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Great Recession

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Converging Crises

Maybe we can get through the climate crisis without a global catastrophe, although that door is closing fast. And maybe we can cope with the huge loss of jobs caused by the revolution in robotics and artificial intelligence (AI) without a social and political calamity.

But can we do both at the same time?

We should know how to deal with the AI revolution, because we have been down this road before. It’s a bit different this time, of course, in the sense that the original industrial revolution in 1780-1850 created as many new jobs (in manufacturing) as it destroyed (in cottage industries and skilled trades).

The AI revolution, by contrast, is not producing nearly enough replacement jobs, but it is making us much wealthier. The value of manufactured goods doubled in the United States in the past thirty years even as the number of good industrial jobs fell by a third (8 million jobs gone). Maybe we could use that extra wealth to ease the transition to a job-scarce future.

The climate emergency is unlike any challenge we have faced before. Surmounting it would require an unprecedented level of global cooperation and very big changes in how people consume and behave, neither of which human beings have historically been good at.

These two crises are already interacting. The erosion of middle-class jobs and the stagnation (or worse) of real wage levels generates resentment and anger among the victims that is already creating populist, authoritarian regimes throughout the world. These regimes despise international cooperation and often deny climate change as well (Trump in the US, Bolsonaro in Brazil).

And there is a recession coming. Maybe not this year, although almost all the storm signals are flying: stock markets spooked, a rush into gold, nine major economies already in recession or on the verge of one, an ‘inverted yield curve’ on bonds, and trade wars spreading. Even Donald Trump is worried, which is why he postponed the harsher US trade tariffs against China that were due next month.

Economists have predicted nine of the past five recessions, as they say in the trade, so I’m not calling the turn on this one. But a recession is overdue, and a lot of the damage done by the Great Recession of 2008 has still not been repaired. Interest rates are still very low, so the banks have little room to cut rates and soften the next one. When it arrives, it could be a doozy.

So what can we do about all this? The first thing is to recognise that we cannot plot a course that takes us from here and now through all the changes and past all the unpleasant surprises to ultimate safety, maybe fifty years from now.

We can plan how to get through the next five years, and we should be thinking hard about what will be needed later on. But we can’t steer a safe and steady course to the year 2070, any more than intelligent decision-makers in 1790 could have planned how to get through to 1840 without too much upheaval. They might have seen steam engines, but they would have had no idea what a railroad was.

We are in the same position as those people with regard to both AI and the global environmental emergency (which extends far beyond ‘climate change’, although that is at its heart). We know a good deal about both issues, but not enough to be confident about our choices – and besides, they may well mutate and head off in unforeseen directions as the crises deepen.

But there are two big things we can do right now. We need to stop the slide into populist and increasingly authoritarian governments (because we are not going to stop the spread of AI). And we have to win ourselves more time to get our greenhouse gas emissions under control (because we are certainly going to go through 450 parts per million of carbon dioxide equivalent, which would give us +2̊ C higher average global temperature).

The best bet for getting our politics back on track is a guaranteed minimum income high enough to keep everybody comfortable whether they are working or not. That is well within the reach of any developed country’s economy, and has the added benefit of putting enough money into people’s pockets to save everybody’s business model.

And the best way to win more time on the climate front is to start geo-engineering (direct intervention in the atmosphere to hold the global temperature down) as soon as we get anywhere near +2̊ C. To be ready then, we need to be doing open-air testing on a small scale now.

There will be howls of protest from the right about a guaranteed minimum income, and from the greener parts of the left about geo-engineering. However, both will probably be indispensable if we want to get through these huge changes without mass casualties or even civilisational collapse.
To shorten to 700 words, omit paragraphs 7 and 8. (“And there…doozy”)

The Global Economy: A Perfect Storm?

You know how it is with buses? You wait ages for one, far longer than seems reasonable – and then three arrive all at once. Financial crises are a bit like that too.

The financial crisis everybody in the business has really been waiting for is a “hard landing” of the Chinese economy, now one of the two motors of the global economy. (The other is still the United States.) Everybody thought it was bound to come eventually – well, everybody who was not too heavily invested in the Chinese market – and it now appears to be here, although the Chinese government is still denying it.

The second crisis, less widely anticipated, is a credit crunch that is sabotaging economic growth in almost all the developing countries except India. In many cases their currencies have fallen to historic lows against the dollar, making it harder for them to repay the dollars they borrowed. Moreover, it’s getting harder for them to earn dollars from their exports because commodity prices have collapsed.

And a third crisis is looming in the developed economies of Europe, North America and Japan, which can see another recession looming on the horizon before they have even fully recovered from the effects of the banking crash of 2007-08. And it’s hard to pull out of a new recession when your interest rates are still down near zero because of the last one.

These crises are all arriving at once because they are all connected. When the huge misdeeds and mistakes of American and European banks caused the Great Recession of 2008, China avoided the low growth and high unemployment that hurt Western countries by flooding its economy with cheap credit. But that only postponed the pain, and between 2007 and 2014 total debt in China increased fourfold.

The Chinese government is more terrified of mass unemployment than anything else. It believes, probably correctly, that the Communist regime’s survival depends on delivering continuously rising living standards. So the Chinese economy went on booming for another six years, but the “solution” was fraudulent and now it’s over.

The huge amount of cheap credit sloshing around the Chinese economy mostly went into building unnecessary infrastructure, and above all into housing. That did preserve employment, but property values soared and and a huge “housing bubble” was created. There was nobody to buy all those houses and apartments, and there are now brand-new “ghost towns” all over China, so property values are falling fast.

Since the crash on the Chinese stock markets began last month, the government has done everything it could to stop it. It has dropped interest rates repeatedly, it has devalued the currency, it has ordered state institutions to invest more – and nothing has worked.

Chinese exports have fallen 8 percent in the past year, and even the regime admits that the economy is growing at the lowest rate in three decades. Nobody outside the regime knows for certain, but it may scarcely be growing at all. The “hard landing” is now close to inevitable.

Now for the second crisis. While China’s artificial boom was rolling along, its appetite for commodities of every sort, from iron to soya beans, was insatiable, so commodity prices went up. The other “emerging market economies” grew fast by selling China the commodities it needed, they attracted large amounts of Western investment because of their rapid growth, and they borrowed freely because Western interest rates were at rock-bottom.

The collapse of Chinese demand ends this party too. From Brazil to Turkey to South Africa to Indonesia, exports are falling, the value of the local currencies is tumbling, and foreign investors are fleeing. Capital flight from the 19 largest emerging market economies has reached almost one trillion dollars in the past 13 months, and the outflow is still accelerating.

And the third crisis, in the West? The problems that caused the crash of 2007-08 have not really been addressed, just papered over. What limited growth there has been in Western economies is due almost entirely to absurdly low interest rates and“quantitative easing” (governments printing money).

The average time between recessions in the West is seven to ten years, so one is due around now anyway. The likeliest trigger for that is a collapse of demand in China and in the other emerging economies, which is now practically certain. And when it hits the West, neither of the traditional tools for pulling out of a recession will be available. Interest rates are already near zero, and the money supply has already been expanded massively.

It would be rash to talk about a long-lasting global depression in the style of the 1930s, because a lot has changed since then. But it is certainly safe to say that the global economy is heading into a perfect storm.
To shorten to 725 words, omit paragraph 7. (“The huge…fast”)