falloff from the 3.9% projection reiterated just six months earlier — and had pronounced the economic picture “sluggish” ...

The deterioration in the economic picture is not the consequence of irresponsible behaviour by banks or a natural disaster or an unanticipated economic shock; it is completely self-inflicted by major world leaders who have delivered almost universally poor economic stewardship. The trade war initiated by the US sits firmly atop the list of bad policies. Brexit has tipped UK into economic contraction. Europe is unwilling to pursue structural reforms. China has focused on standing up to the US. After promising reforms, India has spun into democratic dictatorship (Rattner, 2019)

This is the ultimate indicator that something is fundamentally wrong with the world economy

If you want to understand the developing trade war, the

first thing you need to realize is that nothing makes sense. Views on trade are incoherent and de-mands, incomprehensible. Besides, Trump vastly over¬rates his ability to inflict damage on China while underrating the damage China can do in return.

China’s response so far has been fairly modest and measured, at least considering the situation. The U.S. has implemented or announced tariffs on virtually everything China sells here, with average tariff rates not seen in generations. China, by contrast, have yet to deploy anything like the full range of tools at their disposal to hurt Trump’s political base (Krugman, 2019).

Index of Trade-Policy Uncertainty

"America’s expansion may be cooling as it enters its

second growth decade, but GDP still grew at a respectable pace and the unemployment rate is a brag-worthy 3.7%. The direct effect of the tariffs should be small: in 2017, before hostilities began, goods trade with China amounted to just 3.2% of GDP. Even including the additional levies planned, they represent a tax rise offsetting only a fifth of the cuts introduced by the Tax Cuts and Jobs Act of 2017".

"What really matters, though, is the wider effects of the uncertainty created by the trade war on corporate behaviour. Most companies make plans over a 5-10 year horizon and invest in assets with a life of 10-20 years. Nevertheless, with each new tariff , the rules for trading their products become less stable and the scope of the trade war has expanded beyond goods to technology and currencies. Perhaps the international banking system, shipping companies or foreign joint ventures could be next. The most sophisticated firms try to gauge such risks (The Economist, 2019).

The Dialectic of

Internationale Trade

It is often said that with hazard comes prospect. President Trump’s punitive tariffs against a host of trading partners that was perceived as an inopportune US shift to trade barriers may in fact have opened a window to improve the performance of the global economy and international trade. El-Erian, (2019: 1-3)

"There is a subtle yet important change occurring in how political

leaders think about international trade, including remedies for enduring problems. It results from a key distinction between the “what” of trade (where there is relatively broad-based agreement among countries) and the “how” (where differences have tended to undermine important relationships, whether transatlantic or between China and the world’s advanced countries). As a result, there is some room for greater

optimism than is suggested by talk of damaging trade wars,

stifling investment restrictions, technological conflicts and

multiplying great-power tensions"

The relatively wide agreement in the international trade area tends to focus on four main hypotheses that are supported by a body of research and evidence:

• Free and fair trade is in the interest of most people in most countries, but it is not sufficient for inclusive pros¬perity. Specific segments of society can be displaced, marginalised, and alienated. As such, trade is not just an economic issue but entails important institutional, political and social dimensions.
• Trade is inherently underpinned by a mutually beneficial set of voluntary interactions that are best conducted, to use the language of game theory, as a cooperative game.

• An accumulation of legitimate grievances undermines both the ideal and the reality of free/fair trade. These grievances relate mostly to non-tariff barriers, including issues such as intellectual property theft, the weaponisation of economic tools, forced technology transfer, insufficiently effective and credible multilateral institutions, and a less-than-stable global economic and financial order.

• Lastly, fixing these problems has proven frustratingly slow. That is where the major areas of disagreement begin. How should the accumulating set of problems that undermine free and fair trade be addressed? Over the years, conventional wisdom has stressed that the best option is to maintain an approach focused on coopera¬tive resolution. This implies negotiations that are best conducted free of actual or threatened punishment such as imposing tariffs and it favours reliance on the rules (Ibidem)

Unlike the 2008 global financial crisis,

which was mostly a large negative aggregate demand shock, the next recession is likely to come from permanent negative supply shocks of the China-U.S. trade and technology war.

Moreover, trying to undo the harm through non-stop monetary and fiscal stimulus will not be an option. There are three negative supply shocks that could trigger a global recession by 2020.

What should Emerging Markets do?

Behind the escalating global

conflict over trade and technology is a

breakdown of the post-war rules-based order. A support for the system that made that possible has disappeared. For much of the last century, the US sheltered the rules-based trading sys¬tem created at the end of World War II. Under the new dispensation, rules were enacted to constrain selfish behaviour and

coercive threats by the

powerful...

An awfully long expansion -

For how long can today’s global economic expansion last?

The world’s business cycles are lengthening, but not abolished. It is hard to summon significant optimism when looking at the world economy.

As the trade-war between America and China, grinds on unresolved, indices

of business confidence have been

falling fast...

Surveys suggest that, as trade growth slows; global manufacturing is shrinking for the first time in more than three years. Services have begun to follow manufacturing’s downward trend as domestic demand falters, even in economies with strong labour markets, such as Germany (The Economist, 2019)

If policymakers from an

emerging-market economy expressed concerns about the potential effects of more open trade on some of their workers, economists were quick to reassure them that any local pain would be outweighed by the long-term gains. All they needed to do was redistribute the gains from trade to the groups left behind.

This would turn out to be easier

said than done...

What do we still need to learn?

More than a decade after the 2008 crisis, macro economists have failed to absorb crucial sets of lessons.

• Models are still struggling – and mostly failing – to cope with disruptive change, and with the fact that both balance sheets and inequality matter. Macroeconomics was one of the casualties of the 2008 global financial crisis. Conventionally, it failed to predict the calamity or to provide a coherent explanation for it, and thus was unable to offer guidance on how to repair the damage.
• Despite this, much of the profession remains in denial, hankering for a return to “normal” and in effect treating the crisis as just a rude interruption. That needs to change. Although an economic recovery has taken root, its structural fragilities suggest macroeconomics is in need of an overhaul.
• Three sets of lessons stand out (Cliffe, 2019)

Macroeconomists must recognize that distribution matters.

Trying to model households’ economic behaviour on the basis of a single “representative agent” elides crucial differences in the experiences and behaviour of people in different income and wealth brackets. The fact that the rich disproportionately benefited from globalisation and new technologies, not to mention from central banks’ successful efforts to boost equity and bond prices after 2009, has arguably been a drag on growth.

What is certain is that widening inequality has dramatically reduced support for mainstream politicians in favour of populists, in turn corroding the previous policy consensus that sustained fiscal probity, independent monetary policy, free trade, and the liberal movement of capital and labour (Ibidem)

The global backlash against the economic

and political status quo has also targeted big business.

• In the immediate aftermath of the crisis, financial institutions were in the firing line. This has contributed to wider questioning of globalisation and international trade, investment, and tax rules.
• Changes in global governance arrangements may disrupt business models, transform the institutional framework, and add a fresh layer of uncertainty to the economic outlook.
• The macroeconomics profession has yet to come to terms with the most important lessons of the past decade. Moreover, without a new consensus on how to manage uncertainty, the world is uncomfortably vulnerable to fresh economic, social, and political shocks. Sadly, another crisis may be needed to force economists to abandon their outmoded ways.

In Canada the banking system was ...

a system of large financial institutions whose size and diversification enhanced their robustness. When European and North American banks teetered on the brink of meltdown in 2008, requiring bailouts and extraordinary central bank intervention, Canadian banks escaped relatively unscathed.

History explains why. Starting in the 19th century, Canada and the U.S. took divergent paths: Canada set up a concentrated banking system that controlled mortgage lending and investment banking under the watchful eye of a single, strong regulator. The U.S. allowed a weak, fragmented system to develop, with far more small (and less stable) banks, along with a shadow banking system of less-regulated securities markets, investment banks, and money market funds overseen by a group of competing regulators (Belsie, 2019).

For more than a century, the

Canadian system has proven itself far more stable. "[B]ut there is a caveat to keep in mind: greater stability may have come at a cost. A more concentrated and regulated financial system may have been slower to innovate, may have been slower to invest in emerging sectors, and may have provided services at monopoly prices."

References and endnotes

Belsie, Laurent. Why Canada didn't have a banking crisis in 2008 (NBER, 20 Sep 2019. https://www.nber.org/digest/dec11/w17312.html)

Cliffe, Mark. What Economists Still Need to Learn (Project Syndicate, 9 Sep 2019, https://www.project-syndi-cate.org/commentary/macroeconomic-models-three-lessons-2008-crisis-by-mark-cliffe-2019-09?utm_source=Pro-ject+Syndicate+Newsletter&utm_campaign=aabf9c90ac-sun-day_newsletter_15_9_2019&utm_medium=email&utm_term=0_73bad5b7d8-aabf9c90ac-106449699&mc_cid=aabf9c90ac&mc_eid=9c501fe808)

El-Erian, Mohamed A. The Dialectic of Global Trade Policy (Project Syndicate, 20 Feb 2019, https://www.project-syndi-cate.org/commentary/trump-protectionism-could-benefit-global-trade-by-mohamed-a--el-erian-2019-02?utm_source=Fareed%27s+Global+Briefing&utm_campaign=5761e33556-EMAIL_CAM-PAIGN_2019_02_20_09_53&utm_medium=email&utm_term=0_6f2e93382a-5761e33556-90111137)

FP Editors. What the Last Recession Tells Us about the Next One - A transcript of U.S. Federal Reserve Chairman Jerome Powell’s remarks in Paris (Foreign Policy, 15 Aug 2019, https://foreignpolicy.com/2019/08/15/what-the-last-recession-tells-us-about-the-next-one/?utm_source=PostUp&utm_medi-um=email&utm_campaign=14524&utm_term=Editor#39;s%20Picks%20OC

Lynch, David J. Banks are now paying people to borrow money and that's a really bad sign for the global economy - Danish lender offering mortgages at -0.5%, (Washington Post. 15 Aug 2019, https://busi-ness.financialpost.com/news/economy/banks-are-now-paying-people-to-borrow-money-and-thats-a-really-bad-sign-for-the-global-economy)

Investopedia. What is an Inverted Yield Curve? (Investopedia, accessed 17 Aug 2019, https://www.in-vestopedia.com/terms/i/invertedyieldcurve.asp)

Krugman, Paul. China Tries to Teach Trump Economics - but he doesn’t seem to be learning (NYT, 8 Aug 2019, https://www.ny¬times.com/2019/08/08/opinion/trump-china-trade.html?action=click&module=RelatedLinks&pgtype=Article)

Janoo, Amanda. Seven ideas for the G7 (openDemocracy, 23 August 2019, https://www.opendemocra-cy.net/en/oureconomy/seven-ideas-g7/?utm_source=Daily+Newsletter&utm_campaign=fd2c16c7d7-DAILY_NEWSLET¬TER_MAILCHIMP&utm_medium=email&utm_term=0_717bc5d86d-fd2c16c7d7-407794629

Mitchell, Josh and Jon Hilsenrath. Warning signs point to a global slowdown - weakness in Germany and China puts pressure on record U.S. expansion, as recession risks rise (WSJ, 14 Aug. 2019, https://www.wsj.com/articles/warning-signs-point-to-a-global-slowdown-11565814494)

Paletta, D.; T. Heath and T. Telford. Stocks Losses Deepen as a Key Recession Warning Surfaces (Washington Post, 14 Aug 2019, https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces/)

Rajan, Raghuram G. The true toll of the trade war (Project Syndicate, 5 Sep 2019, https://www.project-syndi-cate.org/commentary/trump-trade-war-damage-by-raghuram-rajan-2019-09?utm_source=Pro-ject+Syndicate+Newsletter&utm_campaign=d58b1700af-sun-day_newsletter_8_9_2019&utm_medium=email&utm_term=0_73bad5b7d8-d58b1700af-93477489&mc_cid=d58b1700af&mc_eid=ce5f916074)

Rattner, Steven. How World Leaders Ruined the Global Economy (New York Times, 15 Aug 2019, https://www.ny-times.com/2019/08/15/opinion/recession-stock-mar-ket.html?utm_source=Fareed%27s+Global+Briefing&utm_campaign=21bd9cbd59-EMAIL_CAM-PAIGN_2019_08_16_09_01&utm_medium=email&utm_term=0_6f2e93382a-21bd9cbd59-90111137)

Roubini, Nouriel. The Anatomy of the Coming Recession (Project Syndicate, 22 Aug 2019, https://project-syndicate.us10.list-manage.com/track/click?u=9116789a51839e0f88fa29b83&id=65cf1c51b2&e=ce5f916074)

Rowley, A. Macroscope. Brace for a global recession unlike any other amid a world polarised by the US and China (SCMP, South China Morning Post, 9 Jun 2019, https://www.scmp.com/comment/opinion/article/3013604/brace-global-recession-un¬like-any-other-amid-world-polarised-us-and)

The Economist. Under attack - the trade war is leading some firms to crimp investment - much depends on whether hostilities between America and China intensify (Washington, DC 15 Aug 2019, Print edition, Finance and economics, https://www.economist.com/finance-and-economics/2019/08/15/the-trade-war-is-leading-some-firms-to-crimp-invest¬ment?utm_source=Fareed%27s+Global+Briefing&utm_campaign=21bd9cbd59-EMAIL_CAM-PAIGN_2019_08_16_09_01&utm_medium=email&utm_term=0_6f2e93382a-21bd9cbd59-90111137)

The Economist. An awfully long expansion - for how long can today’s global economic expansion last? (Print edition, Briefing, 13 Jul 2019, https://www.economist.com/briefing/2019/07/13/for-how-long-can-todays-global-economic-expansion-last?cid1=cust/dailypicks/n/bl/n/20190711n/owned/n/n/dailypicks/n/n/A/270128/n)

The Editorial Board. The Navarro Recession, II - Evidence of a tariff-inspired slowdown spooks the markets (WSJ, 14 Aug 2019, https://www.wsj.com/articles/the-navarro-recession-ii-11565825029)

Global Security

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Thank you

Maghreb

ECCAS

A window to improve the performance of the global economy!

Recession

UN, New York, Sept 2018

The trade-triggered crisis this time is more complex and systemic than the one that followed the Great Recession. It comes on the heels of economies still emerging from residual stimulus from the 2008 one to keep virgin investment and consumption moving forward, if only uncertainly.

See paper https://www.academia.edu/40400126/Macro-Policy_Chokehold_-_The_World_Braces_for_2019-2020_Global_Recession_RL_Vol_XIII_No_583_MMXIX

Adam Posen, President of the Peterson Institute for International Economics

All of them reflect political

factors affecting international relations.

Two involve China, and

U.S. is at the centre of each.

Moreover, none is amenable to traditional tools of counter-

cyclical macro-economic

policy (Roubini, 2019).

The Make-up

of the Coming Recession

First, the presumption that economies are self-correcting, while tempting in good times, is unfounded and can have catastrophic consequences.

The second lesson from the

crisis is that balance sheets matter. The financialisation of the global economy leaves national economies vulnerable to major correc¬tions in asset prices that can render debt unserviceable.

costy@costantinos.net

Background music 'Meskerem' by Elias Negash