Hurricane EconoMess is not a reference to the severe weather event in Florida. I use it to refer to a Category 6 economic event that is coming and has been developing and strengthening for decades. It has barely touched land, but its power and intensity exceeds any economic event prior, except perhaps Hurricane DepressoMess that began in 1929. It devastated economies for a decade or more and ended up in World War II.
The UK was the first landfall. It won’t be the last Graham Summers provided an early storm report on what happened and what he expects to happen:
The financial system is beginning to break.
The Bank of England (BoE) is now the first major central bank to lose control of its respective bond and currency markets.
Last week, the new government in the U.K. introduced a series of tax cuts to stimulate the economy. British government bonds, also called Gilts, responded by imploding. The yield on the 10-Year British Gilt rose from 3.2% to over 4.4% in a single week.
This is what it looks like when a bond market begins to fail.
It is too early to judge whether this storm will be more damaging than its famous predecessor. It certainly has that potential!
Some believe that the world economy is more vulnerable today than a century ago. Interconnectedness and supply-chain dependencies make it easier for problems in one country to affect others. All countries are “overextended” debt-wise compared to the leverage of earlier years. None seem inclined to address this bankruptcy–insolvency risk.
Unlike prior hurricanes (save DepressoMess), this storm is enormous and ubiquitous. It sits off the coast of all major economies. Storm forecasters are unable to predict where it hits next or whether it hits all continents simultaneously.
Econophysicists believe the dangers can be minimized by seeding the clouds with more economic “hocus pocus.” Econorealists argue that it was years of such meddling that created and strengthened this storm. The debates over “hocus pocus” between the two schools have been ongoing since the Hurricane DepressoMess, almost a century ago. That storm created the schism in the economic profession that has only widened today. DepressoMess split the profession into interventionists and non-interventionists.
The political class of the world always sided with the econophysicists. Econorealists, to them, are little more than a broken-record, one-trick pony with the same recommendation — “Don’t just do something; stand there!”
The political class has built enormous power by claiming it can solve all problems. They want to retain this image and their power regardless of what the proper economic response might be. The only way they can do so is to continue the charade that they control events. That means the econophysicists will continue to have their ear. Harm and pain inflicted on citizens and the world in general is a small price to pay to retain power. The masses need to pay in order to keep political leaders in power.
Following the advice of the econorealists, who recognize the limitations of economics, is out of the question! Especially if these are the proper policies! Well-being is subordinate to power!
Where to From Here?
The econophysicists, with the backing of the power class, will prevail in employing more “hocus pocus” in hopes of mitigating or solving the problem. Econorealists will be ignored because they believe that the power of this storm is beyond anyone’s ability to control at this stage. They believe benign neglect is the best policy at this stage. The storm, unless fed more “hocus pocus,” will eventually dissipate on its own (but not before its energy is dissipated by the enormous damage it inflicts over land.
The political class and their econophysicists have met their match. Some may be aware, but most are not. Even those aware will continue to play the game of more “hocus pocus” either in hopes of some type of miracle or as a screen that extends power for some time. This meddling will only strengthen the storm and its capacity for damage.
However, the myth of government being in control is too important to willingly recognize reality. It must and will be maintained for as long as possible, regardless of the suffering and pain inflicted to do so.
The old saying that it is not nice to fool Mother Nature has a counterpart in economics: “Father Economics carries a grudge and has a long memory.” Both forces have been offended by this economic behavior. Both are about to take back control from the midgets who foolishly believed they ruled the planet. This transfer of power will not be painless!
The adjustment could take a couple of decades to fully play out. Events during this transition could include the following: wars (including another world war), plagues, food shortages, recessions, depressions and/or hyperinflations. Governments will likely topple along with their economies.
Whether lessons are learned by this elongated and painful process is moot. Countries and governments will reconstitute. Political leaders will demand more control than they can handles and this birth-death cycle of civilization will re-start.
Addendum: As I get ready to post this piece, I see that markets around the world have rallied with Great Britain’s cave to more “hocuspocus.” They restarted their monetary printing machine, a sure sign of desperation a sure move toward higher inflation and more weakening in the Pound.
Perhaps the world thinks this “hocus pocus” will work one more time. My suggestion: Don’t bet against Father Economics at this stage of the game.