Since 1971 we have been living in an age of price mega revolution with the average annual rates of inflation reaching their historical peaks in developed economies: +5.3% in the United Kingdom, +4.0 in the United States, and +5.2% in OECD economies.
When your best way to solve economic problems is inflation, this directly implies that there is something wrong with rates of technological progress. There is so much talk about wonderful scientific and technological discoveries, while in reality the growth rate of labor productivity has been steadily declining since the early 1970s.
A rising number of U.S.-listed firms that have been operating with declining profit margins since the early 1970s just confirms this fact (see Picture 1 below).
That is why the Standard & Poor’s 500 Stock Index has a rapidly declining number of “magnificent” companies (7 at most), while the remaining stocks (at least 493) have been languishing recently (see Picture 2 below).
Thus, a visual presentation of the economic history of the last 60 years is as follows: (see Picture 3, Picture 4, Picture 5 and Picture 6 below)
Stage 1. Late 1960s to early 1980s: Tech Slowdown and Stagflation.
The growth rates of technological progress, labor productivity, and GDP slow down. A loose monetary and fiscal policy aimed at supporting the economy fuels demand-pull inflation. The gold standard is abolished. This spurs inflation even further. Two oil crises pave the way for shortages, economic recessions, and cost-push inflation (aka “stagflation”). Interest rates soar, while stock prices languish.
Stage 2. Early 1980s to early 1990s: Financialization.
The U.S. Federal Reserve hikes interest rates sharply. The rate of inflation slows down, while the economy is in a deep recession. To support consumption a loose fiscal policy is initiated. The financial sector is liberalized to make it easier to borrow money. The growth rate of real GDP accelerates. Interest rates fall sharply, while stock prices rise. The growth rate of labor productivity continues to slow down.
Stage 3. Mid-1990s to mid-2000s: Globalization.
The opening-up of China and others, the emergence of new supply chains, the outsourcing of manufacturing to poorer countries, the global migration of labor reduces costs and eliminates the threat of cost-push inflation. This allows to lower interest rates even further, thus encouraging debt-based consumption. Demand-pull inflation starts to reappear. Asset prices keep on rallying due to rising profits, since the rate of demand-pull inflation is far above the cost of resources, labor, and borrowed money. The growth rate of productivity keeps on slowing down.
Stage 4. Late 2000s to late 2010s: Financial Hangover.
Higher debt levels are not able to support higher consumption and asset prices anymore. Asset prices collapse, thus undermining the creditworthiness of private borrowers and lenders. The governments refinance the private sector through stimulus programs, while the central banks refinance the governments by buying public debt and lowering interest rates to zero. The private sector stabilizes its debt situation but at the expense of lower consumption. Inflation is subdued. Economic growth is meager. Stock prices recover due to falling input prices (resources, labor, interest rates), while too much liquidity chases too few investment opportunities. Alternative assets thrive for the same reason. The growth rate of labor productivity falls to zero in some countries.
Stage 5. Late 2010s to now: A New World Order in the Making.
A protracted period of low economic growth undermines political stability around the world. Geopolitical and domestic tensions are visibly on the rise. Cracks began to appear in global supply chains due to trade wars, the pandemic, and military conflicts. This leads to the resurgence of cost-push inflation (“stagflation revisited”). The central banks start raising interest rates, while asset prices start faltering. The growth rate of labor productivity is likely to have become negative in most countries.
So what are the hard facts about the Green Revolution?
1. The fact is that for 50 years we have been living in an age of declining growth rates of technological progress and labor productivity, while most people are brainwashed into believing that technological advances are accelerating.
2. The fact is that we have been living in an age of unprecedented inflation, while many believe that money creation is the major source of economic growth.
3. The fact is that income disparity has reached the level last seen in the 1920s, while we are told that social progress is advancing spectacularly: diversity, inclusion, equal opportunities, sustainability, etc.
4. The fact is that the elite-driven Green Revolution is caused by technological slowdown, while many still naively believe that it is the result of someone’s deep emotional affinity towards nature.
Central banks cannot help us in the long run. Providing more money is able to buy some time to solve underlying structural issues. If you do not have meaningful technological progress for many decades, then printing more money just creates more debt that is primarily used to support a temporary spike in consumption and an inflationary illusion of “nominal” progress. In the end each additional unit of money creates declining units of consumption, rising inflationary pressure, and asset bubbles.
In fact, the real rate of interest is very, very low. But why then many complain that the current level of interest rates is high? Because they talk about consequences rather than causes. The current low level of interest rates seems high because the level of indebtedness is high.
The most important variable in the world of finance is the price of long-term money, that is long-term interest rates. However, the most important variable in the world of real economy is the growth rate of labor productivity. It determines the growth rate of real wages and your economic well-being. And it has been declining for decades.
When you try to replace real-wage-based consumption with debt-based consumption, sooner or later, even the lowest real rates of interest in history may seem too high.
This is what lies behind today’s economic, social, and political problems. And it is the final time for politicians to come up with something innovative.
What are the solutions?
1. Cutting consumption. It will require politicians successfully “selling” green, or rather low-consumption, policies to the public. A new economic paradigm always requires a new religion or a new system of beliefs.
2. Debasing currencies and devaluing debt. It will require politicians successfully “selling” high inflation and postponed retirement to the public. The existing retirement system cannot be sustained and should be overhauled.
3. Invest more in science and technology. Allocating more funding to research and development projects will undoubtedly deliver results. However, it is impossible to know when and to what extent these results will be felt. Thus, it will require politicians successfully “selling” a Great Tech Leap Forward idea to the public.
4. Waging wars. Military conflicts are good for promoting technological progress, suppressing domestic disagreements, and redistributing limited resources.
Given the current state of world affairs, namely, faltering economic growth, inflation, declining real incomes, trade wars, sanction regimes, domestic political instability, geopolitical tensions, and open military conflicts, one may unfortunately come to a conclusion that a military option is still likely to be considered the easiest one to sell to the general public.
“No matter what political reasons are given for war, the underlying reason is always economic,” A.J.P. Taylor.
Maybe, electric vehicles, artificial intelligence, anti-obesity drugs, and space travel are the solutions to our problems? To be continued…
