SATYAHIT DAS: UNA MANERA SENCILLA DE MIRAR A LA COMPLEJA AGENDA DE TRUMP (II)

A simple way to look at Trump’s complex agenda

 Trump wants to extract tributes from the rest of the world. But his policies could end up diminishing America’s prominence, making the respect he seeks harder to come by

 

Occam's razor, a problem-solving principle, suggests that given the choice between multiple explanations, the simpler, obvious one is to be preferred. Applying this approach, US President Donald Trump’s agenda does not require complex economic or political theorising. They involve three simple objectives.

The first is power. The president wants to increase his own authority, forcing others to supplicate themselves. The reciprocal tariffs require countries to make “phenomenal offers” to buy favourable treatment. NATO chief Mark Rutte’s craven flattery, including allegedly referring to Trump as “daddy”, is the behaviour expected.

The second objective flows from the president’s association of intelligence with wealth—the attitude summed up by the line, ‘If you’re so smart, how come you’re not rich.’ Many of his policies are designed to enrich the president and his funders. Examples include the first family’s own investments and trading, BlackRock’s pending acquisition of two Panamanian ports and the administration-aligned firms’ interest in TikTok’s US business. The parallel is 1990s’ Russia, where a small group of oligarchs became wealthy by looting state assets as the Soviet empire disintegrated.

The third involves Thomas Carlyle’s ‘great man of history’ theory. Trump sees himself as an extraordinary leader, possessing superior intellect and heroic courage, whose manifest destiny is to change and rule over America and the world. This is allied to nostalgia and a worldview firmly rooted in the 1980s.

A reordering of the international trading and monetary system is central to this strategy. Prior to joining the administration as chair of the Council of Economic Advisers, Stephen Miran published a proposal to lower the dollar’s value and reduce current account and fiscal deficits. Popularly known as the ‘Mar-a-Lago Accord’—a nod to the Plaza and Louvre accords of the 1980s—it includes a series of steps, including tariffs and currency adjustments to force economic concessions favourable to the US from other nations. One controversial component is a restructuring of US public debt entailing a forced exchange of some US treasuries for long-dated (100-year or perpetual), low- or zero-interest securities to lengthen maturities and provide secure funding. Alternatively foreign holders of US government bonds can place them in escrow or pay an ‘user fee’. Controls over capital movements into and out of the US are possible.

Another element is extracting tributes and territories. The proposed minerals and energy agreement with Ukraine is a brazen attempt to extract payment for ‘services provided’. A similar deal with the Congo has also been negotiated. Allies can increase defence spending, benefitting US armament manufacturers who dominate supply, or pay for American protection. A demand for stakes in semiconductor makers in return for support for Taiwan is not fanciful.

Territorial claims (over Canada, Greenland, the Panama Canal and the Gaza Riviera) alongside threats or actual military actions, such as those in Iran, in the name of national and international security seek to expand the US dominion. After all, Alexander became great by conquering much of the then known world. President Trump, who identifies with the godfathers in Mafia movies, misunderstands the opposition from affected parties and geo-political rivals.

Greek letters, equations and citations of misunderstood academic articles notwithstanding, the tariff plan looks like something an AI engine would produce. The latest threat to some trading partners is for tariffs of 25-40 percent unless their companies choose to manufacture in the US. Any reciprocal tariffs on American products or membership of the ‘anti-American’ BRICS, he warned, would trigger additional duties. The ‘90 trade deals in 90 days’ has not eventuated.

A trade war is likely. As the US has significant surpluses on the trade of services such as technology, damaging tariffs or outright bans on US services exports would hurt successful US industries. The US will be unable, in the short run, to substitute certain essential items resulting in higher prices or shortages. The assumption that overseas firms will absorb the tariffs is incorrect.

In 2016, prices of goods imported into the US did not rise because of the stronger dollar but the administration has stated it now wants a weaker currency. President Trump has threatened to punish, presumably through price controls, US car makers if they pass on the increased cost of inputs transferring the cost to businesses from consumers.

Some imports may be replaced with local production, but it would take years, increase prices and reduce choices. Re-shoring high-end manufacturing will struggle due to the lack of requisite skills given the resistance to immigration. It will not create the expected jobs as these industries are typically highly automated. Tariff revenues will end up being redirected as subsidies to many affected industries. Ultimately, national income depends on importing what you cannot produce or cannot produce at low costs.

The tariffs will benefit US’s trading partners. Barriers to exports into the US will mean producers are forced to cut prices as they divert stock to other markets as the EU has warned. Other economies will reflate shifting to domestic consumption rather than exports effectively bypassing America as the cost of accessing what President Trump calls “extraordinary economy of the United States—the number one market in the world” becomes prohibitive. Global exports to America of $3.2 trillion are not irreplaceable.

The US administration seems not to grasp that the US dollar’s dominance, rather than manufacturing, is critical to America’s position. Restructuring US debt as suggested would constitute a technical default on its obligations. MAGA would become ‘Making America Greece or Argentina’ (both defaulters on their foreign debt). This would accelerate capital flight making it more difficult to finance America’s budget and trade deficit. It risks permanent damage to US capital markets. Up to 70 percent of all funds that flow through the US market are from overseas investors recycled through American banks and asset managers because of low domestic savings.

As much of this is re-routed over time, New York’s prominence as a financial centre will diminish. Attempts to extract tribute and expand territories challenge other nations’ sovereignty. Few will pay for uncertain US protection or surrender to it.

The administration’s path, which ignores economics and history, is indeterminate. The planning and execution have been haphazard. But as Winston Churchill, to whom Trump has compared himself, observed: “The statesman who yields to war fever must realise that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.”

Satyajit Das | Former banker and author of The Age of Stagnation

SATYAHIT DAS: LA MARCHA A LA PRÓXIMA CRISIS ECONÓMICA GLOBAL HA COMENZADO (I)

 

The march towards the next global economic crisis has begun and you must fear its coming

In 2008, around $1.3 trillion of US sub-prime loans triggered the global financial crisis. Worryingly, the exposure to riskier borrowers today is over ten times that... 

 

Like diseases, crises need a vector that propagates the pathogen. In economics and finance, it is the basis of income and value - cash flow.

 

 In early 2025, equity risk premia (ERP), the additional return investors require for the extra risk of equities over safer government bonds, became negative; that is, investors were willing to accept lower returns on shares than safer bonds. In reality, it was caused by high bond yields and stretched equity valuations. This will eventually reverse as the true risk of equities is re-established. 

 

The shift away from cash flow compounds the problem. New-age finance favours growth, market share and capital gains. The model, particularly for unprofitable technology start-ups, is to acquire customers at a loss, undercut competitors and bankrupt them, and when in a market-dominant position, increase prices. 

 

 AI is one example. Deriving from once similarly lauded neural networks, they are pattern recognition engines that generate probabilistic predictions rather than exhibiting reasoning or intelligence. Cheerleaders miss the point that a system which trawls existing data, even assuming that is accurate, cannot create anything new.

Another troubling new-age investment is crypto. Given that they do not represent claims on real assets or cash flows, cannot be consumed, and have no alternative use, they are only speculative objects worth what people ascribe to them.

In addition, crypto assets are tightly held and traded between a small circle of investors creating "mutually supporting fantasies". While elements of blockchain technology may be useful for recording property claims, crypto is unlikely to replace fiat money and become a reserve asset given the fact that its volatility makes it an unreliable store of purchasing power always. Crypto assets then are, as one commentator termed them, "consensual hallucinations".

Declining cash flows and falling values interact with debt, the one thing that there is no shortage of. With nose-bleed levels of borrowings, households and businesses will struggle to meet obligations as incomes fall. Fiat money allows governments to continue the game by debasing the currency and purchasing power. They will issue new debt or create money, effectively paying interest and principal with new obligations that it cannot repay.

Despite the shocks not having flowed through fully, financial distress levels are rising. US business defaults hit a post-financial crisis high of 9.2 percent with rates for highly leveraged private equity loans and junk bonds reaching the highest levels since the pandemic in 2020. The International Monetary Fund has warned of rising levels of distress in commercial property. Delinquency rates on mortgage, auto, credit card and other consumer debt are increasing. Where America leads, others will follow. With tariffs and sanctions raising inflationary pressures, the probability of a return to ultra-low rates adds to the problem.

Falling values have multiple effects. As distributions decrease and losses mount, investors may sell their holdings or redeem funds, increasing pressure on prices and straining liquidity.

Trading liquidity of currencies, government bonds and large capitalisation shares has declined markedly. This reflects the consolidation of dealers and market makers after the 2008 crisis. It also reflects the reluctance to hold inventory because of higher capital charges. Trading is now dominated by specialised quantitative traders, electronic trading and fund managers, who are not providers but users of liquidity. In periods of turbulence, trading will be at disadvantageous prices and incur substantial trading costs.

Illiquid private investments and a mismatch with redemption terms offered to the investor increase the likelihood of gating or suspension of redemptions. Those with longer memories will remember that BNP Paribas' decision to halt redemptions at some of its funds due to the inability to value or trade the underlying securities was a pivotal part of the 2008 crisis.

Liquidity constraints will accentuate price falls. Unable to realise illiquid assets, investors will sell more liquid positions, driving values, including those of safe or unaffected securities, lower. Where they are unable to sell out of positions, they may hedge losses by shorting related assets, placing additional pressure on prices.

Price declines affect borrowings secured over financialised assets. Mortgages are collateralised by houses. With leverage mandatory to boost returns, there are significant volumes of debt supported by real estate, shares, bonds, fund investments and even artworks. As values fall, the loan-to-value ratios rises triggering margin calls soaking up available cash or requiring asset sales.

Reliance on collateral is flawed. Deposits or initial margins are probably inadequate because of artificially low volatility and pressure to increase business volumes without concern for excessive leverage. The problem of wrong-way correlation, where the underlying risk increases at the same time as the value of the collateral decreases, is underestimated. The ability to realise collateral as needed assumes liquidity, which in practice is limited.

The interactions between declining cash flow, falling values, high levels of debt and rising volatility will prove toxic.

Pathways of Contagion

An interconnected financial system acts as the main pathway for spreading the crisis.

Potential losses are sizeable. In 2008, around $1.3 trillion of US sub-prime loans triggered the global financial crisis. The exposure to riskier borrowers today is significantly higher. Global commercial real-estate exposure is around $21 trillion. Non-investment loans and bond outstandings are around $5-6 trillion. Equity margin loans in the US are around $1 trillion and globally, probably 3 or 4 times that.

Lending by regulated entities to the shadow banking sector is greater than $2 trillion globally ($1.2 trillion by US banks alone). Lending to hedge funds, private equity, private credit, and buy-now-pay-later companies is one of the fastest-growing parts of the banking system. Hedge funds currently manage around $4.5 trillion, up from $2.8 trillion in 2008. They have recovered from the significant fall in assets under management after the 2008 crisis and have grown by almost 56 percent since 2015.

Global bank equity is around $6-7 trillion. Banks are leveraged around 8 to 10 times. Large losses would place some banks at risk of insolvency and threaten financial stability.

US banks currently have around $500 billion in unrealised losses, representing 50 percent of their Common Equity Tier One Capital. Global losses are 3 to 4 times that. Liquidation of these holdings would crystallise these write-offs, reducing bank capital.

Resilience and Resolve

The wealthy have gained from rising asset prices.But these are phantom profits based on volatile market values. It is not cash in hand as the gains are unrealised. Investors are reluctant to sell because of fear of missing out on further appreciation. Many investors have taken out additional borrowings against these assets to fund spending. 50 percent of all US consumer spending now comes from the top 10 percent of income earners. The linkage between share and real-estate values and expenditure means that consumption expenditure may be less reliable than in previous downturns.

Any new crisis will be global as the principal drivers affect all economies. The impact of restrictions on trade and capital movements, one of the key factors in the expected downturn, is especially pervasive. The first-order effects of trade wars will be particularly damaging for Europe, China and Canada. Second-order effects from a decelerating global economy will be larger and more widespread.

Emerging markets, which have been under persistent stress, face problems. Those directly reliant on US trade, like Mexico, face major slowdowns. Asian, Latin American and African economies, integrated into Chinese supply chains, will be affected by the cage fight between the two great powers for supremacy. Lower commodity prices, as a result of slower demand, will affect raw materials producers. Remittances, the lifeblood of many emerging nations, will decline. Poorer countries, lower on the value chain and with limited ability to adjust, will be badly affected. Familiar vulnerabilities such as reliance on foreign investment, high debt, spendthrift policies, crony capitalism, corruption, dysfunctional rule and poor governance will be exposed.

Crises result in large loss of wealth. The US economy alone lost over $20 trillion in the 2008 financial crisis, although the number is disputed. There is the additional cost of support. In 2008, the US government committed around $ 2 trillion in interventions, bailouts and economic stimulus packages. The US Federal Reserve committed around $7.8 trillion in lending and asset purchases. Eurozone governments expended € 1.5 trillion in capital support and €3.7 trillion in liquidity support for the financial system. While some of the money was later recovered from sales of acquired assets and institutions, authorities still need to be in a position to make the required initial commitment. 

Governments and central banks' ability to provide support is lower than in previous crisis. Chronic budget deficits, high public debt levels and the rising interest cost limit any new intervention.

Budget Deficit and Public Debt (% of GDP)

Country	Budget Deficit (% of GDP)	Public Debt (% of GDP)
US	6.4	122
China	6.0	89
Japan	6.2	251
UK	4.8	97
Germany	2.8	63
France	5.8	114
Italy	3.4	135

Monetary policy is constrained by low interest rates that make large cuts difficult. Central bank balance sheets remain overextended due to legacy quantitative easing programs. Between 2007 and 2022 (when they peaked), the assets of central banks of the US, Europe, the UK and Japan increased from under $5 trillion to over $25 trillion. While now lower, they remain elevated at around $20 trillion. Central banks also have large unrealised losses on their holdings of bonds purchased at low yield due from rises in interest rates.

Another concern is availability of US dollars, in which a significant portion of capital flows are denominated. In past crises, there has been a significant reliance on currency swap lines provided by the US Federal Reserve to other central banks. The amount extended reached around $600 billion in 2008 and $450 billion in 2020 respectively, helping stabilise money markets. There is no assurance that this will occur this time due to the punitive American approach to its allies. Some European central banks have raised this possibility.

The Kindleberger Trap, named after the eponymous economist, identifies the danger that a fading power lacks the ability, but the ascendant one lacks the will to supply a reserve currency. This was a factor in the Great Depression with the Bank of England unable to act as the international lender of last resort and the US Federal Reserve unwilling to do so. It helped the crisis escalate into a full-blown economic collapse. Any change to the Federal Reserve's willingness to supply dollars would signal the end of its dominance as foreign ownership of US assets would diminish.

Assuming large-scale support from and bailouts by governments and central banks is optimistic.

The End of Illusions

The severity of the upcoming crisis is unknown. A real economy slowdown comparable to the 1930s is not inconceivable, with a deep and long global recession possible. Large financial excesses, particularly, the disjunction between cash flow and prices, make severe asset value adjustments likely.

The process has commenced with large falls in the value of financial assets. The real economy effects will take longer to emerge. As economist Rudiger Dornbusch noted: "the crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought."

In a 1974 essay The Year It Came Apart, Arthur Miller observed that "an era can be said to end when its basic illusions are exhausted". It is characterised by strangeness of the familiar and a deep-seated fear and uncertainty which nobody admits to. We have arrived at such a moment. To paraphrase Nassim Taleb, this crisis will follow a path that maximises damage.

(Satyajit Das is a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives  (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequence – Reloaded (2021). ). His latest book is on ecotourism – Wild Quests: Journeys into Ecotourism and the Future for Animals (2024).) 

This piece draws on material first published at the Nikkei Asian Review and The New Indian Express

ALGUNOS DETALLES SOBRE LA "FUSIÓN" ENTRE CREDIT SUISSE Y UBS (SATYAHIT DAS SOBRE LA CRISIS MUNDIAL)

Before the UBS – CS take-over conditions were finalized, Ms. Keller-Sutter consulted with her US counterpart, Janet Yellen, Secretary of the Treasury.

Here are some facts that emerged since the coerced deal:

• The UBS – CS merger should be finalized by end 2023;
• The Swiss Government (Swiss tax-payer) provides the UBS a loss guarantee of up to CHF 9 billion;
• The Swiss National Bank (SNB) grants UBS and CS a liquidity line of credit – called by its true name, a “bail-out” – of CHF 200 billion, of which the Swiss Government (tax-payer) is guaranteeing any uncovered amount.
• Compare the CHF 200 billion with the CHF 50 billion the SNB offered CS to restructure and sanitize itself – which a day earlier was assessed as being sufficient;
• In the context of the huge “bail-out”, it may be worth mentioning that on 5 March, two weeks ago, the SNB announced one of its biggest losses in recent history, of CHF 132.5 billion;
• The leadership of the merged banks will remain with UBS;
• The volume of the combined UBS/CS-managed assets will be about US$ 5 trillion.
• This banking giant is expected to gradually control 30% to 50% of the Swiss market and will become an important player in the international arena, next to BlackRock (US$ 10 trillion) and Vanguard (US$ 7.2 trillion).

Credit Suisse Takeover in a Black Box 

If there is a new global financial crisis, then what will governments do?

The complexity of the highly interconnected financial and economic system makes predictions about the exact sequence of events in a crisis foolish.

Founder of GMO Jeremy Grantham once noted in October 2008:  "I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect."

The problems currently are within the global banking and financial sector. But financial dislocations feed back into the real economy. There are two primary channels. First, reductions in income and losses of capital affect earnings and savings. Depending on magnitude, it may decrease consumption and investments.

Second, a banking crisis reduces the availability of funding and increases its cost. Small and medium-sized banks play an important role in economies. In the US, banks with less than $250 billion in assets provide roughly 50 percent of all commercial and industrial lending, 60 percent of residential real-estate lending, 80 percent of commercial real-estate lending, and 45 percent of consumer lending. More stringent regulation, tighter lending standards and the likely consolidation in banking will also reduce the supply of funding.

The real-economy effects will intensify any economic slowdown driving new stages of the adjustment.

(...)

The relative geopolitical stability of 2008 is in the past. Current tensions between major powers mean that the likelihood of a co-ordinated response is low. Instead, trade restrictions, sanctions, deglobalisation and containment now dominate discourse. It is difficult to see China rushing to the aid of Western economies and institutions at a time when the US and its allies are keen to restrict the rise of the Middle Kingdom as an economic challenger and great power rival.

The probable response is low rates, government support and generous infusions of money, the policies popularised by former Fed Chairman Alan Greenspan, the 'Maestro' to sycophants. Because it is expedient, easy money is seen as a solution when it is the issue. In essence, it will be another kick of the can down the road although the available tarmac is now much diminished.

The global economy may now be trapped in an easy money-forever cycle. A weak economy or financial crisis forces policymakers to implement expansionary fiscal measures and more monetary expansion. If the economy responds and the financial sector stabilises, then there are attempts to withdraw the stimulus. Higher interest rates slow the economy and trigger financial crises, setting off a new round of the cycle.

If the economy does not respond or external shocks occur, then there is pressure for additional stimuli, as policymakers seek to maintain control. All the while, debt levels continue to increase, making the position ever more intractable.

Economist Ludwig von Mises was pessimistic on the denouement.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion," he wrote. "The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

In a new global financial crisis, where are the dead bodies buried? 

The need for funding coincides with a decrease in the amount of new money available. New inflows into private equity have declined by around two-thirds from the 2021 level of around $600 billion. Start-up investments worldwide fell by a third in 2022. The number of funding mega-rounds (fund raisings of $100 million or more) fell by 71 percent. New unicorns (private firms valued at $1 billion plus) fell by 86 percent. It remains to be seen whether VC tourists, who have been amongst the largest losers, return. Most private investments are liquified to realise returns and generate cash, by trade sales or IPOs. With these markets now closed for an unknown period, the ability of investors to free up funds for new investments is constrained. 

There is the additional problem of valuations. Between 2021 and 2022, the valuations of private start-ups tumbled by 56 percent. The average value of recently listed tech stocks in America dropped by 63 percent. In 2022, Klarna, a Swedish buy-now-pay-later (also known as point-of-sale (POS) instalment loans) firm, suffered a 87 percent slide in value in one year. In March 2023, payment processing firm Stripe raised more than $6.5 billion implying a valuation which was $50 billion, some 47 percent below its 2021 peak. The cases are not isolated. Lower valuations affect fund-raising options, especially as founders and existing investors would be reluctant to recognise large losses on existing positions. The coincidence of losses on investments and capital calls may lead to a general liquidity contraction for investors, requiring them to undertake forced sales. The position is not confined to the US but also exists in Europe and emerging markets. 

A mitigating factor is a record amount of undeployed capital held by managers ($300 billion) and sovereign investors (undisclosed but believed to be, at least, comparable). However, new investments will need to meet stricter criteria with a focus on profitability, cash flows, strategic sectors, and longer holding periods. Since the global financial crisis, higher risk or more complex lending or trading moved into the opaque and less regulated shadow banking system -- non-bank financial institutions which include insurance companies, pension funds, mutual or hedge funds, family offices and speciality financiers. The Bank of International Settlements estimates its size at $227 trillion as at 2021, almost half the size of the global financial sector up from 42 percent in 2008. 

Traditional banks are deeply embedded in the shadow banking sector through trading relationships, custody and clearing. Some are minority investors in these off-balance-sheet vehicles as well as arrangers of capital. Banks also provide leverage, often using derivative products or other off-balance sheet structures. Alternatively, they provide direct funding – 'lending to the lender' -- frequently backed by collateral. As the collapse of hedge fund Archegos illustrated, the extent to which it eliminates risk is debatable. 

The position is reminiscent of 2000 when the dotcom bubble deflated and also 2008. On both occasions, private funds did not fully recognise or report impairments and were able to take advantage of liquidity fuelled recoveries. It is not clear whether the same will occur this time. An unpleasant revaluation shock in private markets and large write-downs are not impossible. 

 Under the terms of the UBS merger, Swiss Franc 16 billion ($17.3 billion) of Credit Suisse's Additional Tier 1 ("AT1") capital bonds were written off in their entirety. Around Swiss Franc 1 billion ($1.1 billion) of other capital was also written off. Retail and private banking clients globally, especially wealth management investors in Asia, hold significant quantities of complex, highly-engineered derivative-based products. Bought in search of yield during the prolonged period of low rates without a full understanding of the structure and review of the detailed documentation, potential losses could be significant. 

 After the Credit Suisse AT1 write-offs, the Financial Times published a primer of the structure which might have been useful to investors especially prior to purchase. The extensive use of derivatives to provide exposure to prices and leverage (especially via the ubiquitous carry trade where low-cost funding is used to purchase higher-returning investments) may prove another source of instability. At a minimum, higher volatility across all asset classes will create increased margin requirements triggering cash needs. A true stress test to the central counterparty ("CCP") system designed to reduce credit risk on derivative transactions is possible. Any malfunction would cause a major disruption for financial markets. 

Euro-zone banks hold around €3 trillion ($3.2 trillion) of sovereign bonds, around 9 percent of total assets. A dislocation would set off the sovereign doom loop: Rating downgrades of a country result in falls in the value of government bonds held by banks who face calls for additional collateral draining liquidity from markets. The deterioration in a sovereign’s credit quality increases the amount of capital that banks must hold on certain transactions, not only with the sovereign but entities in that jurisdiction. Banks are forced to hedge this risk, usually by purchasing credit insurance on the sovereign or shorting government bonds exacerbating losses. Alternatively, they can use proxies, shorting equity indices, major stocks or the currency spreading losses and volatility into other asset markets. Correlation between major asset classes becomes unstable, especially in a risk-on risk-off trading environment. The increasing financial risk, higher funding costs and reduced market access of banks adversely affected by losses on government bond investments and the reduced ability of the government to provide emergency support sets off a chain reaction of actual losses in the inter-bank markets, requiring further hedging, compounding the spiral. Loss of trading liquidity, uniform rules, similar risk models and herding behaviour, where participants have similar positions and strategies, can prove additional accelerants. Individual Euro-zone nations' lack of independent monetary policy, fiscal capacity, currency flexibility and ability to monetise away debt would re-emerge as policy constraints. Any new debt crisis will expose simmering divisions between debt and inflation-phobic creditor and debtor nations. 

The risk of unexpected trading losses and disorderly and uncontrolled liquidation cannot be discounted. 

John Kenneth Galbraith in The Great Crash, 1929 described 'bezzle' -- theft where there is an often lengthy period of time between the crime and its discovery. The person robbed continues to feel richer since he does not know as yet of his loss. Bezzle, which increases under benign conditions, is only exposed by changes in the environment. Over the last decade, investors have been 'bezzle-d' by investments offering high returns which did not adequately compensate for the real risk that only emerges much later. If a major financial crisis develops, losses on these bezzle-based investments will impoverish investors. Ç

 For the moment, financial markets are holding. But as one analyst of the 1929 crash observed: "Everyone was prepared to hold their ground, but the ground gave way."

SATYAHIT DAS: END OF EMPIRE-3 The US will join the UK as a failed first-world state

The Ukraine conflict may be important in the re-shaping of a fractured world.

Individual trajectories within the Western bloc will differ, in part because of internal divisions. The most likely to peel off are Europe and Japan.

The US strategy appears to be to weaken Russia by sacrificing Ukrainians and Europeans as actual or economic cannon fodder. Given its high dependence on imported energy and sensitivity to fuel costs, Europe, especially Germany and Italy, risk a severe economic contraction, damage of its industrial base, loss of living standards and a banking crisis. Unsurprisingly, industrial leaders have written to the European Commission warning of an "existential threat" from higher power prices. They highlighted the danger that shutdowns pose to employment, taxes and ability to repay borrowings that would be ruinous for Europe. Environmentalist are concerned variously about recommissioning nuclear power plants and restarting dirty old coal fired power plants.

(...)

If the US were to place sanctions on China, then Australia and New Zealand would find it extremely difficult to trade with their major trading partner without broad exemptions which may not be forthcoming. The cost in national income would be substantial.

The problem is not exclusively antipodean as Europe is highly dependent on Chinese trade. In 2021, China was the third largest destination for European Union goods exports (10 percent) and the largest source for European Union goods imports(22 percent).

(...)

After having spent decades championing free trade and capital movement and forcing the Washington Consensus on other countries (most recently on Sri Lanka and Argentina), the West are busily implementing the very policies they derided – trade and capital restrictions, price caps, subsidies, nationalisation and replacing market forces with state controls.

For British statesman Lord Palmerston, countries had no eternal allies or perpetual enemies just permanent interests.  It is probable that Europe, Japan and perhaps Australia and New Zealand will drift away from the alliance. The stance on Ukraine may be an indication of the long-term trajectory. Already, large protests have taken place in the Czech Republic against continued support of Kyiv and its effects on the cost of living.

(...)

The UK's position perhaps provides a guide to America's fate. There are similar economic susceptibilities -- high debt, lagging infrastructure, a hollowed out industrial structure and problems of inequality.

(...)

In The Rise and Fall of the Great Powers published in 1987, Paul Kennedy argued that great power ascendancy and decline correlates to available resources and economic durability. America's military overreach and military spending – greater than China, India, Russia, United Kingdom, Saudi Arabia, Germany, France, Japan, and South Korea combined– is unsustainable. Ungovernability, deadlocked body politic, elite looting and absence of leadership add to the problems.

America and the UK revel in the past.

But the facts suggest that the US will join the UK as a failed first-world state, a Somali with nukes. As historian Arnold Toynbee argued: "civilizations die from suicide, not by murder."

(...)

Large systems do not fail quickly. British power has been falling for a century. The roots of the demise of the USSR can be traced back Stalin committing the Soviet Union, at the end of World War 2, to an unwinnable direct competition with an economically superior US.

(...)

But the signs are that a critical point is approaching. Structures are unravelling. Economic growth is stagnating. Resource scarcity, climate problems and resultant inflationary pressures are rising. High debt levels may prove difficult to sustain. The financial system is fragile. Global political, business and cultural elites are increasingly detached from the concerns of ordinary people. Geo-political tensions are high and the American-dominated  unipolar world is under threat from within and without.

The internal contradictions of the existing order make change inevitable. The outcomes may be positive or negative. At the edge of chaos, the exact shape of any transformation is unpredictable and rarely simple. Great powers can undertake reforms, such as those America undertook during the Great Depression, to reemerge.

 

© 2022 Satyajit Das All Rights Reserved 

Satyajit Das is a former banker and author of numerous works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives  (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011), A Banquet of Consequences RELOADED (2021) and Fortune’s Fool: Australia’s Choices (2022).