The Spread Firewall
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What is it, cyclical, frictional or structural unemployment? Which factor is the ‘core driver, or cause' of our current malaise? Is this an extension of the usual economist/analyst debate? Absolutely! In this case, we believe that unemployment is "structural."
The core reason that we are focusing on the structural element is due to the labour-to-capital shifts in corporate balance sheets across the globe. The untrained eye will see the manifestation of the captioned point by the rather dramatic increase in profit and cash on hand at corporations combined with, in some cases alarming, decreases in employment.
Moreover, the increasing use of technology in combination with other innovative and technical factors has created a phenomenon that we call ‘workforce leverage'. Simply put, increasing workforce leverage is leading us, by default, to serious levels of low or under employment. This circumstance has created the conditions for increasing slack in aggregate demand worldwide.
On the demand side in Tier 1 countries, we think that it would be wise to consider some of the elements that have moved us towards progressively more unstable growth markets since the end of World War II. These elements include:
- Increases in productive capacity in combination with rapidly maturing markets in Tier 1 and Tier 2 countries.
- A shift from cash to a debt-fuelled economy. This is a particularly cogent point for middle-class consumers.
- A rising level of policy paralysis that is leading to the misapplication of public resources.
- Increasing gaps in the reshaping of the regulatory environment that is lagging ever farther behind economic realities.
At this juncture, we are faced with swift increases in productivity, prompt de-leveraging of debt, and maturing markets.
How did we get here? Let's take a moment to generally examine public policy.
To date, policy mismanagement, combined with resource misallocation, has left many societies in the West without the necessary ‘hull speed' to address the structural issues. Specifically, in the US, for example, there has been a serious lack of allocation of public resources on education, infrastructure and science, etc.
Professors Daron Acemoglu and James A. Robinson in their book Why Nations Fail: The Origins Of Power, Prosperity And Poverty (March 2012) view that this misallocation of public resources is the result of the hijacking of the political process by moneyed interests that ignore the interest of the society at large. This is an illustration of the decoupling process.
Other western nations are by no means immune to this condition. The continued elective "cumulative neglect" has left the US structurally weakened. Based on the currently compromised state of the nations in question, it is clear that "corrective action" is quite possibly an undertaking that may be beyond reach in the short-run despite "ceremonious grandstanding" of politicians on both sides of the isle.
Next up: Europe. When we turn to Europe, the current state of regional weakness is farther exacerbated by the euro zone debt crisis. Specifically, the euro forces European countries to aggregate their previously uncertain circumstances. It is safe to say that devoid of an extraordinary effort, this combination is not going to lead to a strong solution. Moreover, one of the principal problems of application of a ‘force fit', or in this case, aggressive coercion is that often, by default, it is met with natural levels of increasing resistance.
The amalgamation of European countries is a far greater task than just the creation of a currency. That needs national systems, etc. to merge. So is union possible in the context where these countries have fought for independence/sovereignty in one form or another for centuries?
Europe is just on the verge of ‘celebrating' the 100th year since World War I, beginning 2014 and is just 67 years away from the end of World War II. It means that the last generation of Europeans that machine-gunned themselves on a grand scale on a battlefield is just barely disappearing now.
These things take longer to disappear from collective memory. Are policy-makers playing a game of chicken to see who blinks first and forfeits the historic national sovereignty? The current series of standoffs eagerly suggests that perhaps that is the case.
It is entirely unrealistic to think that harmony and eventual abdication of hard fought sovereignty is going to take place without a degree of consternation combined with a political paralysis that might render the project inoperable. This is, in part, an intangible and historical threat. I would suggest that quantification of this issue is nearly impossible due to the mosaic of unknown variables.
The European currency project was very loosely modelled on the American experiment. The differences, however, are vast. For example, participants in the American project had individually and collectively weak infrastructure and social constructs. Additionally, clear lines of both regional and state autonomy were not firmly established. Thus, the ability to forge a ‘union' was made easier due to the weak central structures that were balanced off against and, in fact, ultimately outweighed by external threats. This helps build a political system that lead to generally ‘acceptable' elected officials that are installed ‘originally' to represent the interest of the nation.
Currently, this is not the case in Europe. Both regional and national sovereign lines are clearly established there. Officials are elected at the national or country level. In turn, these individuals and groups are ‘appointed' to the supranational level. It is at this point that the problems begin. Specifically, it is clear which body has the "ultimate" supranational authority. However, it is unclear who really has the ultimate authority within the superstructure due to the decoupling, dislocation and distortion of the electoral process.
To date, the results in the decision process at the superstructure level have been plagued by indecision and inaction that is damaging the world economy. Obviously, as markets tighten, there is an ever increasing need for "clear guidance" from policy-makers. The troubles of policy are — for better or worse — immediately reflected in the markets at the macro level and unemployment at the micro level — clearly, instability reigns. This is not likely to succumb to a perceived ‘short-term fix'.
Majumdar is chief science officer at R-square RiskLab. Workman is director of corporate finance at L'Alliance Revision Sarl-Luxembourg
(This story was published in Businessworld Issue Dated 06-08-2012)