These financial shocks are byproducts of deeper trends, in my opinion. The world has begun a process of regime change, as the foundations of the post-WWII geopolitical order decay. Here are some of the major trends forging a new world. Each of these has played a role in bringing us to this point; some will play an even bigger role forcing events during the next few years.
(a) The transition from a bipolar (or unipolar) world to a multi-polar world.
(b) Entering the transition period to peak oil, as global oil production peaked (not necessarily the peak) in 2005. Since then biofuels have provided most of the growth in liquid fuel consumption. Rapid GDP growth (almost 5%) required high prices to match ex ante demand with flattish liquid fuel production.
(c) The replacement of the US dollar as the reserve currency (by what we do not yet know), after 30 years of foreign borrowing – 30 years of increasing current account deficits.
(d) The exhaustion from overuse of monetary and fiscal policy. Persistently too-low interest rates yielding serial investment bubbles. The long decline to near zero of the marginal elasticity of GDP with respect to debt.
(e) Structural weakness: Funding long-term businesses with “hot” (aka liquid) capital, from the disintermediation of household savings. Money shifted from vehicles where institutions bear the risk (insurance, annuities, CD’s, etc) to direct participation (owning stocks and bonds either directly or through mutual funds). See this post for an explanation.
(f) The Thomas Kuhn-type paradigm crisis in Keynesian economics, by which the world economies have been steered for fifty years. The aggregate debt level of an economy is not a significant variable; attempts to integrate into orthodox theory by radical Keynesians (e.g., Hyman Minsky) were unsuccessful. Sometime after 2000 we reached and broke though the edge of the “operating envelope” of Keynesian theory. We ran like Wile E. Coyote off the cliff and beyond – a few exhilarating years – and now we fall.
Read the rest here.
From small wars to global economies.
Vimothy is correct – FM informs me that RGE Monitor has covered 45 of his posts, in particular: