Imagine you are an historian in the year 2500. Sitting back in your wing-backed chesterfield, if any still exist, and quaffing a snifter of 2480 vintage brandy, your personal favourite, you think back to the first part of the 21st century, the famous age of instability, and consider the perennial historiographical debate of that period: what was it that caused the post-Cold War ‘Brave New World’, in the words of that ancient president, George H W Bush, to so quickly fall apart despite the rapid technological advancement, the relative lack of war, fecund demographics and few natural disasters?
How was it that Pax Americana was so short-lived despite the overwhelming hegemony of the United States? Why did the Western consumer so quickly lose heart despite the abundance of cheap goods, the ease of mortgage credit and the array of options for employment? Who was responsible for the most avoidable economic crisis in history?
Now being an armchair historian with a predilection for fine spirits, you have a tendency to take a broad-brush approach, so forgive yourself for what follows: a bird’s eye view of the past that doesn’t take account of complexities and nuances if they get in the way of a good yarn. But a good yarn it no doubt is and in its own way this impressionistic picture, viewed from afar, gives a clearer image of what went on in those halcyon days than any contemporary reading ever would…
The Great Disconnect, as it came to be known, began in the year 1991 when the Soviet Union dissolved and free market capitalism, in its then form, triumphed gloriously over socialism, promising a new era of peace and prosperity.
Yet the ascendancy of the United States as the world’s sole superpower was made problematic by the very fact that it had no binary. There is no peace without war just as there is no black without white. And capitalism without socialism, or indeed any other alternative philosophy of political economy, ended up like Plato’s Ouroboros, eating itself in an eternal cycle of mutually reinforcing destruction and rebirth. It was not the “end of history”, as a scholar of the time, Francis Fukuyama, put it. It was the beginning of something worse.
Having achieved sufficient technological progress to lift the world out of a Hobbesian poverty, leaders of the time could have created a paradise on earth, with abundant food, water, land and leisure for all the earth’s inhabitants, if only they wanted to share. Yet the now-dominant system of the time, free market capitalism, relied upon a serf class of cheap labour to produce the Veblen goods –Toyota Priuses (a kind of transport vehicle that aspired to saving the earth, but caused above-average ecological damage in the making), Gucci handbags (a strange fashion of the era) and fair trade espressos (a primitive beverage of the time favoured by those who were rich because it was made by those who were poor) – that the elite would conspicuously consume. And the irony was, of course, that the only way to remark on this bizarre situation was to use the discredited theories of Karl Marx’s redundant socialist system.
Yet unbeknownst to the people of the time, capitalism – to paraphrase Marx – had sold itself the rope by which it would hang. It relied on cheap labour, largely from a place that was once called the Third World, yet it also needed new conspicuous consumers to buy that labour’s produce.
Until this contradiction would become apparent however, the so-called Third World, a largely tropical hinterland between the First World of America and Europe and the Second World of Russia and its satellites, had now become known as ‘emerging markets’. Along with the short-lived acronym BRICS – which indicated the largest of these countries (before they imploded under the weight of their own imbalances) – emerging markets would be to the Western-dominated businessfolk of the early 21st century what the spice trade was to the 18th or the crusades were to the 12th: a way to get rich and powerful on the backs of unfortunate foreigners.
But those unfortunate foreigners would bite back, with a vengeance. Using the same economic tools they took the best technology, improved it and worked hard at providing cut-price consumer goods. When these goods sold and took market share they then sold even more on vendor credit. But what started out as trade finance quickly became much larger, thanks in part to the facilitation of the financial industry’s concurrent deregulation, which was not only ideologically fashionable, but sucked the best and brightest workers of the rich world away from competitive manufacturing and into the vocations of investment banking and money market arbitrage. Rarely in world history had the merchant class been more powerful than priests, warriors or lords, yet at the same time been so stupid.
And so these ‘masters of the universe’, as they dubbed themselves (whether this was serious or in jest we have no surviving evidence), operating in their glass and steel temple cities of London, Hong Kong and New York, developed new rules and new techniques to expedite what was already a quickening process of borrowing and lending across political borders. Alongside the development of new information and communications technologies, it was now possible to have a factory manager in China reinvest his profits into a securitised batch of American housing loans within a fraction of a second, instantly accruing fees to the arranger, who was subsidised by the government of those being lent, and, at the same time, giving that factory manager a kind of quasi suzerainty over those who had previously enjoyed a quasi suzerainty over him.
Yet these arrangements were ultimately unwise for borrower and lender alike. The value of those same housing loans evaporated when it was realised that many of them were being extended to people who had no chance of repaying them. The value of other financial instruments, structured on similarly dubious grounds, likewise evaporated, and a global financial crisis would begin.
Starting in America, and then moving to Europe, some wags at the time considered it as heralding a shift in the locus of power and wealth to emerging markets and the BRICS, but before too long these economies too would fall apart like a centrifuge. Amid social unrest – owing to the competing objectives of their own polities – and rising costs of primary resource extraction, a factor of production that had hitherto been ignored and mispriced, what was then supposed to be the Asian Century more or less died before it was born.
A Great Disconnect had been recognised. The earth’s bounty, which had nourished and supported the evolution of man for millennia, had almost been exhausted and it was borrowed against, rehypothecated, securitised and collateralised so many times that nobody knew who owed what, who owned what or indeed who stood behind the quickly-erected facades of so many offshore corporations held in little islands that were at the same time being swamped by rising oceans, another by-product of global capitalism.
Land was depleted. Labour was costly. Capital had been collateralised to the extent that a hundred years of cash flow would never repay. The only factor of production left was technological progress – the hero of this story, if there ever was one – but this would take time to evolve too before cornucopia would return to the world and Malthusian predictions of the limits to growth would again be repudiated.
At the time of the Great Disconnect, those who invested in technology would become the Croesus’s of the age. Like the industrialists of the 19th century, the technologists of the 21st century would accrue inordinate riches at a time of otherwise widespread economic depression, where the skills of workers failed to match the needs of business and the owners of capital – the 1% – almost subjugated the providers of labour – the 99%. Only through the productivity gains offered by technology would business grow, countries become more wealthy and the Great Disconnect be bridged.
Politicians and their sage advisors would attempt to smooth this transition through increased money supply, more debt, economic stimulus and various ‘rescue packages’ but all would ultimately fail. Only time would heal this imbalance and this disconnect between markets and economics, capital and labour, elected and ruled, rich and poor. The attempts to provide cyclical solutions to a structural problem were made in vain. A generation would pass before equilibrium was restored.
The upshot, of course, was that the lack of interim capitalistic growth gave the earth its own time to heal. Fields, left fallow, gave strength to the soil and rivers, left undammed for electricity unneeded, fed forests that helped stall an otherwise rapidly changing climate. A period of ice-free seas was thankfully short-lived and as deserts retreated and smog-filled skies cleared the 21st century looked back and was glad that some progress paused…
At this point you drift off, only to be woken by your robotic valet, an invention of a Mr Zukerberg in the mid 21st century, an itinerant entrepreneur who had spectacularly failed at his first technological venture: connecting friends to each other by pictures on their telephones and expecting to profit.
The valet, Winkelvoss 358X, enquires whether your brandy needs refilling or whether you would care to sample a plate of Neptunian cheese. Thank Google for the discovery of fusion energy and warp-speed travel, you think; the colonisation of other planets has done wonders for the palate.
Michael Feller is an investment strategist at Macro Investor. This week Macro Investor looks at the great disconnect between the markets and the economy, with a range of technology stocks, fixed income strategies and trading ideas for brave new portfolios. A free 21-day trial is available at the site.