The quantum leap
There is virtually nothing normal in the global economy today. Structurally, we are on the cusp of yet another great transformation, taking a quantum leap in productivity and disruptive innovation. Incidentally, this is not the first great transformation. The Great Transformation is a book that appeared immediately after the Second World War, written by Karl Polanyi. At the same time, Friedrich Hayek’s ‘The Road to Slavery’ appeared. Polanyi was strongly opposed to the free market economy. According to him, whenever markets were deregulated, bad things happened. Prices have been driven up, employers have dehumanised workers until they have become mere commodities or zombie machines. Landowners have turned thriving ecosystems into deserts, the remnants of short-term profits. Hyperglobalisation sees human labour as a production factor, just like land and financial capital. This must lead to fascism, populism or socialism, according to Polanyi. Seventy-five years later, the book has lost none of its force.
This is not a normal economic cycle. The world economy is recovering from a pandemic, is driven by a large mountain of monetary, fiscal, and savings money, and also has to cope with major disruptions on the supply side of the economy. The scale of US policy, in particular, is unprecedented. The priority is on recovery, on more jobs, and this looks in everything like the monetary policy of the 1960s. At that time, too, inflation was less important to the Fed than economic growth. Rising inflation combined with extremely low interest rates seems to indicate a structural shift in the economy, which can only be justified with the necessary dose of optimism about the development of productivity. In geopolitical terms, structures and institutions seem out of date and the United States and China are facing the new reality of conflict, competition, but also cooperation.
The market assumes that the US central bank will reduce bond purchases in roughly one year and raise interest rates in two years. In the meantime, a lot can happen. Every month, the Fed buys 120 billion dollars. In Europe, the ECB is buying up a similar amount of bonds. After the destruction of the Southern European economies and with them the European financial system, it is now the turn of a large amount of Northern European savings. The moment that ageing takes hold coincides with the moment that savings become worthless. Savers have nothing more to do in the eurozone.
The stock market remains interested in long-dated assets and is setting new records almost daily. Fears of a bubble similar to the dot-com bubble, the Japanese double bubble of the late 1980s or the sub-prime bubble of 2007-2008 are rife. But financial markets do not seem to care about rising inflation, even now that it has risen so fast that even the Fed has reached dangerous levels. During the previous bubbles, some sceptics predicted that the bubble would burst, but they almost always went bankrupt themselves first and were proved right by the market afterwards.
Suppose the Fed were to maintain its extremely loose policy for a few more years. The world economy will then be under high pressure in a kind of pressure cooker. It is quite possible that this policy will result in strong economic growth and strong job creation. Inflation will rise to 2.5 to 3 per cent, which is exactly what the Fed had expected and hoped for. History shows that an expansionary monetary policy and a stimulative fiscal policy can last for a long time before getting out of hand. After the publication of Polanyi’s book, it took 20 years for inflation to get out of control. The market seems to believe in this quantum leap to a kind of uber-Goldilocks scenario. That is not normal, but there is little of that in this cycle. Fortunately, the market is always right