When Economics Plays Politics

Japan then South-East Asia and now China (and Germans before), the story remains broadly the same ensure political control over national savings, invest in creating factory and infrastructure capacity far in excess of domestic markets needs and export to the European and especially the US markets. Corollary to this, use the net exports to build large enough dollar currency reserves to hold down the local currency. This story as we can see has played out multiple times before. But this time it’s different, in four critical ways:

• GDP growth is productivity growth and population growth. Both these have slowed down or reversed in the developed markets. Consequently, the ability to consume has only been enhanced in recent times by a reduction of savings (or expansion in indebtedness) in US and Europe rather than an expansion of incomes as before;
• The scale of investment relative to the world that the Chinese are doing is unprecedented. For a country whose consumption is only about US$4 trillion or about 10% of global consumption, it is annually investing closer to US$5 trillion which is roughly equal to 25% of the global investment. Japan at its peak in the late 1990s was investing just about a third of its GDP, the Chinese are investing almost half. With more sophisticated supply chains built now this results in imposing a prohibitive cost to investments anywhere on the globe;
• Robotics, automation and artificial intelligence are making humans more and more redundant. This is rendering humans less relevant in planning production locations. That Foxconn plans to put a plant in Wisconsin (US) for Apple products is made possible by this factor as much as other issues;
• Lastly, the global financial crises of 2008 which in many ways was a manifestation of the first point led the central banks to adopt policies which made the returns of middle class savings and pensions returns practically zero, while the asset inflation that ensued have made the wealth distribution even more unequal.

Source: CBO, US

The global liberal order which was very much an American creation post WW II was shaped but a large middle class allowing American borders to be politically open to trade and finance. This, however, is under pressure. In Capital in the Twenty-First Century, French economist Thomas Piketty argues that "extremely high levels" of wealth inequality are "incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies" and that "the risk of a drift towards oligarchy is real and gives little reason for optimism about where the United States is headed."

The election of Donald Trump and the campaign of Bernie Sanders was an indicator of manifestation of the anger of American public on the economic insecurity that has built up over the last two decades. The revocation of TPP, the talk of unwinding NAFTA and more recently steel sanctions are pointers to a 180-foreign policy change to country which has been more intent in securing foreign markets and offering its own. In November 2016 article I had written, “The US single-handedly consumes as much as the next 5 countries of the globe and 26% of total global consumption or 5% of the globe’s population consumes >25% of global production. It has added in the last 8 years 3x debt for every dollar added to GDP. I had discussed this in an article in December last year in greater detail (http://poleconomyindia.blogspot.in/2015/12/imbalance.html). Which means the US economy provides jobs across the world to support its consumption while middle America production belt suffers.”  

The US public focussed on domestic issues is changing the political discourse in Washington. It’s interest in global affairs is diminishing, also tired from Afghan and Iraq adventures, – be it Afghanistan or Middle East except maybe North Korea as it threatens to nuke the US mainland – and this is creating fear across states as the established security order suffers. While the Europeans seem to show no stomach for a fight, the Baltic and Eastern European states are frightened by Russian moves to resurrect their buffer zone, Japan is changing course to react to greater Chinese power and less trust on American security guarantees as is India and South-East Asia and Middle East is a free for all.

To add on top, it’s not that the American economy at a macro level doing well:

• Real GDP growth has been 1.97% and 0.83% over last 3 and 5 years respectively;
• Federal Government debt is 106% or 2x more than 2000 and expected to be 130% in 10 years;
• At $8.6trillion corporate debt is 30% higher than September 2008;
• Productivity continues to fall and is approaching zero;
• Fed balance sheet is 6x larger than pre-crises level and it wants to start trimming it 9 years into the current cycle (one of the longest is US economic history);
• The S&P 500 Cyclically Adjusted PE is only been greater once in 1990s and is almost same levels preceding Great Depression and when higher than 1920s when adjusted for economic growth trends;
• Total domestic corporate profits have grown at annualized .097% in last 5 years and over the last 10 years S&P 500 corporations have returned more money than they have earned;
• The list goes on…

(Source: Michael Lebowitz)

The political and the geopolitical problem will only get worse if the economy turns over…and, of course, economics plays politics all the time but then there are those times when it really matters.  

Likely Age of Technology Leap

The global geopolitical fracture is also likely to lead to higher defence expenditure. This also is likely to herald, if past is anything to go by, a period of great technological change. How it affects political power (like in the case of nuclear bombs) or changes in economic course. Many significant pieces of tech we use today came out of military technology – the micro-processor first invented to guide inter-continental ballistic missile or GPS to help military find location or internet developed as a fail-safe communication protocol in case of nuclear war. Or sample this a list drawn by the French Military in 1993 to classify technologies they were working on:

• totally military technologies, lack of duality (nuclear technologies, electronic warfare, stealth furtivité, etc.);
• technologies moderately dual (missile propellants, lasers, etc.);
• technologies partially dual (optics and optronics, electromagnetic, acoustics, etc.);
• technologies largely dual (aircraft engines, super-computers, etc.);
• technologies totally dual (Computing tools for complex systems integration, Modelling and simulation for complex systems integration, Artificial intelligence and neural networks, Industrial systems of production (including robotics), Materials treatment and shaping, Ergonomic and neuroscience)

These classifications will however change with time as they did with cellular telephony. But the government’s ability to spend and acquire resources on futuristic technologies for battle-field superiority is far deeper than any private body.

For example, Defence Advanced Research Projects Agency (DARPA) is spending on developing solar powered stratosphere floating sensor for targeting applications but the same can be used for location and weather applications or harnessing ocean currents for powering Automated Underwater Drone applications can be used for shipping, submarines or civilian energy generation.