The Everything Bubble Bursts

So, as a public service, I present one of the nation’s most important economics columnists, Rana Foroohar, from the Financial Times. She is a liberal Democrat-- which does not work in her favor-- but she is vastly more intelligent and engaging that the man who writes an economics column for the New York Times. 

I am reporting this morning on an interview that she did with Ezra Klein of the Times.

Now, the reason for looking at her views is simple. We are, Foroohar suggests, in an everything bubble. I like the concept, almost as much as I like everything bagels. Anyway, the everything bubble, wild asset price inflation, is coming to an end. We have been watching the crash of crypto, the crash of tech stocks, the crash of NFTs and the pending crash of the real estate market.

One might say that this shows that the markets will out. The bubble was produced by an unprecedented exercise in money printing, process that has been going on for decades, thanks to the government and the Federal Reserve. It has produced, she says, a sugar high, and now it is unwinding.

At the least, her explanations are cogent and understandable. Less jargon and more reasoning is a good place to start:

And that’s really down to the fact that Washington has, and in particular, the Fed has been manipulating the price of assets, certainly for the last 15 years or so following the financial crisis. 

We saw even more of that in Covid because it was a way of uplifting the price of assets and making people feel a little richer in the midst of a global downturn that could have been catastrophic, it was in many ways, in a human sense.

But even before that, if you go back decades, we have been manipulating the economy in a way that is fundamentally disconnecting Wall Street from Main Street.

Why did it happen that we could flood the system with money? Well, we delinked currency from gold and this gave central bankers a greater ability to manipulate the markets. Dare I say, many libertarian and conservative economists have been making exactly the same point:

When you have a fixed pie of money, you really have to make those choices. But when we actually delinked from gold and that enabled central bankers to have a lot more control over how interest rates could go up and down, how much money could go into the economy. That sort of unleashed that, it unlocked that peg of decision making. And so politicians were able to say, you know what, Fed, you deal with the guns and butter decisions, you keep interest rates low, you stretch out the business cycle.

So, with our money printing, we abolished the business cycle. We have persuaded everyone that we should always buy the dips, that we cannot get hurt, that the Fed put, as they call it, will always bail us out.

And yet, the money we have been printing has not been funneled into the production of things. It has simply sloshed around, making the rich richer, but not appreciably improving the lives of the rest.

And that’s basically what we’ve been doing more or less since the early 1980s in particular. And you can actually see that in the statistics. So business cycles and by that, what I mean is boom-busts, so recoveries in which the economy is growing and then recessions in which there’s a correction and some weaker parts of the economy, companies, et cetera being weeded out. Those cycles used to happen every five years or so.

Thus, a sugar high:

But the problem is if you keep rates low if you put a lot of money into the economy and that happened especially after the subprime crisis, and then again after Covid, what you’re doing is creating this kind of saccharine high, where asset prices are growing because that’s really all the Fed can do, it can lower interest rates, it can make credit flow more easily. Rich people have most of the money in the economy, they tend to use it to buy more stocks and more houses. And the price of those things go up.

The money has not gone into building; it has gone into speculation, as in, crypto currencies:

But the Fed can’t do what policymakers can do, it can’t change the story on Main Street. It can’t build a new factory. It can’t re-skill all of us to do better jobs that are higher up the food chain. It can’t change that story.

So what you do is you almost get the sugar high, where there’s these headline numbers, stock prices are up, housing is up, things are booming. But nothing at the ground level is really changing. And so when I say manipulate that’s what I mean.

Interestingly, while stock prices have been soaring, corporate research and development funding has been going down:

Meanwhile, as you say, companies are able to leverage the low rate environment and the printing of money that the Fed was doing, the distributing of all that money into the economy, to their own ends. So if you look at stock prices since 2009, I mean, they’re just except for the last few months, on a completely upward trajectory. At the same time, corporate spending on things like research and development, again, until very recently because of some shifts that we can get into, has been going down.

This produces, she continues, dysfunction:

And every time a company, not just the government but a company tries to do something like, you know, invest in a technology that maybe isn’t going to pay off for seven years, or 10 years. And maybe it’ll be a little pricey and it’ll mean that you get a little hit to your quarterly profits, their stock prices tank. And so you have an entire financial system, not just a political system, that is locked into a very dysfunctional way of doing things.

To be fair, this assumes that the nation’s businesses had an option. Foroohar will show her liberal stripes when she calls for industrial policy, government direction of research and development. We do not dismiss the argument out of hand-- remember the Manhattan Project-- but her larger argument, that the free market failed to control the everything bubble, and that it failed to encourage production over speculation, is slightly off kilter.

In the first place, by her analysis the problem was produced by the fact that there is no free market in money. If the Fed can do what it pleases as far as printing money is concerned, if it can skew the market for treasury bonds by printing money to buy them and to keep interest rates down, then the situation Foroohar analyzes resulted from an effort to sidestep the free market.

Moreover, the regulatory  state, the massive bureaucracy that interferes in production decisions-- whether for environmental or humanitarian means-- does not give us a free market. It is yet another vampire squid sucking the initiative out of private enterprise. One might even say that labor unions do not encourage companies to build in the United States, because they make it too expensive to hire workers over here. 

And let’s not forget, the American educational system is not producing the talent needed to produce very many semiconductors, for instance.

Anyway, Foroohar bemoans the fact that manufacturing companies have turned themselves into financial services companies, most spectacularly with Jack Welsh’s leadership at General Electric:

The other example I would use — and this has been publicized recently in the book about Jack Welch, a company like G.E., great American innovator, under Jack Welch, who is sort of the epitome of the downsize in workers and distribute profits to investors sort of model, basically turned the company from a company that made things into a company that issued loans so that people could buy things. He cut workers, he cut investment. He turned the company really into a financial firm.

Speaking of core fallacies, Foroohar suggests here that the fault lies in the markets.

Which is what I believe the core fallacy of both neoclassical and neoliberal economists are, which is that the market was going to always know best, the market was going to distribute absolutely properly and we would get this trickle-down effect. We are not getting a trickle-down effect. None of the statistics show that.

Now, she points out that economic growth, the kind that involve building more things and engaging in less speculation comes from Asia. Naturally, she exaggerates the extent to which Chinese growth is dependent on industrial policy and labor unions and the Communist Party. That error has led some in this country to want to follow the Chinese example.

Unfortunately, the products of our educational system, run by and for liberal Democrats, have their minds filled full of leftist ideology, and cannot qualify to do the jobs that Foroohar wants them to do:

And I believe that point is coming and I think it’s coming in part because if you look at where the growth is in the world, it’s mostly in Asia right now. And this is definitely going to be the Asian century. We’re going to get cut out of that growth. And not because of anything that a U.S. policymaker has done but because the Chinese policymakers have decided we’re going to own our own supply chains.

And of course we in the West are also falling behind because we are shooting ourselves in the head over climate change. In truth, while American liberals whine about saving the planet, the Chinese, with their more practical approach, are building coal fired electricity generating plants and even nuclear energy plants. We are putting up more windmills and buy solar panels from China. Seriously....

There’s of course, an amazing opportunity right now for the U.S. and Europe to come together on climate change standards, and maybe even put a price on carbon, which would just immediately knock out Chinese mercantilism because it would actually help us to tally the cost of cheap labor, child labor, long supply chains, that take up too much energy to tote cheap stuff to us to put in Walmart or sell on Amazon, all of these things are happening.

The war in Ukraine has exposed the fault line in the Western model of liberal economics. Energy supplies to Europe are being cut off. Food supplies are diminishing. America is refusing to build new refineries and certainly not any new nuclear power plants. Do you honestly think that this will lead us to overtake China in manufacturing? The Democratic Party, led by senile Joe Biden, is whining and complaining. But really, they have another thought in mind. They are working long and hard to deflect blame for their own responsibilities as the everything bubble bursts on their watch.