I want to talk a little about the political economy. A few months ago I added the topic tag “nationalism” to the topics this blog covers because I believe this is an issue which becomes relevant during global economic crises. So far, I only see two posts labelled with that tag, but I may go back and re-tag some other relevant posts that way.
Here’s the depression macro thesis I have developed prominently featuring a kernel of nationalism:
- Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
- Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
- As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
- Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
- From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.
In one of the two posts I wrote now tagged “nationalism” called “Rising economic nationalism” the thoughts of SocGen’s Dylan Grice for Europe feature prominently. Dylan wrote:
So “in-group bias” can cause wrong ideas to persist longer than they should. But persistence isn’t actually the problem. Any distribution has extremities at any point in time and there will always be some people with bizarre opinions about why one out-group or another is the cause of the world’s wrongs. The problem is when such thinking gains traction …
And this is why I’m worried about where the euro is going. Most experimental evidence clearly shows that while in-group bias is common, we do a good job at suppressing the distorted perceptions and prejudices it creates. Social norms, empathy and the adoption of more rational value systems all help to mitigate our tendency to discriminate against out-groups. However, on a personal level that suppression requires an ongoing supply of what is essentially a highly scarce resource: mental energy. And in a fascinating literature review of recent work into the psychology of prejudice by two academics at the University of Kansas a detailed picture emerges of how mental stress and emotional fatigue increase our susceptibility to “in-group bias”. Thus, the rise of aggressive nationalism throughout the world in the 1920s and 1930s and the consequent breakdown of global trade all occurred under conditions of extreme economic distress.
I believe what we are seeing is the beginning of the eurozone’s credit crisis, not the end. The historic and psychological evidence clearly links economic dislocation with the scapegoating of out-groups and, of course, the eurozone edifice stands increasingly lonely and tall as a lightning rod for the latter. I believe the likelihood is that over the course of the next decade or so, the trend will be towards greater fiscal problems and greater economic problems. I believe these problems will increase the temperature of debates about whose fault it all is, and that as the conclusion to these debates becomes more polarized they will play into the hands of nationalist, anti-immigrant and increasingly, anti-euro sentiment.
I saw three separate pieces today that prompted me to write about nationalism once again.
First, James Fallows had a piece called ‘When Will They Take a Stand Against Their Own Crazies? He hits on two threads. Writing about the boos a homosexual American soldier in Iraq received during a recent Republican debate, Fallows says:
One of the earliest political histories I remember reading was on why it took Dwight Eisenhower so long to condemn Joe McCarthy and his destructive, bullying “investigations” during the Red Scare years. I can’t now be sure just where I read it, but I remember the mounting sense among Eisenhower’s admirers that he was shaming himself by not taking a stand (and indeed for campaigning with McCarthy during the 1952 election). Ike finally turned on McCarthy late in 1953, after McCarthy began attacking the patriotism of Army officers and challenged Ike’s own Secretary of the Army. The situation now is different now in many ways, but as the reader suggests the basic dynamic is the same. The hateful side of a party is showing itself, and the party’s leaders are either pretending they don’t notice or else are actively pandering to the haters.
But also notice how Fallows leads talking about the muscular approach the police took to anti-bank demonstrators this past weekend. This is exactly what I am thinking of when I talk of an “unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government”.
The point is that in-groups will always demonise out-groups, which gives economic nationalists strength. Interestingly, this concept of demonization ties in nicely with the second piece about the Le Pen’s National Front in France. The Telegraph writes:
Miss Le Pen, 43, a twice divorced mother of three and lawyer by profession, is disarmingly amiable and unusual among French politicians in cutting straight to the chase.
She is less punchy – metaphorically and literally – than her father and uses a sophisticated, gentler vocabulary but has the same combative character. Like him, she gives the impression she says what she thinks and thinks what she says.
“I believe I have succeeded in de-demonising the party, perhaps not among the elite, because the elite are very attached to the system that feeds them but among the ordinary people. When you see how I am approached by people in the street and treated with kindness and affection even among those who don’t vote for me, you can see that in the space of ten years things have changed enormously,” she says.
“Of course people say I am the soft face of the devil and suggest that nothing has changed, but that’s their only way of maintaining the wall to keep us out. If that falls, then we will be elected and they know that.”
Asked what she believes is the greatest menace to France, she is quick to respond and unequivocal: the European Union and immigration.
“The greatest threat is the loss of our freedom as people because we can see that in reality the European Union has become another Soviet Union constructed without the people and sometimes against the people. It makes decisions and our democracy has disappeared; we French people cannot decide on our own future, it’s a bureaucrat or technocrat who decides in our place.
“The other great danger is massive immigration that will result in the loss of our identity. I am madly in love with the idea of there being a diversity of nations, but for nations to be diverse their people have to stay together. It is not a lack of respect or hatred for foreigners, but I want Malians to remain Malians and defend the language and identity of Mali, Americans to stay Americans, the Chinese, Chinese and the French, French.”
Miss Le Pen wants to “de-demonise” her party so that it can in turn demonise the European Union as “another Soviet Union” and warn of the dangers of a “massive immigration that will result in the loss of our identity.”
The third piece is actually a video of Hans-Werner Sinn, the head of Germany’s well-regarded ifo Institute. He was on Bloomberg talking about the prospect of recession in Germany, and, surprise – he doesn’t see one anywhere. He sees the current situation in Germany as rather robust. I think his characterisation of the German economy is noteworthy for two reasons.
First, I just wrote a post called “S&P: More bailouts will lead to Germany’s eventual downgrade”, which says pretty much the exact opposite. In Sinn’s defense I would say that I focus on expectations and Sinn described the current situation as robust in contrast to more worrisome expectations. However, in noting a week ago that Nouriel Roubini agreed with Sinn that Greece should default and abandon the euro, I specifically remarked “Where Sinn is concerned about German taxpayers paying the part of the bill left for bank creditors, Roubini is concerned about Greek taxpayers and workers also paying that bill.” My point was to focus on the nationalistic interpretation of the sovereign debt crisis to which Dr. Sinn gives voice. His view is a softer version of the morality play which says that Germany is a virtuous, prudent country which should divorce itself from Greece, which is a slothful, reckless country. That view of the sovereign debt crisis brings to mind this editorial quote which I tacked on to the end of a post about Europe:
P.S. – Economics is not a morality play. Hopefully, you will have noticed that I don’t write about this in moralistic tones (using language that conveys undertones about ‘evil’ Germans, ‘lazy’ Greeks and so on). Anyone who does has an axe to grind and you should be very wary of the biases this creates for their analysis.
I thought Sinn’s analysis on the eurozone breakup made sense. And in listening to his analysis of the German figures below, I believe he is careful to distinguish the ‘rather robust’ current conditions from less robust expectations. But, it has always been clear to me that he sees this economic crisis in nationalistic terms which can cloud analysis. When Dr. Sinn says, “no, no, no, no, no, no, I don’t see a recession for Germany” just after the 2-minute mark, this is what I am hearing. I would appreciate any comments on whether his comments give you this same impression.
This post originally appeared at Credit Writedowns and is reproduced with permission.