Geopolitical Update : Bigger monopolies & state interventions, is the West converging with China?
By Christian Takushi, Macro Economist. Switzerland – Sat 22 July 2023 (truncated public on 25 July 2023)
With bigger monopolies and state interventions, is the West converging with China?
On the surface it seems that two opposite superpowers are struggling for supremacy – a Free Capitalistic West is facing an autocratic China-Russia alliance. Two opposite poles seem to face each other.
Let’s ask, whom is the rest of the world following?
Well, a large number of powerful emerging markets and large developing nations are supporting the BRICS, although very few of them are pro-Russia. 24 of the 41 nations interested in joining a possible gold-backed BRICS currency want good trade relations with the USA and Europe. Few want to replace a US hegemony with a Chinese one. Many are on the sidelines, because they fear our sanctions or retaliation.
But let’s analyse underneath the arithmetics. Failing economies don’t carry the same weight as successful ones with trade surpluses. The really interesting observation we can make here is that within the non-Western world the healthiest economies with superior monetary-fiscal discipline and ample free competition are leaning towards supporting the BRICS currency in order to reduce their dependence on our Western currencies.
The no 1 trigger these thriving nations mention for this stance is the weaponisation of the USD in 2022 by President Biden. They think the West will sooner or later freeze their assets if they don’t embrace our climate & gender policies. Maybe President Biden’s decision to seize Moscow’s USD reserves did more harm to America’s strategic interests and Western investors’ long term interests than it did hurt Moscow.
The current Political Process could drive stock prices lower for decades
If our assessment on the bleak trajectory of competition & freedoms in our Western economies proves to be correct we should expect – ceteris paribus – the overall level of organic economic profits to decline and Western currencies also to suffer under the weight of deficits and debt. In the more likely outcomes, the G7 may be forced into a somewhat confiscatory or devaluating monetary reset, a major overtake of the economy by the state (system bifurcation along capital restrictions) or war. Other scenarios are also possible, albeit currently less likely. As this can change we are monitoring the variable inputs and re-testing our working hypotheses continually.
We are dealing with a complex dynamic situation with converging crises where policy makers all over the world are stretched and therefore working with different scenarios. Thus, we urge you to be cautious with exact forecasts underpinned by exuberant confidence. Many things are possible, but no outcome can even claim a 66% probability. Not yet.
Let’s re-embrace the “Free Market Economy”
Many experts still describe our leading economies of the West as a free market economy, but I would tend to disagree. Our independent analysis shows the differences are becoming smaller while the similarities between the two great powers continue to grow in recent years. Let us put economic growth and living standards aside to focus on other less discussed issues, because clearly the living standards for a majority of Chinese have been improving over the past 25 years (one generation), while the living standards for a majority of US and EU citizens has deteriorated.
Well, we are sure freer than in China, but we are far away from where we used to be before we granted China full-fledged free access to our markets without reciprocity. In some ways all great powers seem to be converging in recent years. Our economies and societies are in a transition – we are in a mix. If you want to know where the overall economy is going, look at its financial sector. The financial market is essential in an economy – like the cardio-vascular system of our bodies.
An inconvenient truth: In 2009 the USA and Europe seized control of their Financial Markets to avert a major recession and adjustment of asset prices.
Our governments intended it to be an extreme measure for just a short time. Sadly, they never retreated from the markets or couldn’t, financial markets remain under their control. It is 14 years now. As a result, since 2009 the G7 states are managing the financial sector, and controlling interest rates and asset prices, which reverberates throughout the whole economy.
Very few people know that once the government dictates the so-called Risk-free Interest Rate, the 10 Year Treasury Yield and exercises control over Asset Prices (bonds, stocks, houses etc.) for a considerable time, everything else in the economy is affected. Everything – even nursing homes and schools – and in more ways than we dare to think. Over time it blurs our perception of free mechanisms and pseudo-free mechanisms.
While many independent observers assume premeditated policy intent for the market takeover by our G7 governments, our analysis shows that the more likely reason was the sheer necessity to stabilise our fragile economies. Our governments were forced to increase their control over the economy in order to prevent a disorderly asset price implosion and a recession voters were completely unwilling to tolerate. Thus, policy makers responded to the political conditions in Western societies.
Although it still has many of the looks and frills of it, the Western Financial Market is no longer a free market in the narrow sense of the economic term. Since 2009 investors operate freely only within the confines the government is setting. That is not a terrible thing in itself, because it was somewhat necessary. What is rather a concern, is that 14 years are not 14 weeks, and that roughly 90% of bank officials and financial journalists still believe and behave as if they are working in a capitalistic free market. It is their new normal. Banks were rescued by the state, thus they couldn’t really sound the alarm. How about financial media and other stakeholders? They enjoyed the asset price boom with zero interest rates.
If I had to, I’d currently describe our leading Western economies as an increasingly state-controlled economy characterised by rising monopolies & oligopolies co-existing alongside remnants of free-markets. The monopolies are increasingly co-shaping regulation and policy, so those efficient free markets are regulated in a way that the role of the state and monopolies/oligopolies is getting bigger. This most likely not by intent, but because the multiple crises demanded it. We should just be aware of it.
Add to the big monopolies and state new technologies
The issue is that with today’s technology and the growing activist-interventionist character of our crisis-shocked Western administrations, those huge monopolies can increasingly help the government (be it liberal or conservative) unduly influence or control citizens’s opinions, behaviour and the use of their money. Furthermore in a not too distant future they’ll be able to track your digital money and tell you how and if you can spend it. That might not be far away from the criticism that our Western scholars and politicians raise about China’s Social Credit System and surveillance state.
As analysts we have the advantage to be purely analysis driven: It was clear for us in 2020 that US and European governments would make mistakes during the unprecedented overlap of a US political crisis and Covid crisis. The censorship of disinformation was not flawless, but could be understood. Nevertheless, the censorship of “true but inconvenient information” in hindsight saw very little policy correction and judiciary action – let alone remorse. This shows that the technology-based cooperation of the state (be it liberal or conservative) with big firms is already a source of bipartisan concern.
Another trend that raises the stakes of this “undue influence” concern: Based on our independent statistical analysis, by the end of this decade roughly 3/4 of all incomes paid out in Europe will be coming from the state, a monopoly/oligopoly or an industry that owes its existence to state-regulation. Currently some economies are on track to achieve this even before 2029. Persons that depend on the state for their income might think twice before changing the status quo – despite the rise of serious concerns. People in free enterprise tend to be freer in their assessment of their options and vote.
Driven by multiple crises government officials and expert groups are increasingly dictating – so far mostly driven by good intentions – what you can buy and how you should spend your money. Thus, I’d like to warn that our G7 leading economies are no longer as free as we usually think. This doesn’t mean to choose inaction in the face of crises, but to create credible transparent frameworks with independent and public oversight. Current technology would allow for the state to also be transparent and show its citizens for instance where their taxpayers money is really going. Even CPI data should be reviewed by independent sources. The post-GFC regulation created thousands of risk control units. Years later many bank risk controllers told me that they feel rather an extended arm of the state than a free enterprise agent.
Government officials say that misinformation forced them to take extraordinary measures. They may have a point and it calls for all stakeholders and members of society to cooperate in self interest for the preservation of our way of life and rights. My point is this – Not only our governments, but also we citizens have to make cautious use of the technologies available to us. Not everything that supports our views might be correct in its entirety.
Some may think I am defending our G7 governments now, but I am only trying to be objective and fair: it seems to me that almost everyone, i.e. governments, citizens and corporations, may have been making unrestrained use of new technologies in recent years. We citizens cannot morally expect others to show restrain in their use of their technological possibilities if we don’t.
Don’t take me wrong, I am not someone that shuns every regulation and the state. We need the state and we need regulation. Here in Switzerland our federal government does a good job overall in running our railways, communications, health and pension system. I appreciate that in our country people don’t lose their jobs and homes, because of a bad diagnosis. It is the extremes we have to be aware of and we are seeing a few of them.
The issues I have presented so far should concern all political forces and parties in the West, because any party in government in the coming years could be tempted to make use of the massive discretionary powers (since 2009 the new quasi normal), technology and the rising monopolies .. to unduly influence the opinion and behaviour of its economic agents and citizens.
America – once home of free competition could be it again
It is helpful to remember that America was built on the relentless competition of ideas and businesses. America has for long rightfully been deemed a “Wild West” of opportunity. That is what made America so unique and great, and why so many persecuted people in Europe emigrated to the United States.
Europe has a long sad history of persecuting people of dissenting opinions or beliefs. I know it doesn’t reflect today’s values, but while still flawed, it was in fact a freedom-loving and God-fearing America that revolutionised competition in all realms of life and the market economy. After the end of WWII the USA helped established the capitalistic brand of its market economy in Europe. I have taken flak over the years here in Europe for seeing America as the greatest and most benign super power the world has ever had. With Britain coming in second place. They have surely made many tragic mistakes and abused power, but also brought progress and institutions. Have other powers done better in history?
While many experts see America in irreversible decline (which to some extent is anti-American reflex), I think we cannot rule out yet that America will embrace her roots again and be once more the champion of free competition.
Since the rise of the EU, we see the gradual return of the interventionist state on the Old Continent though. For all my love for German and French culture, as an economist I’d have to admit that the EU commission and parliament tend to prefer to “steer” people through regulation, pricing-directives, subsidies and prohibition into doing what government committees deem better for them. Sadly, and somewhat unnecessarily, government-sanctioned expert groups are increasingly censoring dissenting expert voices and driving EU policies. While they mean it well, they may be causing damage to the public trust in our institutions and sciences.
The Old Continent led by a protectionist-interventionist Brussels is lagging behind America in economic growth and it is not just due to demographics. Our growth was not so much driven by competitive innovation, rather by EU expansions and state decisions. It could have been worst. Japanese carmakers were forced in the 1980s to massively increase their prices to protect European carmakers. EU journalists were told, the EU has not levied any tariffs on the Japanese, they did it out of their own free will. It looked like free markets.
Are we becoming used to monopolies – of all kinds?
I make the proposition now that the Capitalistic Free Market Economy & Society that made America so powerful in the last century is being increasingly replaced by monopolies in business and public opinion. It seems that public opinion is being increasingly shaped by the consensus of so-called experts. They decide what is information, disinformation and true-but-inconvenient information. We have seen though that on several occasions inconvenient truth was also censored, with even Mr. Zuckerberg, founder of Meta (Facebook), expressing on 26 Aug 2022 his own discomfort in hindsight.
I am often called an expert, but I am weary of the term, because in my field of economics (and in every other field of science) the experts have tended to be wrong – especially when we have “banded together around a consensus”. In groups experts defend their consensus and dislike to see them challenged. Add to it the pressure of reputation, career and money.
Monopolies destroy competition and diversity
The impact of monopolies is never limited to their industry of their operations. In fact it is no wonder that with the rise of huge monopolies we are seeing both a decline in free speech and a rise of all types of censorship and active shaping of public opinion.
I don’t dislike monopolies per se, but monopolies end competition and they strongly shape the political process and regulation – not only through lobbying. As a result of their lobbying the rest of the still free-economy is shaped and regulated in ways that grow their monopoly businesses and their control.
We need to realise that the sheer magnitude of our debts, deficits and asset bubbles is compounding the massive interventions of our G7 states (how well intentioned they may be) and the size of our monopolies. Democracy without Free Speech reminds me of the former Eastern Germany (Deutsche Demokratische Republik or Democratic Republic of Germany), only democratic in name, not substance.
Freedom of Speech (Competition of Ideas) and Capitalism depend on one another.
If America shall embrace free competition again, given America’s superior geography, resources and human diversity .. it could experience a powerful resurgence as a geopolitical-economic power.
But if the West stays on the current track of state interventionism and large monopolies, it runs the risk of increasingly mirroring China with its state control over the economy, social life and speech. Ironically, the West may increasingly mirror the very adversary it wants to contain ..
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We may thus have to be more tolerant and self-controlled to save capitalism and free speech .. and with it to preserve thriving financial markets and Returns on Investment (ROI) in the future. Those returns will determine the standard of living of our children and the purchasing power of our pensions. Otherwise – given the current subsidiary conditions – we are headed for a convergence with China.
By Christian Takushi MA UZH, Independent Macro Economist and Geopolitical Strategist. Switzerland – Sat 22 July 2023. (Public release adapted and truncated on 25 July 2023)
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