• Running out of jars


    ACCORDING to Jeff Spross, who writes for The Week, the world is tangling with a bit of paradox: Financial markets have begun 2016 in a state of utter panic, and have fallen much more than the overall state of the world economy suggests they should.

    Spross’ argument is that, in spite of some alarming indicators, the world economy is on the whole in good shape; the IMF estimated growth in 2015 at 3.1 percent, and at least for now is projecting 2016 growth to be about 3.4 percent, which are modest numbers , to be sure, but are nonetheless positive.

    The implication is that the collapse of oil prices does present some problems, but should be a benefit to most economies, and the slowdown in China, which is simply bringing its annual growth into the 6 to 7 percent range, is not as significant as we have been led to believe.

    Yet despite the reality, markets are behaving as though we are in the early stages of a global economic catastrophe; Spross points out that the S&P 500 has already lost 9 percent this year, and many emerging-market indexes are doing even worse (as of the end of last week, our own PSEi was down 10.7 percent from its close on the last day of 2015).

    The reason for the extreme volatility of the markets, Spross explains, is that there is simply too much money circulating around the upper levels of the economy without being put to any real use; there is not much worth investing in, but investors are continuing to earn returns, and now they’re running out of places to put it all. Thus, it is finding its way into the markets, but is simply bouncing back and forth without finding its way into new projects and new jobs—which is what the real purpose of market investment is supposed to be.

    Spross is making the same practical argument against income inequality that celebrity economist Thomas Piketty did: The world’s money, in other words, is becoming “trapped at the top;” the longer this continues, the more the social framework (i.e., skills, experience, and relationships of workers) necessary for real economic growth deteriorates. Although Spross doesn’t take the argument as far as Piketty did, the implication is that at some point, all the money will be “trapped at the top” and will have reached the limit of how much it can profitably circulate on that narrow plateau, and there will be some kind of collapse; the investors will realize they’ve run out of jars in which to stash their money.

    Ideally, the money, having nowhere else to go, would be turned back into business expansion, creating new products and services and jobs—all of which helps to increase the size of the markets, or in other words, adds more jars so the whole cycle can begin again. Because it’s already gone on too long, however, the tools for business expansion are rusty and useless, so business expansion cannot happen quickly and broadly enough—or perhaps cannot even happen at all—to soak up the loose money, and so wealth will lose value and start to simply disappear. And will keep disappearing—with all the dreadful real-world consequences that implies—until economic equilibrium is once again established.

    The concept is generally logical, but “wealth inequality” is a bit like “climate change:” The problem is not whether it exists—it clearly does—but what to do about it. The point of view based on a belief that wealth beyond some individual limit is inherently evil demands some sort of active wealth redistribution, but inevitably fails because the limit cannot be workably defined; arbitrary limits almost always lead to unintended negative consequences. A good example would be land reform; it has failed completely here, and in places where it has worked (like Taiwan and South Korea), it has only done so through massive external subsidization of one sort or another.

    That essentially leaves “doing nothing” as the only reasonable alternative. Well, why not? The conventional wisdom is that markets are seriously overweight, anyway, and sooner or later they’ll correct themselves no matter what anyone tries to do about it; the path of least resistance may be just to let it happen. Settling for “modest” global growth is not that far removed from “stagnation,” and current circumstances, while stable in a certain sense, are not benefiting most people. Getting business out of the survival mode it has been in since the 2008-2009 financial crisis—the mode in which financial health is carefully managed, risks are avoided, and market returns and valuation become more important than actual profit from business activity—is not going to happen unless business is presented with clear evidence that it is no longer working better than other alternatives; probably the only thing that will provide that evidence is a general collapse of the financial markets.



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