Lost Eras, New Realities :: by Wilfred Hahn

The globe has been transitioning into a major new era over the last decade or so. The signs are everywhere, particularly in the fields of economics and geopolitics. Some analysts see this as one realm—political economics. We would further add that such shifts, whether political or otherwise, can hardly take place without an associated change in societal values (certainly so for democracies). Religions, ethics, and beliefs are involved, although very, very few analysts have been willing to tread this ground over the last century or so. The point we are making is that a new era (we would call it an epoch, except that we think it will be a relatively short transition period) has begun. Moreover, changes that ushered in its arrival have been rapid, especially over the last two to three years.

Gone are the familiar characteristics of the post-World War II era that had been beloved by so many. Legions of economists had built mathematical forecasting models on the assumption that the underlying drivers of the five decades between 1950 and 2000 would remain the same forever. In reality, most never did actually seek to understand the theoretical underpinnings to the prosperity of this period. For them, simple rear-view gazing through quantitative measures of stock markets and economic trends (or virtually anything that was measurable) was sufficient to predict the future. Little appeal was made to causes; the only focus was on results. What became future fact was the past result itself. For instance, how many times would one have been told that the average gain of the Dow Jones Industrials stock market index has been “X”% for a given period in the past, with the implication that this should be expected to continue in the future? This is a ridiculous presumption yet countless analysts actually believed in this type of “reading of the chicken entrails”.

We next list an assortment of factors that defined the prosperity of the World War II period; try to guess the commonality that applies to them all. 1. Rapid population growth which in turn drove the growth of the work force. 2. Higher workforce participation rate as more women entered the job market. 3. Debt growth faster than economic expansion. 4. Productivity growth, much of this driven by new efficiencies and also by off-shoring manufacturing. 5. Increasing financialization of human activity. 6. Globalization … the growth of free markets and the increasing intensity of world trade. 7. Ample supply of cheap global labor. 8. Cheap energy and commodities. 9. Increasing capital efficiency, i.e. companies shrinking their working capital. 10. Corporatism and the attendant boom in corporately-funded lobbyism. 11. A boom in financial alchemy, creating the illusion of prosperity through a decoupling of financial markets for the underlying industrial economy. 12. The maximization of government deficit-spending stimulus. 13. A build-up in unsustainable external trade and current account deficits.

All of these factors (and more) played a contributing role — both real and illusory — in the apparent prosperity and halcyon boom of the post-WWII period in the Western world. What is common to all of them? All have reached their limits or are slowing. This “causal fountain” is gone. The trends have changed and the past has become irrelevant to the future.

We turn our focus back to the financial markets. Here, the global foundation that was put in place after WWII (i.e. stemming from the agreement at Bretton Woods, these leading to the foundation and definition of such transnational agencies as the International Monetary Fund, the World Bank, and the Bank of International Settlements) has crumbled.

The notion that debt could be a foundational asset for banking systems was based on the expectation that the sovereign debt of the developed nations (these, for the most part, being members of the rich country club of the Organization of Economic Development and Cooperation, O.E.C.D.) would be considered to be risk-free. That assumption was catastrophically debunked when Greece fell into crisis two years ago. While it has not yet officially defaulted in a technical sense, what else would explain why a Greek government bond —which is supposed to be a risk-free asset—has fallen over 60% in value? Now the same uncertainties have enveloped a number of other country bond markets, from Portugal to Italy.

As we write, massive monetary changes are occurring around the world. In fact, we suspect that a new system is evolving right under our noses. Central banks in the Western world have been carrying out massive interventions, buying up the weakened collateral of banks and lending them capital in unprecedented amounts. As a result of these types of actions by the European Central Bank (ECB), the interbank funding market has already been effectively nationalized, or more accurately said, Europeanized. Why? This is because banks will no longer lend money to each other due to their low trust in the financial solvency of other banks. How things proceed from here will depend on the degree of desperation and further crisis in Europe’s banking sector and sovereign bond markets.

The reserves (this basically being the manufactured money that is held on deposit with the central monetary authority by commercial banks) of the top eight largest central banks in the world now amount to almost one-third of the value of global equity markets (or $13 trillion measured in U.S. dollars). That is three times the level of just five years ago. Would anyone believe that these large interventions will ever be reversed? Perish the thought; it will not happen.

Suffice it to say that one should expect anything and stay informed. The future will not be the same as the last half of the 20th century.

The Bible warns of the mistakes that have befallen the zeitgeist of the post-WWII era. Jesus Christ illustrated the importance of “causality” when He said: “Woe to you, blind guides! You say, ‘If anyone swears by the temple, it means nothing; but anyone who swears by the gold of the temple is bound by that oath.’ You blind fools!” (Matthew 23:16-17). They cared only for the gold, giving little recognition to why it was there in the first place. Similarly, by only looking to the golden results of a prosperous era, its foundations were not only ignored, but also debased.