The Great Fragility

Posted on January 22 2018

Might I recommend today's column from my old friend and fellow Green New Deal member Larry Elliott in today's Guardian?

As Larry argues:

A synchronised upturn in the global economy has dispelled the pessimism that has been around ever since the financial crisis of a decade ago. Booming stock markets mean the billionaires who will spend the next few days emoting about inequality are considerably richer than they were a year ago.

Last January, the fear was that the world would never shake off the 2008 banking meltdown blues. Now there is talk of a return to the Great Moderation, the period in the late 1990s and early 2000s when growth was robust and inflation was low.

Larry is right; this is the new mood. The FT is positively drooling over it. 'Normalisation', otherwise known as the abusive form of bank led capitalism that was unconstrained pre 2008, is the aim of the wealthy elite now. But as Larry notes:

Yet, the Great Moderation was always shakier than it looked at first glance, built as it was on foundations of debt, speculation, rising asset prices and a world divided between countries running trade surpluses and those deficits. As the WEF noted in its Global Risks report last week: “The global economy faces a mix of long-standing vulnerabilities and newer threats that have emerged or evolved in the years since the crisis.” Talk of a new Great Moderation looks premature. The Great Fragility would be closer to the truth.

I agree. Debt; inequality; the failure to address imbalanced economies; weak infrastructure; growing environmental threats; populist challenges to democracy; undermined public services, under-capitalised outsourcing: the threats to our economies are enormous. As Larry summarises it:

So that's the Davos reality this year: economic fragility, environmental fragility, social fragility and political fragility. And it's worth remembering that when there's a threat of an avalanche, one rifle shot or even an untimely bellow can bring the whole mountain down.

Why? Because Donald Trump comes to Davos on Friday.

He may be the tipping point. I am not sure though: at most he is emblematic of the deeper malaise I have already noted this morning. But whatever might push neoliberalism off its perch its fall is inevitable. The only question is on what the consequences might be be.

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21 Responses

  1. Andy Crow says:
    January 22 2018 at 9:31 am

    I rather like the idea of Donald Trump as ‘creative destruction’ personified’.

    It IS after all’s said and done, what he was elected to be.

    (I’ve come to the conclusion that his ostentatious hair is actually a Kevlar wig.)

    • Marco Fante says:
      January 23 2018 at 2:27 am

      “I rather like the idea of Donald Trump as ‘creative destruction’ personified’.

      All that he needs now is the “creative” bit.

      Hard to imagine though.

  2. Robin Stafford says:
    January 22 2018 at 11:50 am

    I fear that in the Donald’s case, its just destructive destruction.

    Good piece by Larry – I have the image of the Great Moderation as a Trumpian mansion with a whole series of sink-holes opening under and around it. Unfortunately at the moment, for lack of a genuine alternative we are at risk of heading down the sink-holes with it.

    • Andy Crow says:
      January 23 2018 at 3:11 am

      Robin Stafford says:
      January 22 2018 at 11:50 am
      “I fear that in the Donald’s case, it’s just destructive destruction.”

      You might be right, but that’ll do, since what he’s going to destroy is shite anyway.

      Somebody on Auntie Beeb made the point yesterday that Davos is a ski resort and this is prime ski season.

      These people are supposed (Ha!) to be the economic cognoscenti, so why aren’t they meeting in a summer resort which could use the extra business?

      I suppose it’s unkind to hope for the avalanche. (?)

  3. Andrew Dickie says:
    January 22 2018 at 1:40 pm

    ” ‘Normalisation’, otherwise known as the abusive form of bank led capitalism that was unconstrained pre 2008, is the aim of the wealthy elite now.’

    There couldn’t be a better example of the completely “tin ear” ahistorical approach and thinking of those who claim to be our “betters and masters” (merely because they have become more adept at theft and gangster style racketeering, and creaming off of rents for their thuggish services) than the adoption of the term “normalisation” – the slogan of the repressive neo-Stalinist regime imposed on a 1968 Czechoslovakia that had tasted the beginnings of real democracy and reform, and which was then spread across the whole Warsaw Pact.

    But our “masters” should note, “normalisation” eventually collapsed under its own contradictions, and because the foundations upon which it stood were eventually almost completely eroded away.

    The same is true of neo-liberalism: the people have seen that the Emperor has no clothes, and that another way is possible. Davos is basically be neo-liberalism’s Berlin Wall.

  4. Marco Fante says:
    January 23 2018 at 3:29 am

    ” Now there is talk of a return to the Great Moderation”

    There can be no greater guarantee of a now certain if not imminent crash. Going by historic precedent and the broad but reliable principle of pride before the fall.

    They always do this, one way or another, and even truly great thinkers like Irving Fisher who gave us the evergreen Debt-Deflation Theory had previously lulled himself into a state of optimistic stupidity in 1929 (yes,1929) by declaring that “Stock markets have reached what looks like a permanently high plateau.”

    The actual term “The Great Moderation” was first coined by Stock & Watson in this 2002 article here: http://www.nber.org/chapters/c11075.pdf

    But made famous in 2004 by the Fed. Governor, Ben Bernanke in this speech entitled “The Great Moderation”. https://www.federalreserve.gov/boarddocs/speeches/2004/20040220/

    2 years after Bernake’s speech the US housing market started to tank, and then GFC in 2008. So maybe that gives us a possible indication of our timeline – 2 to 6 years perhaps? Possibly sooner? It feels closer than 6 years to me.

    • Richard Murphy says:
      January 23 2018 at 7:44 am

      Two seems more likely to me

      Maybe less

    • Andy Crow says:
      January 23 2018 at 10:02 am

      Thanks for the link to the Ben Bernanke, Marco.

      I only got as far as this bit on the ‘Great Moderation’…..

      “The reduction in the volatility of output is also closely associated with the fact that recessions have become less frequent and less severe.”

      …before the hysteria overtook me and I could no longer focus.

      Two to six years ? Definitely two seems more likely than six. If it pops this year, though, it will be because of something ‘out of left field’ that sets it off. Market complacency is very solid at present and I can’t see it being easily displaced.

      If ‘they’ were concerned Richard would be in Davos this week. That he isn’t, is cause for the rest of us to be concerned.

      The short termists are firmly in control.

  5. Robin Stafford says:
    January 23 2018 at 11:20 am

    It would be interesting to see if there are any dissenting contrarian voices at Davis. The snowboarding dudes (Richard…!) in amongst the skiers. Or is it just an echo chamber, reinforcing sense of complacency and that all is well.
    Meanwhile there would seem to be plenty of potential left field externalities to upset the ‘moderation’. Trump for a start, Middle East, massively over-valued stock markets.
    Robert Schiller of Irrational Exuberance fame has a piece just out:
    https://www.project-syndicate.org/commentary/us-stock-market-highest-cape-ratio-by-robert-j–shiller-2018-01/english
    He’s putting it cautiously but reads to me like he thinks we are well into the ‘froth on the top’ stage of stock markets. So a lot nearer 2 years than 6

  6. Graeme says:
    January 23 2018 at 8:53 pm

    You said the cliff edge was there last November. Are you shorting the exchanges or using spread bets or options or futures to show us how to handle the mayhem?