10 Apr A Quick Report on the Economic Climate; The Rise of Populism and the Agonizing Death of Compromise*

A Quick Report on the Economic Climate

For reasons that should be apparent, this is an opportune time to take the world’s macroeconomic temperature.

The global economy continues to expand, although at a decelerating pace, driven primarily by the U.S. and China, and global equity markets continue to ride the bull. Although the U.S. economy is cooling after its huge 2017 tax-cut stimulus, the employment-unemployment ratio remains positive, productivity growth has accelerated, inflation/deflation remains under control, and corporate profits continue to grow, albeit at a slower pace.

Stock markets around the world took a major hit in 2018. They bounced back during the first quarter of 2019. China’s markets are up over 30{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. The U.S.’s up over 15{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. The recovery from the short-lived stock market plunge in December 2018 has been the fastest since WWII. Give credit to the Fed for its swift about-face. It’s promised no rate hikes in 2019 and no further balance sheet reduction for the foreseeable future. Globally, Central Bankers have fallen into line, renewing their loose money policies and their guarantee that they’ll “do whatever it takes” to ensure the health of the global economy … and of its equity markets. President Trump has threatened to take action against the Fed if it isn’t supportive – he understands that the 2020 election will focus on the economy – and he’s nominated two shills helpers fellow-travelers to the Federal Reserve Board as insurance.

But what about macroeconomic events outside Central Bankers’ control?

For one, there is the possibility that a no-deal Brexit could tip-over the global economy.

Additionally, a close look at the technology sector reveals that the PHLX Semiconductor Sector Index is at an all-time high at the same time as reported earnings have been horrible. Projections for the remainder of 2019 are discouraging to say the least. Technology was the trigger for the 2000 dot-com bear market and is often a harbinger of stock market strength and weakness.

Some believe that the recent yield curve inversion is signaling a 2019 recession, though this is much debated. Crude oil prices are rising. Corporate profits are declining. European as well as global manufacturing has hit a wall. The U.S. and China, the world’s leading economies, are in the midst of a Trade War. Tariff barriers initiated by America are rising recalling the Smoot-Hawley tariffs of 1930, with the U.S. this week escalating the Trade Wars with tariff proposals on European goods. Housing starts and new and existing home sales are falling, especially in the U.S., Canada and Australia, and auto production and sales everywhere are weak.

Risk is rising at a time when the American expansion is about to reach the 10-year mark, a new post WWII high.

Although U.S. equity markets are driving higher, they’re doing so on momentum and not value. They too are approaching their all-time highs. Is there sufficient momentum to carry them through?

It would be imprudent not to mention China’s debt issues, Russia’s foreign incursions, Iran’s threats, and the potential for Black Swan events.

The Rise of Populism and the Agonizing Death of Compromise

America’s political parties are unable to agree on almost everything. Europeans are in the midst of political, budgetary and Brexit battles where emotions run high. Dialogues at all levels often are at cross-purposes, laced with hate-speech and filled with historically-laden innuendo. The world has sunken into damaging trade wars where a winner-take-all mentality prevails and compromise is treated as a four-letter word. And it’s often difficult to have even casual conversations about politics or economics or even the weather without eliciting heated responses from friends and neighbors.

Why have people become more rigid, inflexible and doctrinaire? What has caused open minds to close?

In two words, social media.

Social media have fragmented society into distinct groups sharing the same thoughts, politics and prejudices. Social media have led to the death of consensus politics, consensus conversation and consensus policy-making. The number of like-minded people who communicate with each other and no one else on the internet has confirmed the validity of every anti-social uneconomic undemocratic possible belief. Sameness shuts out alternative voices. It closes minds. It polarizes. Whether it’s simply Fox News or MSNBC, unsupportable assertions facts whether true or not and opinions find justification and reinforcement. As a consequence, people’s biases, preconceptions, ingrained beliefs and suppositions are being reinforced. Humans, innately tribal social animals, have formed media-based communities consisting of like-minded people, preferring to interact primarily only with those who share their views and strengthen their beliefs. They avoid those with whom they disagree. That’s why homo sapiens has a history of tribal warfare. That tribal history has been enhanced by social media with understandably pernicious consequences that have led, and at times inevitably must lead, to malevolent outcomes. At the fringes, extremists who were isolated before the birth of social media, who had no confirmation that their views were shared by others and who had no supporters for their proposed actions, now have online comrades. They find it easy to communicate with fellow-fanatics. It doesn’t take many echoing voices to crystalize and reinforce extremism. What once might have been a fringe view now finds wide-enough support to cement that view … and sometimes to trigger action.

The harsh reality today is that a person’s views, no matter how silly, no matter how extreme, and whether or not based on fact, can find support and confirmation somewhere on social media. That’s not going to change anytime soon.

One pernicious consequence of social media’s influence has been a breakdown in what once were widely-shared beliefs. In the West, that includes the belief that hard work will be rewarded with higher living standards and that children will be better off than their parents. That belief was founded on the experience of prior decades – 1945-1980 – when the growth of the economic pie raised the standard of living of virtually everyone, especially Americans. The reality for the past 30 years is that the pie in America and Europe hasn’t grown for the majority. The percentage of American children who grow up to earn more than their parents has fallen from 90{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in 1970 to 50{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} today and, for the majority, the outcomes are worse. This mirrors the economic dichotomy that existed in America in the late 1930s when populism last divided America and the world. That dichotomy had drastic consequences.

The predictable result is that the increasing disparity in wealth is fueling conflict, conflict that finds support for all sides on social media, sharpening differences between and among affected groups, different religions, different nationalities, different nations, and different races. Social media has accelerated and exacerbated that conflict.

Populists on the right have responded to the no-longer-growing-pie by advocating policies that retain or increase their percentage of the pie. They believe that unfettered capitalism is the best wealth-creator and that it invariably enlarges the pie for all. Populists on the left have tabled proposals to divide the pie more fairly equally. They believe that the wealthy can survive with somewhat smaller pieces of pie, leaving slightly more pie for the majority. This therefore has become a battle between those who don’t know how to divide a pie and those who don’t know how to grow a pie. While some characterize this as a battle between capitalists and socialists, that’s an oversimplification. The necessary take-away is that this is a problem that requires a consensual solution, one that Western democracies are uniquely positioned to facilitate. That solution will require compromise. Without compromise, the slogan “Workers of the world unite” may again resonate with the majority whose share of the pie continues to shrink. Karl Marx’s slogan led to more than a century of revolution, war and repression in which everyone was a loser.

Winston Churchill framed the burdens of capitalism and socialism in the following way: “The inherent vice of capitalism is the unequal sharing of blessings…. The inherent virtue of socialism is the equal sharing of miseries.” Churchill also famously said that “democracy is the worst form of government except for all those others that have been tried….” Capitalism is not a perfect economic model. Socialism is a terribly imperfect one. The role of democracy is to find the optimal balance between the two, ensuring that there are proper incentives and rewards for hard work, that there is equal opportunity for all, especially in education, and that there is an efficient safety-net for those who need one that neither discourages work nor saps Keynsian “animal spirits.”

The rise of social media has not only created a rising anti-capitalist tide, but also a challenge to the underpinnings of democracy. In a democracy, problems are solved by dialogue and compromise. The rise of social media has greatly exacerbated the difficulties in doing so. Although compromise may be a dying ethos, it provides the only realistic path forward.

Finally (from a good friend)

Dog Diary:

7:00 AM – Outside! My favorite thing!

8:00 AM – Dog food! My favorite thing!

9:30 AM – A car ride! My favorite thing!

9:40 AM – A walk in the park! My favorite thing!

10:30 AM – Got rubbed and petted! My favorite thing!

12:00 PM – Lunch! My favorite thing!

1:00 PM – Played in the yard! My favorite thing!

2:00 PM – Looked out the window and barked! My favorite thing!

3:00 PM – Wagged my tail! My favorite thing!

4:00 PM – Chased a bird out of the tree! My favorite thing!

5:00 PM – Milk Bones! My favorite thing!

6:00 PM – Watched my people eat! My favorite thing!

6:20 PM – Table scraps! My favorite thing!

7:00 PM – Got to play ball! My favorite thing!

8:00 PM – Wow! Watched TV with the people! My favorite thing!

11:00 PM – Sleeping on the bed! My favorite thing!

Cat Diary:

Day 983 of my captivity.

My captors continue to taunt me with bizarre little dangling objects. They dine lavishly on fresh meat, while the other inmates and I are fed hash or some sort of dry nuggets.

Although I make my contempt for the rations perfectly clear, I nevertheless must eat something in order to keep up my strength. The only thing that keeps me going is my dream of escape.

In an attempt to disgust them, I once again vomit on the carpet.

Today I decapitated a mouse and dropped its headless body at their feet. I had hoped this would strike fear into their hearts, since it clearly demonstrates what I am capable of. However, they merely made condescending comments about what a “good little hunter”’ I am. Bastards! There was some sort of assembly of their accomplices tonight. I was placed in solitary confinement for the duration of the event. However, I could hear the noises and smell the food. I overheard that my confinement was due to the power of “allergies.” I must learn what this means, and how to use it to my advantage.

Today I was almost successful in an attempt to assassinate one of my tormentors by weaving around his feet as he was walking. I must try this again tomorrow — but at the top of the stairs.

I am convinced that the other prisoners here are flunkies and snitches. The dog continues to receive special privileges. He is regularly released and seems to be more than willing to return. He is obviously retarded.

*┬® Copyright 2019 by William Natbony. All rights reserved.