The Post Capitalist World

Without The Growth, It's A Zero-Sum World

I cam across an article written by a Japanese economy professor who ran a historic analysis of what it means to be running Zero Interest Rate Policy (ZIRP for short in certain circles). It's a pretty straight forward article that even an economics novice can understand, and it centres round what it means to have ZIRP and why this signals a problem.

Japan is running interest rates lower than 2.0% for a couple of decades now. Germany has been doing the same for some time. The level of low interest has not both seen since the days of the Reformation and by that we mean the days of Genoa during the wars that saw the rise of Protestantism in Europe, thus splitting away the fiefdoms controlled by the Catholic Church, effectively stunting the growth of lending to the Catholic Church by the bankers in Genoa.

The point is, that the extraordinary length of ZIRP in our time is pointing to something extraordinary in the history of capitalism itself, and it essentially comes down to this: Capitalism has ceased to self-replicate at the rate it has done for most of modern history that extends back as far as the Reformation. Economic Growth and Modernity were interchangeable for a very long time, but we've arrived at a point where there is no scope for growth in some of our advanced economies. The growth won't come because in most part we've hit a saturation point for where capital can be applied.

The article goes into some quick schema to paint a picture which can be reduced to a simple formula. If an economic unit produces more, then the quantity of production the increase in production and subsequent sales can be understood to be on this axis which we can call 'X'. Another axis's the rate at which we produce and sell these goods and services, whites essentially the productivity. We can call this Axis 'Y'. Combined, the 'X' and 'Y' axes provide a field which is the GDP of the economic unit. When taken at the national level, what we find in advance economies is that we can't seem to grow quantitatively and we can't seem to grow qualitatively. So our GDP stagnates.  

The only other axis is actually growth in the virtual and cyberspace. And this is why there has been growth in the financial sector and growth in the internet and technology businesses. This is the 'Z' axis which has exploded comparison to the stagnant growth which befell the 'X' and 'Y' axes growth in the first world.

Up until 1980, there was consistent growth in modernity because there was space to grow into. Since 1980, we've pushed for globalisation so that there was more economic space to grow. As of 2008, the first world economies have hit the limit. This also dovetails with the drives for productivity sought by business and governments since 1980 where we've seen offshoring of manufacturing and attendant mass lay offs in the first world. In its place we've seen the greatest growth in the space created by technology, whether it is in advanced financial instruments and high frequency trading or simply high-tech industries that are off-the-charts in valuations as soon as they list.

It's not as if the 'Z' axis opened up because of the limits to growth on the 'X' an 'Y' axes, although there is a partial relationship between the need for growth and the massive rationalisation that high tech brings. Most of the gains in the 'Y' axis have come from the dividends of the 'Z' axis. The 'X'and 'Y' axes can't grow because the world is just about saturated with the economic activity of the first world.

What The RBA's Drop To 2.25% Tells Us

The whole world is experiencing the limits of growth along the 'X' and'Y' axis. The Central Banks in Europe are also running historically outlier low interest rates and even ZIRP in some countries. It's no coincidence then that the RBA has been running the lowest interest rates in its history, and this week set a record low 2.25%. The shenanigans of Federal politics aside, it's interesting to note that it comes at a time when the forecast for growth in Australia keeps dropping.

Combine this with the fact that the automotive industry is pulling out of Australia and myriad manufacturers have had to close their doors in the short time the Coalition Government has been in, and you get the picture of an economy that is quickly running out of ways and places to grow. It's one thing for Joe Hockey to tell the world leaders that what we need is growth. We sure do, Joe; but if there is no room for it in the physical world relative to the G-20, then it's a bit like fish in a crowded fishtanks saying what they need more of is water.

What's become even more stark and obvious with the retreat of commodity prices to their historic norms, is that absent the income from mining, we suddenly are back to being that economy thetas bloated in the service sector. And while this can be roughly divided into to categories like most things - good and bad - the glaring truth is that the manufacturing we lost is never coming back and even if it did, it would have no economic space in which to grow.

In this context, it would have been (and still very much is) imperative to to grow along the 'Z' axis which would entail growing the tech sector, growing businesses that operate in the virtual space, and look to becoming a force in 'Z' space. Odd then, that we have a government fixated on miners, bricks and mortar retail businesses and a degraded numpty version of an NBN. The complete array of policies concerning business and the economy is fundamentally backward looking and fails to take in the evolving problem.

We're not investing in tech or education or for that matter paying for students to learn things that would help them survive the evolving economy. Our government is trying to off-load those costs back on to the people and wipe its handoff the responsibility, exactly at time when a strategic view needs to be taken as to what kind of industries can be imagined and nurtured along the remaining 'Z' axis of growth. Instead the investment money has flooded into real estate - mostly because those investors get to borrow money so cheaply, this forming a positive feedback loop, but also because they have so few alternative options to invest but on bricks and mortar.

The popping of the Australian property bubble may never come - after all the guys at Zero Hedge have been saying China's economy is doomed and somehow the thing keeps going, and if China keeps going there's no reason why Australia's property bubble should collapse. If the GFC didn't pop it, then god only knows what it would take. But the distortions created by the property bubble are here to stay, putting a gigantic brake on growth. Eventually the RBA may well cut interest rates down to the ZIRP. In which case we will have arrived at the end point of capitalism without having made any investments into surviving what comes after traditional capitalism completely matures.  

The Problem With The Stimulus Packages

The greatest irony of Tony Abbott's tenure as Prime Minister is that having promised to be a Infrastructure Prime Minister, he hasn't really done much of any of it, and the infrastructure he did want to build was roads because let's face it, it's about the political donations coming in from general construction companies. You can't accuse them of corruption, but you can sure charge them with crony capitalism as Bernard Keane has done.

Again, we've seen this development in other countries but basically big government contracts are sold as good for jobs, and investors in General Construction companies make out like bandits on these projects. Australia has a peculiar development called Private Public Partnerships whereby the government refuses to go into debt and sucker investors are given the exploding doll sold to them as a good deal. You'll notice that once built, those roads really don't create more jobs or economic activity in of themselves. It's amazing that they get classified under Capital Expenditure. But these tollways Tony Abbott's backers want to build, are simply unlike factories that actually produce things or for that matter a digital workspaces that churns out apps. They don't contribute to the 'X' axis of production and they're only marginal contributors to the 'Y' axis of productivity, not to mention having no impact on the'Z' axis.

Equally stupid then, is the belief that we can have a building-led recovery. I know it flies in the face of the way our economy gets reported, as well as the housing sector making up 25% of our GDP,  but a house that's once built does not contribute to any of the 3 axes. The worst use of capital going around is all the debt piling up on the private sector's ledger as mortgages. It's good for the banks but it has much, much much less of a future than the NBN. In fact we're seeing this very problem unfolding China because they keep building the ghost cities in order to pump up the GDP figures but those ghost cities, once built, are contributing absolutely nothing to the 3 axes of economic space while the fastest expanding and most successful Chinese venture is probably Ali Baba, an internet market.

It's the same in Japan where fro 20years the government has unleashed stimulus package one after the other and still growth and the 2-3% inflation everybody so desires eludes the government of Japan. All those stimulus packages were one-off spends that contributed very little to the'X' and 'Y' axes over the same time span. The most healthy growth in Japan has been the IT sector. This pattern is repeated in the UK, the USA, and other members of the G8 ...except Russia where frankly, nothing makes sense except digging up more oil.

This is why I was banging on about the NBN prior to the September 2013 election. It really is our only hope for a future with a growing economy. Instead we voted in a government that is on the whole insensitive to that reality and hastily knobbled it to help out some backward looking cronies. Unless that gets rectified, in the years ahead, we'll come to see that this Coalition government was responsible for screwing up the future of this country.