My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 issues by Peter J Underwood, author
The global financial system is quite clearly dysfunctional and we have looked at some of the elements in Issue 7; see here: https://www.theburningplatform.com/2018/06/30/the-financial-jigsaw-issue-no-7/ In this issue we will wrap up the final observations about this system before moving on to the individual jigsaw pieces which build up the whole picture next week when we begin with ‘Money’, what it is and where it comes from.
Can governments help economies to stabilize?
Fiscal policy is the use of government spending and taxation to influence national economies. Governments typically use their fiscal policy to promote strong and sustainable growth and reduce poverty.
The role and objectives of fiscal policy gained prominence during the global economic crisis in 2008, when governments stepped in to support financial systems, attempting to jump-start growth and mitigate the impact of the crisis on vulnerable groups. In the communiqué following their London summit during April 2009, leaders of the Group of 20 industrial and emerging market countries (G20) stated that they were undertaking ‘unprecedented and concerted fiscal expansion’. What did they mean by fiscal expansion?
They were really talking about ‘monetary policy’ as initiated by central banks rather than fiscal policy per se. For the first time, central banks coordinated to implement Quantitative Easing (QE) across the globe, led by the US Federal Reserve (the ‘Fed’); thus saving the world’s economic system which had reached a serious crisis point, such that goods and services had frozen, and allowed to fester, the effects would have been akin to Armageddon.
The global financial system is so flawed that its stability now depends on implicit government guarantees; unfortunately such guarantees ensure that weaknesses persist. This vicious cycle keeps the global financial system permanently unstable.
Global logistics need a stable financial system to function
Supply chain flexibility in manufacturing or service industries is crucial for economic stability. Supply chain flexibility is a business issue affecting an organization’s purchases or logistics network in terms of environmental, risk, and waste costs.
Sustainability in the supply chain is increasingly seen among high-level executives as essential to delivering long-term profitability and has replaced monetary cost, value and speed as the dominant topic for discussion among purchasing and supply professionals.
Whereas in decades past factories manufactured finished goods on-site from basic materials like steel, rubber, and plastics, today sub-assembled parts are delivered complete, on time, error-free as part of the global ‘Just-in-Time’ logistical input process. Robotic plants are now merely assembly areas, having evolved from the 20th-century production-line system invented by Henry Ford.
Global markets change and alter every single day. Some changes are significant enough to trigger multinational companies to quickly shift resources and supply chains from one country to another. The resulting income shock leads to demand weakness in some countries, but, when stimulus is applied, to offset the income loss, it merely delays the necessary macroeconomic adjustment.
Central banks are responsible for market ‘bubbles’
Most central banks in developed economies made policy mistakes during the past three decades of rapid globalization. This has led to one financial ‘bubble’ after another to support demand. Income, on the other hand, has never recovered, and this eventually became part of the global financial crisis.
In reacting to this, the same central banks are powerless to influence incomes. Their policies are leading to bubbles again, especially in bonds (long-term loans like mortgages) and stock markets. These bubbles have to burst soon, creating a collapse much worse than that of 2008, because these bubbles are bigger and more dispersed worldwide.
Any economy that suffers an income shock should deal with the consequent unemployment by stimulating the supply side, which minimizes income loss by quickly redeploying resources to more competitive industries.
Easy monetary policy (remember: money printing again) and financial bubbles prevent the necessary adjustment and accumulate significant bad debts. The good intention of monetary stimulus has a major side-effect: it boosts inflation in non-tradable goods and assets like housing, education and healthcare.
When the money supply increases, it creates inflation in markets where there are supply constraints under general economic theory, where prices increase when supply levels fall. This reduces a country’s competitiveness and accelerates the loss of income in tradable activities. This is now happening in the UK, Europe and USA.
When debt bubbles burst (when for example, technology investments in 2000/1 and housing in 2007/8 wrecked the OECD economies), their central banks adopted quantitative easing (QE) – another euphemism for ‘money printing’ to stabilize the situation.
The resulting cheap liquidity also flooded into emerging economies. Instead of learning from the bubble lessons in the West, they used the liquidity to manufacture bubbles themselves. The resulting ‘growth’ led many to believe, incorrectly, that emerging economies had found a way to grow despite the crisis.
The emerging market bubble, especially in the BRICS countries, is now growing. The process is slow because interest rates are artificially low everywhere and this slowness makes the bursting bubble unusual and difficult to follow.
Financial markets remain confused about the situation and there is constant speculation that growth is being revived, yet the fundamental evidence is very much to the contrary: https://medium.com/insurge-intelligence/govt-economic-advisor-warns-british-defence-planners-that-growth-is-ending-abf806f17845 Governments around the world are falsifying their published statistics, trying to talk up a recovery and these statistics are at best a gross distortion of what is really happening.
The issues that follow will describe how the jigsaw of money, banks, markets, governments and national economies work. Learning about this opaque financial system should, I hope, indicate how it affects you individually and what options and choices are available to protect yourself and your family’s future.
Next week will be about the origins of money and its uses and begins our journey of building our complete jigsaw picture.
To be continued next Saturday
