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Geopolitical Update : Beginning of US Downfall? Debt Crises & Conflicts loom

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By Christian Takushi, Independent Macro Economist. 24 Apr 2020 (public release shortened and delayed by 4 full days).

The current Corona Crisis is exposing like no other challenge since WW2 the structural weaknesses of the US Economy – it is in particular exposing the lack of a modern Economic Infrastructure. In a nutshell: a great economy shouldn’t just be able to grow fast and generate profits, it should be resilient to systemic shocks as well. Applied to the USA – A great economy cannot just be an array of great businesses.

Having taken flak over many years for defending key US policies and for my love for America, it is my hope that our US readers will bear with me and be gracious to me as I address some imbalances and excesses. If unaddressed the future of this mighty nation could be at risk.

Rough Reality Check: According to my independent analysis almost 100 million Americans are in dire or desperate conditions. The job creation of ten years wiped away in three weeks. 15 million households in the USA have no running water, while in Florida only 17% of registered unemployed people are getting their money. The governor acknowledged the system was utterly broken before the crisis even hit. Thousands of Americans queuing up for handouts, sleeping in their cars to get free food and water. Can all this suffering be blamed on the coronavirus? Did the USA engage in an extreme form of market economy? Is the lack of safety nets for the majority reconcilable with the many lobbied loopholes and bailouts for big businesses?

This is only our preliminary analysis of a dynamic global situation, thus the conclusions will be reviewed as new data is available. As we wrote in an earlier research report, nations cannot rely on past successes and have to remain humble & flexible: not even Germany. Some nations that handled the first corona wave very well, are now struggling to contain the second – read Japan.

We are in the first chapter of this crisis and much can still change. While further down the road, the USA may recover her former greatness, let us not miss to make an analysis at this juncture. Yes, I am saying that it is possible that America could not recover from this. It is not about the recovery of accounting profits and stock prices, they may recover. They are managed expectations anyway and the stock market is flooded with money – debased paper money. Meanwhile, the fibre of a great nation could be irremediably broken, and other nations may want to follow other models in the future.

The different way the USA and Germany have been affected in the first four months of this global crisis is absolutely remarkable. From February to March 2020 the unemployment rate in Germany was almost unchanged at 5.2%, while in the United States it jumped from 3.6% to roughly 18%. And our current estimate is for 5.7% (GER) and 21% (USA) in May. We are talking about more than 20 million households been affected by unemployment in a matter of three weeks in the USA – Such financial uncertainty surely takes a toll on families, their health and their trust in the system.

 

Some experts see Germany’s unemployment rate climbing to 5.7% later this year. Our worst case scenario for Germany is currently 7.7%, that is still far better than the 22% we foresee for the USA. Germany’s unemployment could of course suffer more depending on new developments.

USA on the ropes, Germany a beacon of relative stability 

During this crisis, the greatest global crisis since World War Two, Germany is clearly outshining America and other Advanced Economies. The crisis is hitting the healthcare, aggregate supply and demand sides of all economies. It has also unleashed a massive disruption of the Global Supply Chain. I don’t focus on the noise and the daily news, rather the big picture. So let me be straightforwardly open with you: This is just Chapter 1 of a long crisis. Chapter 2 will have to address the fact that the USA and most other Advanced Economies are unable to repay their outstanding debt and are even bankrupt. Chapter 3 may entail geopolitical conflict and war.

Why this is just the first chapter? Most G-20 nations will issue gigantic amounts of debt that their own central banks will have to buy .. with paper money they will have printed out of thin air. Such a thing is unethical, a “crime” against future generations and should be forbidden. It will lead to economic disaster sooner rather than later.

Germany has become “the model” many governments and experts around the world are trying to understand and study. Germany has indeed so far handled the medical and economic crisis much better than other Advanced Economies of similar size. Countless articles are explaining this success with the smart measures taken early in the crisis. Most of these articles are misleading though. For starters Germany made a number of mistakes, but those were more than compensated by a solid infrastructure, permanent safety mechanisms, smart decisions and superb organisation. Thus, the foundations of the success were already laid long before the virus was scattered around the world within a few weeks by eager air travellers.

As someone that has studied the advantages and disadvantages of the German Economic Model versus the Anglo-Saxon Model and the Asian State Capitalist Model, I can assure you there are no German Wunderlösungen or “miracle solutions”. Much of it comes down to “learning from history, organisation and order”. And if on top of preparedness and professionalism .. the head of state is even-keeled & honest, the population can be expected to go a long way to support the course of action.

Let me put it this way: As the only G7 economy that has not lived beyond its means  and that has actually amassed big reserves for a rainy day, it is not a total coincidence that Germany is quietly leading the fight against the current medical and economic crisis with the best practice. Due to her economic prowess, history-shaped hesitation to lead, and her lack of threatening military power, Berlin has become the most respected and trusted power on all continents.

Underpinning such a stable economy is a rather boring political system fixated with stability though. Thus, the German success model has some weaknesses like geopolitical foresight. But it is not a coincidence that both Japan and Germany feature the most stable and risk averse societies among the G7 with a high propensity to save. In a way Germany needs America, just as much as America needs Germany these days. Geopolitically and macro-economically if the USA, the UK, Germany and Japan would join forces, they would complement each other perfectly. It would be a stable anchor for the world economically and politically.

Fiscal responsibility pays off 

Germany may be the world champion in fiscal responsibility, but it is not alone. In general, nations that have managed their finances responsibly and built financial reserves over the years, are exhibiting a swifter economic response to the crisis: take Denmark, Switzerland or South Korea. They have more “degrees of freedom” or leeway than their peers to announce & release support for workers and companies during the shutdowns. Over-indebted nations have announced measures they are struggling to finance. Britain told self-employed citizens that they may get support by the end of June – read July. Self-employed people are better off elsewhere.

My goal is not to parade one economy against another, but to identify approaches and systems that can be adopted elsewhere in order to improve systemic deficiencies. I have been warning about this transitional decade full of disruption for almost 6 years: Nations that are unable to improve and adapt, may go under in this decade. Confronted with the breakdown of entire systems and communities across the USA, I heard an American business analyst saying today “this is just our American free market economy”. I believe we all ought to be a bit more humble than that and be open to learn from others.

Great businesses don’t necessarily produce a great economy 

My point is this: Even if business is at the core of an economy, an economy has a complexity that goes beyond the business realm – Furthermore, a great economy has to be resilient to shocks as well. The United States of America is probably “the place” to start and grow a business. While there is a link and a certain causality relationship, both common sense and historic evidence suggest that great businesses do not necessarily create a great economy. All great superpowers indulged in debt and monetary experiments before their fall.

For some years now we have observed that many thought leaders in America believe that great businesses automatically make a great economy. We have seen successful businessmen dominating the stage of prominent Economic Conferences, and that some of their controversial economic views went pretty much unchallenged. They prided themselves in an economy where everything was great as long as profits continue to rise regardless of the growing adverse spillover-effects: and I only name a few ..

 .. growth is increasingly driven by debt & easy money, bridges risk collapsing, water pipes & electricity grids are dangerously old, government services are broken, workers live from one check to the next and a pre-existing health condition or accident can send a decent family into poverty ..

To me as a macro economist, this is a vulnerable economy where much of the profits came at the expense of company’s substance, private households, the environment and society. Broken roads and broken safety nets are the results. A truly successful economy shouldn’t leave millions of decent citizens behind. This debt-driven US economy where 53% of its citizens have no reserves to face a crisis is an economy that needs some rethinking. Even a great nation can be humble enough to learn from others, because there are plenty of time-tested concepts out there that the USA could use and take advantage of. To give just some examples ..

  • Constitutions that don’t allow governments to spend beyond their means, leading them to put reserves aside in good years (some mid-sized emerging markets are doing this for years)
  • Separating health care coverage and pensions from the employer
  • Subsidiarity – the government does that which the private economy could not do better or should not do (it is sad when hospitals and schools are “primarily” there to grow profits instead of serving the sick and students respectively)

A nation may be powerful, but its greatness will be tested the day it has to face a systemic crisis.

Crises test our character

Major crises test a nation just as much as they test an individual. Such a crisis will test its preparedness, its institutions and its leaders. For the USA this is that day, and what we can see is worrisome.

This may not sound very capitalistic, but it is very capitalistic indeed: when companies lay off their employees en mass just to protect their short term profit margins, they shoot themselves in the foot. Longer term it makes more sense to sacrifice the profit margins for 1-2 years in order to rise together (the better model). The former model is short-sighted and tends to give way to excessive inequality and violence, the latter tends to give way to a more stable society, where companies maximise long term profits and invest in the training of their employees. Which in turn leads to higher retention rates, better pay, a more stable aggregate demand and higher pricing of goods and services. The USA is an example of the former, while Japan and Germany are examples of the latter model. To some extent they are on extreme opposites, but I believe they could learn from one another.

This speaks volumes: German workers that didn’t go to university have a much better professional training and as a result a higher income than their American peers.

Can America – the best place to do business – enter economic decline? 

Although I thought it was absolutely refreshing to have a business man in the Oval Office, for three years now I have been concerned that America is being led by too many savvy business men. Back in Q4 2019 I remember watching a FOX News anchor hailing the current administration for its ability to attract so many multi-millionaires into the White House and other key institutions. An alarm bell rang for me as I remembered how those gentlemen had made their fortunes. We need a diverse set of experts, gifts and characters for a successful government, even a few business predators. Not all successful businessmen are as dedicated to public office as Secretary Mnuchin though. You need more than great business acumen to run a whole nation and an economy.

While it might be helpful to have experienced business people in your government’s economic team, it can be disastrous when they over-dominate the decision-making. Even fortune 500 CEO’s could tell you that. An economy is also about sustainable growth, long term profitability, the health and wellbeing of its citizens, the resilience of its institutions etc. While accounting profits were booming at big US corporations, economic (opportunity) costs and pain were mounting elsewhere in America.

Many things can still happen, a miraculous cure could be found against the Covid-19 virus, but 2020 could possibly mark the beginning of the US downfall as the Economic Superpower. Thus, while America will recover on the surface, she will be scarred & fragile, and lose out relative to other powers. It is thus my hope the USA will make the necessary adjustments.

It is worthwhile stressing that I am not one of those many perennial doomsayers of America. It is almost painful for me to write this, because I regard the USA as one of the greatest nations that has ever existed – not least, because of its liberties and entrepreneurship. The land of the free and the home of the brave was once the home of the “American Dream”. This has been the case for fewer and fewer Americans in recent decades though. The great American economy failed to learn from some of its competitors and adjust course.

In the long run, it is about resilience 

In a way, Economics is a fascinating social-mathematical science: If you cannot comprehend the complexity of the big picture, you can try to look at an average household or average firm around the corner.  Often what you see is a pretty good indicator of the health of the overall economy.

What I am saying is this: the US economy is showing the same crisis-resilience as the average American household.

Spending way beyond its means, running on debt, with no reserves whatsoever, and unwilling to build in safety nets, the US government has had to run into panic mode to master an improvised protracted crisis response. Despite its superb resources, America has not been able to convince with its response to the coronavirus so far.

Other nations have done better. Some much better. In part thanks to common sense, in part thanks to built-in safety nets. Those safety nets (insurances) in countries like Germany, Austria and Switzerland have more than paid for themselves. Not only that, unlike America those governments and parliaments did not have to spend months to scramble new legislation and set up concepts to channel the help. All that is highly inefficient and wasteful – Just what Washington is doing now. With little legislation battles to fight and no voters to impress, German politicians could focus exclusively on managing the response to the crisis. The safety nets already in place take care of buffering the first impact. Thus, leaders could afford to weigh the expert opinions, the data and the evidence from Asia.

It has of course helped that Chancellor Merkel is a scientist herself. As any person academically trained in statistics and hypothesis-testing, she knew that in the face of a new phenomenon there should be more questions than answers. A science with a tight consensus and “closed ranks” among experts is dangerous science and potentially driven by ideology. The Chancellor could handle that ambiguity, be honest about it, and this has paid off.

The USA is in many ways a great nation, but three weeks into a novel crisis have undone 10 years of job creation and inflicted untold pain to roughly 1/3 of the population. The current supply-demand shock is on track to get 1/5 to 1/4 of the workforce into unemployment. A great depression may be averted, but only thanks to an improvised, inefficient and wasteful gigantic rescue package that will bring America closer to her own Day of Reckoning – The day when Washington has to admit to her creditors that it will never be able to pay back the outstanding debt.

All over the world investors, politicians and workers are discovering that the resilience of their economic system is something they can no longer overlook. Resilience will be critical in this decade, because the world will face a series of dramatic crises and systemic events.

Why is Germany’s economic system more resilient? 

It is worthwhile to dig a bit deeper and to understand the importance of Kurzarbeit and a solid health care system. The UK Government’s COBRA data exposes the remarkable performance difference: On the health care front Germany has also outdone the USA, Britain, France, Italy and Spain.

At the macro economic level everything is inter-connected: Germany’s economy is responding much better than other large European economies and the USA, not only because of its fiscal discipline and solid economic structure. It is also thanks to its robust health care system.

Local hospitals and labs are well equipped, while every person has access to health care insurance. More importantly. A low income person doesn’t have to go to Berlin, Hamburg or Munich to get a good treatment. Every federal state has state of the art hospitals and universities. Maybe not a Mayo clinic and not an MIT, but the average level of education and health care is high across the whole country. What Germany teaches us is that the vast majority in a country cannot live off the excellence of a few privileged institutions. A bitter experience that nations like the USA and UK are making these days. Their world-renown institutions and famous experts could not beat the down-to-earth and less-salaried German counterparts. Their advice was not only spot-on, the implementation at state and local level was seamless.

All coming together – politics in disarray, panicky improvisation ..

Let us look at businesses: As I am writing this report, we are approaching the end of April and very little of those USD 2.8 Trillion has been really released. Countless businesses will be lost as a result. Not very different from the UK’s move to offer help for the self-employed by the end of June 2020. Meanwhile, small businesses have been given preference in Germany to be the first to re-open for business this week.

Small businesses, investors and workers have been let down by their government across many nations. Preparing for crises is part of the governance duties of government and business leaders. They have utterly failed and should not deflect by blaming the virus, the WHO and China for their own predicament. They have their own share of failure.

In Germany, Austria and Switzerland businesses didn’t have to watch their politicians fight each other over whether they should rescue them and over how to help them. They have already a well-established set of institutions with time-tested mechanisms. One of these excellent automatic safety buffers in Germanic nations is called Kurzarbeit  or “reduced work”.

In the good years it is practically financed by the state, employers and workers. Some economists call it a tax, some die-hard conservatives call it a Socialist tax, I call Kurzarbeit an “economic fire insurance” – it is common sense. Would you build a house and fail to get a fire insurance? Would getting insurance make you a socialist? Equally, the benefits of offering every citizen a health care insurance far outweighs the potential costs. I am not a socialist, but a conservative macro economist.

When a crisis hits, the government releases the money. This works best of course when the government sets money aside in the good years, so that it has enough buffer to increase budget deficits in the crisis.  Germany, Switzerland and Austria have that leeway. In times of systemic shocks it allows German companies to retain their workers, with the state financing 60 to 67% of the income loss. So far this year nearly 730’000 Germans are on Kurzarbeit. The government can simply extend it if necessary. No extra political drama and no extra bureaucracy. Unlike US firms, most German companies are absorbing the shocks together with their employees, because they want to retain the highly skilled labor they helped to train .. and .. because they think “long term” in good old-fashioned capitalistic self interest. This is a massive advantage for German businesses versus their competitors in the USA and other nations. This gives businesses and employees some certainty and allows them to plan ahead with less panic for the tough months ahead.

Although German businesses and workers won’t be spared the pain of this global corona crisis, it is a huge difference to have a system in place that absorbs the first shock in a major crisis. It gives people the time and space to rationally prepare for the most likely and painful outcomes of the crisis.

America is paying a high price for rejecting “Economic Fire Insurance” as Socialism

It is a huge problem to have no permanent economic buffers (i.e. economic fire insurances) in place, and having to create one in an emergency is terribly inefficient & wasteful. Much of these USD 3 Trillions are going to be inefficiently spent. Not only that, in the USA, big corporations with their armies of lawyers are at a big advantage versus small businesses to get federal support money. That is no Free Market, that is a predatory market where big firms crowd out small competitors.

Despite its greatness, US thought leaders oppose the building of a proper economic infrastructure with “insurances” for its businesses and workers. Unfortunately, everything designed to cushion shocks is deemed “socialist” by many conservative and even some evangelical groups. Somewhat beyond my understanding, because when I read the bible the first Christians put the poor & needy in the first place, and even shared all their possessions. Pulling the US parties at the seams are radical Socialists and radical Conservatives. Being an independent economist, I personally find many constructive ideas among both Republicans and Democrats.

The truth is that not having those buffers in place can turn out to be far more costly in the long run. The lack of a proper economic-social-healthcare infrastructure to support companies and workers .. combined with a protracted and heavily politicised response by federal & state governments to the Coronavirus could deal the USA economy a blow from which it may not be able to recover for years to come.

The world will never be the same after the Corona Crisis and I feel America may not be able to ..

If you want to read the full research report, you can write to c.takushi@bluewin.ch

By Christian Takushi MA UZH, Independent Macro Economist & Geopolitical Strategist. 24 Apr 2020 (public release shortened and delayed by 4 days)

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation

A distinct broad approach to geopolitical research

(a) All nations & groups advance their geostrategic interests with all the means at their disposal

(b) A balance between Western linear-logical and Oriental circular-historical-religious thinking is crucial given the rise of Oriental powers

(c) As a geopolitical analyst with an economic mindset Takushi does research with little regard for political ideology and conspiracy theories

(d) Independent time series data aggregation & propriety risk models

(e) He only writes when his analysis deviates from Consensus

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