A Recession? It’s Different This Time

Now that the signs are being given of an end to lock down, talk invariably turns to the coming recession and how, or even if, we will scrape through. Pundits are saying “It will be different this time”. (I’ve heard that before somewhere.)
But systems, like ours, are centralized, dependent on a handful of points that are each points of failure, and are intrinsically fragile and prone to collapse.
Systems in which all the critical points are tightly bound are prone to domino-like cascades of failure as any one point of failure quickly disrupts every other critical point or node that is bound to it. It’s also known as Changing One Thing Changes Everything
A handful of corporations own the vast majority of the media; a handful of banks control most of the lending and capital; the NHS and pharmaceutical companies control health care.
Control of digital technologies is even more concentrated, in virtual duopolies: Google for search and YouTube for video. Facebook/Instagram and Twitter for social media. Microsoft and Apple for operating systems. Mobile communications are Android and Apple.
When unexpectedly severe volatility occurs, the disruption of a few nodes can bring down the entire system. The disruption of the US subprime mortgage market, a relatively small part of the total mortgage market, nearly brought down the entire global financial system in 2008.

And what’s the“fix”?
Increase its fragility by bailing out the most tightly bound, dominant nodes, as happened in 2008?
Nassim Taleb, a mathematician and options trader, described it below

Some things benefit from shocks; they thrive and grow when exposed to volatility, randomness, disorder and stressors and love adventure, risk and uncertainty.
Yet in spite of the ubiquity of the phenomenon, there is no word for the exact opposite of fragile. Let us call it antifragile. Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better.
This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes, the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance.
And we can almost always detect antifragility (and fragility) using a simple test of asymmetry: Anything that has more upside than downside from random events (or certain shocks) is antifragile; the reverse is fragile.
We have been fragilizing the economy, our health, political life, education, almost everything… by suppressing randomness and volatility. Much of our modern, structured, world has been harming us with top-down policies and contraptions… which do precisely this: This is the tragedy of modernity:
As with neurotically overprotective parents, those trying to help are often hurting us the most.

This relatively modest part of the financial system almost triggered a stock market crash, so the Federal Reserve, and most EU states, including the UK,immediately printed money. They called it Quantitative Easing (QE).
Making an fragile system more fragile via bailing out every node of concentrated capital, power and control guarantees the entire structure will collapse.

Financial pundits seek some situation in the past which will clarify the swirling chaos.
We’ve been seen charts overlaying recent stock market action over 1929, 1987,2000 and 2008 . The closest analogy is actually the Oil Crisis of 1973.
But the reality is there is no situation in the past to this present.

Here are a few of the differences between previous recessions and the current situation:

1. Households have never been so dependent on debt to prop stagnating wages.
2. Real earnings (adjusted for inflation) are stagnant for the bottom 90% and have been for some time.
3. Corporations have never been so dependent on debt (selling bonds or taking on loans) to fund money-losing operations (see Netflix and Twitter) or stock buybacks (Apple, Debenhams, Fitness First- resulting in a CFA in 2010) designed to saddle the company with debt to benefit its management board and directors.
4. The stock market is dependent on stock buybacks (to push valuations higher).
5. The economy is dependent on overvalued stock valuations to prop up pension funds
6. The economy is now dependent on free money like Universal Credit, not forgetting Rishi’s 80% of all earnings during lock down.
7. Major sectors of the economy are now quasi-monopolies highly centralized
8. Households and companies are now dependent on “free money” gained from asset appreciation (property) not an actual increase in productivity or value.
9. The increase of self-interest in politics and finance is virtually complete, the resulting moral rot now apparent. This was highlighted in the drawn out Brexit negotiations of Theresa May that should have concluded within 6 months
10. Institutions such as higher education, the NHS, the civil service and UK defence have never been so dysfunctional, resistant to reform or costly.
11. Never before in history have the most valuable organizations all been engaged in selling goods and services that actively reduce productivity and happiness.

Income is in free-fall, while debt, which must be serviced by income, is increasing.
Bailouts are not a permanent substitute for income. In the short-term, bailouts are a necessary substitute for lost income. But longer term, subsidizing income with borrowed money weakens the economy, and productivity stagnates.
The furloughed workers are getting extra money not out of kindness but to make sure households can continue to service their debts: car loans, student loans, credit cards, etc. If not, millions would default on loan payments, creating a financial crisis.
Investment income is also crashing as companies slash dividends and stock market gains dry up. Oil exporters are facing a $1.2 trillion cut in annual income now we all work from home and have less need to commute, commercial property owners are facing steep declines as tenants stop paying rent to workn from home and declines in employment will push rents lower in all properties (unless Rishi funds that too).
As the housing market implodes, everyone will feel the domino effect. The UK realizes it no longer needs vast office spaces for its (reduced) workforce as millions are working from home, the demand for commercial properties will fall off a cliff, and their rental income will also fall off a cliff.
The money that’s being sent to furloughed workers and the small businesses being offered loans and grants is all borrowed money. Borrowed from who?

Advocates of the bullish outlook will argue that “this time it’s different,” that debt doesn’t matter, but where is the history to support their claim that capital flowing into an overvalued economy is going to generate earned income that can survive this debt load?
All debt has to be serviced, sooner or later, ask anyone who has dealt with a relatives probate.

 

Image by Steve Buissine

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