Secular Stagnation is the New Norm

Democracy became a commodity. Never before, was so accurately achievable for a small interest group armed with the right tools to influence masses opinion and create polarization.

There is a price-tag for lobbying any policy maker. Media concentration in the Big Tech allow effectively influence public opinion and increase polarization with the so called modern cyber-weapon: psychographic microtargeted marketing. The elector is vulnerable not only with the concentrated TV journalism but also more influenceable online with it’s personal data exposed.

World democracy index fell back in levels as lower as 14 years ago. Extremists and strong-hand politicians are the new normal. Inequality widening made they more appealing and voters were fooled by misleading cause-correlation.

Big nations leaders capitalized public discontent blaming selective issues such as globalization, immigration or fantasizing a country enemy. Due to the rise of extremist politicians in power the populist and nationalists are threatening the global commerce and also evading a developmental agenda integrated between developed and emerging markets. Is this a sign that a more digital, decentralized and distributed democracy is loosing the battle against an aristocracy?

The elite is retro-feed with the invincible feeling, wealth concentration allows fewer people to influence trade rules, investment decisions, and political shifts through their rising economic supremacy. It nourishes their power addiction because it is doable.

Debt, debt and more debt.

The debt trap affect countries in different ways, for example individuals are mostly excluded of financial services due to high indebtedness in India, avoiding many from taking credit to consume. Also 40% of low-income countries wrestling with debt distress or high-risk debt levels. In this emerging countries public deficit and currency instability are major barriers so that public spending can’t provide structural needs for their fragile economies to develop.

The size of debt matters and when it is much big, it start to harm economies, this phenomenon called finacialization, an effect of a vicious monetary policy just putting a bandage on structural problems. For example, in the 70s the ratio between real assets and financial assets were 1:1, and it doubled at 90s, tripled the proportion in the 2000s. At late 2017 we have $350 T total wealth in a $80T GDP economy. That would approximate to a staggering 4.4 ratio.

Let’s not forget that 12 years ago, the global financial crisis amplified this situation and white collar crimes, in the Americas and Europe, were treated with complacency soft penalties or very selective forgiveness.

The criminal operators from for example Lehman Brothers, Deutsche Bank and Monte Paschi had damaged the global economy relatively to mass destruction weapons but were merciful punished when it happened.

The expansionary monetary policy created the everything-bubble era, boosted equity valuations, and the the hazardous expansion of: junk bonds, high yield, distressed assets… Prudence on government budgeting and fiscal policy are indeed the harsh remedy that is neglected in our stagnated society. Instead, it is stealing the growth from the future generations that will inherit enormous debt.

Central banks artificially provided a stable growth, partially avoided volatility in the last 20 years, but such an over-interventionism have masked systemic anomalies in our capitalism. It postponed urgent reforms with the binary choice of flooding less or more money to the market (analogue to Wall-Street short-termism).

Source: IMF Staff estimates

Most developed markets are doing are in the “too much finance” zone, and its dangerous because it amplify bankruptcies damage and allow inefficient business to keep running. It also highly reward predatory market behavior and low productivity jobs (tax evasion professionals, anti-competitive M&As, financial services in a deregulated market). It drains our best brains from real value creation jobs, in engineering, technology and creative sectors.

There are some benefits from the credit and insurance business as they avoid liquidity shocks, and give predictability. Nevertheless, there is a high cost to fight the natural volatility of business cycles and prevent the so called creative destruction purposed by Schumpeter to happen. The over reliability on Central Banks to bail-out inefficient, highly levered or too-big-to-fail companies prioritized the Finance Engineering over innovation and productivity.

Neither corporate tax exemption nor more Quantitative Easing can solve our productivity stagnation problem, that would just cause the opposite. It is an inverted U-shape graph, the more finance the worse for the above-mentioned rich countries. They are hyperfinacialized, in statistic words they are at the downside in the negative concavity.

The end of the boom-burst era is synchronized with the end cycle of the longest global growth period. Say hello to the new age of Secular Stagnation, the New Norm which is here to stay is a byproduct of complacency and bad policies. Climate warming and growing populations will increasingly expose how badly our leaders failed to address sustainability in all dimensions (environmental, social, geopolitical).

A solution would require international cooperation towards tax justice, fiercely tackling fiscal heavens. It is also needed to split monopolies and conglomerates, de-merger Big Tech’s and a relentless anti-trusts action that favors competition rather than hundred-billion-dollar-companies shareholder return. Also a fair carbon-tax that turns investment in sustainable projects feasible, leading to infrastructure projects in poor countries that are also efficient in terms of Human Development Index rather than GDP disillusion.

This actions could pave the way for a globalized XXI century. But perhaps this humility, recognition of failure and empathy for the next generations is too much to ask from ourselves. Or isn’t it?

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Andre Castelo Branco

Venture Capital @ TM3, building best practices of ESG & GRI. Engineer, entrepreneur & minimalist. Worked with SaaS Startups, Wealth Management and Agribusiness.