EKIP– Expert Club for Economics and Politics A Different Opinion
Author: Yaroslav Romanchuk
Translation: Marina Zaharieva
The Deformation of the Capital Structure – A Volcano with a Wooden Lid (read part one here )
The main problem of the global economy since the late 2010s and early 2020s is the deformation of the capital structure. This problem is clearly, thoroughly and reasonably described by the Austrian School of Economics. The synchronizers of the deformation process are, first of all, the central banks and governments of the G-7 countries and the Federal Reserve. As McKinsey writes – “this time the breadth and depth of the signals of economic slowdown indicate that we have entered the final phase of the economic cycle.”
Let's lay out a few facts about the state of money, finance, production, trade, and assets.
- Judging by the statements of the Fed and the ECB in 2020. the intensity of quantitative easing will increase. More than $ 12 trillion in paper money has failed to help economic growth. Even if the club of global interventionists throws another $ 2-5 trillion, the demand for loans from producers of products and services will remain very low. Even negative interest rates do not help. The flow of money from the rich to developing countries is also limited, because the possibilities of labor productivity growth are limited by state interventionism and nomenclature protectionism. The most astute are turning everything into cash and gold and creating private alternatives to state paper money. So far, nothing threatens the dominance of the dollar. Over the past 15 years, the volume of monetary operations on the world market has increased sharply. In April 2019, the daily turnover was $ 6.6 trillion. Three years earlier, it amounted to $5.1 trillion. The dollar continues to be the dominant currency in international trade. It accounts for 88% of all trade turnover. Great Britain, the United States, Hong Kong, Singapore and Japan have handled 79% of all currency transactions. We should pay special attention to the United States, always described by global interventionists as the “perversion of the free market”. The per capita tax burden in the United States (all levels) has increased from $5,247 in 1960 to $11,461 in 2018, that is, by 118%. During this time, the population has increased by 81%. Federal budget expenditures per capita have increased by 191% - from $4,300 in 1960 to $12,545 in 2018. The combined budget of all federal regulatory agencies has tripled over the past 40 years. – from $20 billion in 1978 to $65 billion in 2019.
- The rapid growth of government debt, including in the negative zone. Fannie Mae, Freddie Mac guarantee mortgages for almost $ 7 trillion. This is 33% more than before the housing crisis in the second half of the 2000s. The US government debt exceeds $ 23 trillion. We can only thank the world for buying US government bonds with such fervor. Here is the dynamics of debt in individual developing countries: in 2008, China's total external debt amounted to $ 380.35 billion, in 2018 it increased 5.2 times - $ 1.96 trillion. The government's external debt during this time has increased from $ 91 billion to $ 243.4 billion. In Brazil, gross external debt as of 2008 was $ 263 billion, in 2018 - $ 557.8 billion. The share of public debt has increased from $79.9 billion to $190.1 billion. In Argentina, in 2008, gross external debt amounted to $129.75 billion, in 2018 - $280.5 billion. Public debt during this time increased from $70.9 billion to $131.2 billion. In South Africa, in 2008, gross external debt was $70 billion, in 2018 - $179.3 billion, with public debt increasing from $19.28 billion to $77 billion. Developing and transition countries also used the extremely loose monetary policy of developed countries to finance their spending. At the same time, the regime of foreign exchange interventions together with the increased payments on foreign exchange debts sharply limited the ability of developing countries to continue their financial policies in the same spirit. The Fourth Industrial Revolution could worsen the financial situation of low- and middle-income countries if they retain their old production structure and continue to support their nomenclature favorites with new loans. The relapse of Argentina, which increased gross government debt from 43.5% of GDP in 2010 to 95% in 2019 and practically went bankrupt, will become the norm of behavior. At the beginning of July 2019, dollar loans to non-bank borrowers outside the United States reached $11.9 trillion, for developing and transition countries - $3.7 trillion. Euro loans to countries outside the eurozone grew faster than dollar loans, reaching €3.4 trillion. or $3.8 trillion. Net financial flow (debt instruments and shares) in low- and middle-income countries amounted to $1 trillion. This is 19% less than in 2017. In 2018, they issued $302 billion worth of government bonds. For comparison, in 2017, the bonds were worth $405 billion.
- A large increase in the number and levels of trade barriers. According to the WTO, the G-20 countries alone have introduced 20 new trade barriers (against imports) in the last year. The new restrictions have affected goods worth $336 billion. In 2018, trade barriers restricted cash flows amounting to $481 billion. In general, trade activity worth over $1.15 trillion. is subject to various types of protectionist measures. The G-20 countries actively use trade restrictions such as sanitary and phytosanitary certificates, anti-dumping measures, technical barriers, and subsidies to producers, especially in the agricultural sector. According to Global Trade Alert, as of 2017, more than 50% of the exports of the G-20 member countries were subject to harmful restrictive measures. In 2009, this indicator was 20%. In November 2008. 36 countries adopted 348 measures that contributed to trade distortion (protectionism). Each of these measures negatively affected more than $10 billion worth of goods/services.
- Sharp concentration of capital in the hands of a small group of market players. Thus, 20% of the banks in the world create almost 100% of the economic value of the entire sector. Despite the fact that money has become not just cheap, but even negative in value, in 2018. credit growth in the global economy was only 4.4%, the lowest recorded growth in the last five years with nominal GDP growth of 5.9%. The Forbes billionaires list or the Credit Suisse wealth status show us that people with a fortune of over $100 million have adapted wonderfully to the soft monetary policy of central banks and the financial irresponsibility of governments.
- The lion's share of the world economy is concentrated in countries with democratic or authoritarian Leviathan. In 2019, the amount of government spending in the G7 amounted to 39.5% of GDP, in the euro area – 47.1% of GDP, the USA – 36.2%, Sweden – 48.4%, France – 55.7%, Italy – 48.8%, Great Britain – 38.4%, Japan – 37%, Germany – 45.2%, Canada – 40.7%. And this is taking into account the corresponding tax and regulatory burden on producers of products and services, and if we leave aside the tens of trillions of resources and assets that are de facto managed by the dispensers of foreign wealth. The tastiest pieces, of course, are for the members and partners of the club of global interventionists. They actively use offshore and special zones to reduce the tax burden for themselves. For example, Luxembourg, with a population of 600,000, is a recipient country of the same volume of foreign direct investment (FDI) as the United States - $4 trillion. And all this is accompanied by the OECD's active fight against "harmful tax competition". Obviously, only the one that is not coordinated with global interventionists is harmful. Luxembourg and the Netherlands are recipients of almost half of the so-called phantom investments. If we add to them Hong Kong, Bermuda, the British Virgin Islands, the Cayman Islands, Switzerland, Ireland and Mauritius, we will get 85% of all phantom investments (about $15 trillion).
Extracts:
1. The extremely soft monetary policy of developed countries, together with fiscal measures to maintain economic growth, have created enormous negative consequences for the world economy, deeply distorted the structure of capital, destroyed the norm of financial responsibility, activated currency and trade wars, killed trust and nullified the effectiveness of international law. The club of global interventionists is doing everything possible to prevent the widespread spread of electronic payment receipts and to return money to its commodity nature.
2. Today's world and its economy are a direct consequence of the theory of general state interventionism. The basic principles of the free market, capitalism and liberalism have been buried by VIP distributors and consumers of foreign goods. The Austrian School of Economics is and will remain the true science of "economics" - objective, outside of ideology and politics.
3. The exit of the economies of developed countries from a state of multiple, interconnected bubbles, i.e. the correction of fiscal and monetary policy, will hit low- and middle-income countries very hard. Especially those that have become addicted to credit. The crisis will hit them harder and last longer. Copying the monetary and fiscal policy of high-income countries is a gross theoretical and political-economic error.
4. The technologies of the Fourth Industrial Revolution will accelerate the degradation of those countries that continue to pursue policies of state investment, trade protectionism, and financial self-isolation. They will be left with large debts and an acute shortage of young talented personnel.
5. The club of global interventionists is actively preparing the scapegoat for the enraged masses. Capitalism, “fundamentalist liberalism” and “the unfair free market with its invisible hand” are being prepared for this role. New structures and organizations are also being prepared to ensure “peace throughout the world”, “a green, sustainable planet” and “a fair distribution of the Earth’s resources”. These should be powerful, supranational centers that will manage global flows of money and resources.
6. The club of global interventionists can only delay the onset of the first global depression of the 21st century, but not eliminate it. There is a high probability that high-income countries, through their monetary instruments and securities, will redirect toxic assets, structural imbalances and technological “slag” to low- and middle-income countries, saving their skins.
7. The first to emerge from the Great Depression of the 21st century will be the countries that:
- move to a regime of small and flexible government with government spending at a maximum of 20-25% of GDP;
- transition to a regime of open (open) competition between traditional, electronic and commodity payment methods;
- give up the business functions of the government (the volume of state assets will remain only for the protection of life, property and safety of citizens - 10-15% of the country's assets and resources);
- abandon the existing tax system, which was invented for production, exchange and redistribution before the active use of the technologies of the Fourth Industrial Revolution. The new innovative tax system - this should be a maximum of 2-3 flat taxes on the widest possible tax bases and no preferences and special tax regimes.
- transition to a free trade regime, with competition in standards, products and services
- ensure high quality government services (high quality governance) to protect life, safety and property, including granting citizens the right to choose a jurisdiction for the protection of their property rights.
