Is the world economy headed into the dumper? One thing's sure, says Ian Welsh: Western elites are losing control of the global economic narrative

"[T]here is more pain to come, but there always was. The decision was made in 2008 and 2009 to not allow an actual recovery and to protect the rich at all costs. There was a cost; it has been paid for the last six years, and this is yet and simply another one of those costs. China, as an exporting power, cannot carry the world economy when the people to whom it exports insist on various levels of austerity (be clear, the US is in austerity too, just not as bad an austerity as Europe)."

-- Ian Welsh, in his post this evening, "As the Dow Jones Drops"

by Ken

I think Drew Harwell's late-afternoon washingtonpost.com report, "Global sell-off turns to chaos in rocky day for financial markets," is representative of at least the American coverage of the day's financial events. It begins (links onsite):

A worldwide selling frenzy on Monday bruised U.S. stocks and sent the Dow Jones Industrial Average plunging nearly 600 points, as investors worried over China’s slowing economy extended a global-market meltdown.

The Dow fell more than 1,000 points within six minutes, its largest single-day slump in history, before staggering back to close down 588 points, or 3.6 percent, its lowest point in 18 months. It marked the second straight day of a 500-point-or-more loss for the Dow, a blue-chip index of 30 large companies.

The Standard and Poor’s 500, a broader look at the market, and the Nasdaq Composite, a tech-heavy index, posted similarly dismal starts before swinging wildly then sinking again to losses of close to 4 percent.

The global whiplash underscored investors’ shaken confidence in China’s slowing economy and central bank. The world’s second-largest economy is now reeling over what China’s state media is calling “Black Monday,” during which its markets just recorded their biggest one-day nosedive in eight years.

WHEN LAST WE LOOKED AT CHINA'S PLUNGING EQUITY MARKETS --

in early July, Tufts professor Daniel Drezner, in the washingtonpost.com post "The politics of China's stock market collapse," was quoting he Financial Times's Tom Mitchell saying that "if anything, a three-week, 30 per cent correction after a 12-month, 150 per cent surge seemed like a welcome adjustment." Experienced watchers of the Chinese economy were pointing out that, given the size of the bubble that had inflated the Chinese markets, and in combination with news of the Chinese economy's slowdown, there was still a heckuva lot of bubble deflating to be done. So I don't think there should be any great surprise that the Chinese markets have done more plunging.

However, there was (and still is) much interest in the Chinese government's handling of the situation, notably the hardly precedented effort to appear to allow its currency to sort-of-float while simultaneously being seen making various quite conspicuous, even frantic efforts to maintain control (that's the control-freak PRC we're accustomed to) -- frantic and notoriously unsuccessful. In the less than two months since, the government's efforts to get control of the situation have mostly served to show how little actual control it has.

Nevertheless, as Ian Welsh points out in the post I've referenced at the top of this post, China retains the distinction of having an economy that's actually producing actual stuff,.

China is the key maker of goods. There are a few other countries that also make goods as the most important (not largest, most important) part of their economy. Everyone else is a commodity producer, a financier, or trying to sell intangibles (intellectual property, whether inventions or fiction or branding).

This means that China has to buy resources from somewhere to be able to make stuff and has to have markets where they can sell the stuff they make. So the Chinese economy, already in slowdown, has been further vulnerable to world increases in resource prices and to fall-off in consumer demand in its once-humming export markets.

During this period we had repeated currency devaluations in an attempt to increase the competitiveness of exports. These devaluations had marginal effect at best, didn’t work at least.

China’s growth had been slowing (thus the reduction in their demand for commodities), they encouraged a stock market bubble as consumers were proving reluctant to continue piling into real-estate. They printed vast amounts of money, at least twenty times as much as Europe, Japan, and the US combined, but exports were no longer leading growth. Regular Chinese and private firms have massive amounts of debt.

To put it simply, China had reached the point where export-led mercantilism was no longer working. They needed to shift to domestic consumer demand.  They chose to try and inflate bubbles instead.

Virtually every country in the world was either rolling off a cliff, or struggling to keep their head above water. Most of the South of Europe had never really recovered (Ireland is a partial exception). Latin America was diving, Turkey’s real-estate driven, neo-liberal growth was stalling, India’s “miracle” was always more of a paper tiger than most made out, being concentrated to a minority even as the average number of calories consumed in the country dived.

To Ian it's significant that the economic "contagion" started in China, "spread to emerging economies, money fled to the US and a few other safe havens, China’s economy continued to stall, its stock market fell despite radical attempts to keep it inflated, and that has now come home to New York." He points out that he has been saying for years that the next 1929-style crash "would start in China." Whether this is actually the new 1929 "we won't know for a while," Ian says -- "just as they did not know in 1929 that it was 1929."

"Welcome to the new world," says Ian.

The US and Europe put a LOT of effort into moving as much industrial production as possible to China. China just promised that a very few people would get very rich doing it, and those people made sure it happened. (Look up the profit margins on iPhones.)

I will note that there are still bubbles. Real-estate bubbles (Canada, Britain, a few important US cities, Australia, etc.) and a vast amount of highly leveraged derivatives have been pumped back out since the 2008 crash, since no one actually bothered to regulate or forbid them. And banks and financial companies are now larger and fewer, making the economy and financial markets both more subject to contagion.

The elites learned from 2008 that the important thing to do in a financial crisis is to just print enough money and relax enough accounting rules–extend and pretend. That will be the play again this time if this contagion turns truly serious. I would guess that it will work, sort of: More zombies will be created, they will need higher profits, the real economy will be even more stagnant. And people like Corbyn, Trump, Sanders, and so on will reap the rewards electorally.

Printing money is a viable strategy only as long as the elites control the regulatory apparatus (including prosecutors, finance departments/treasuries, and central banks), legislators, and executives. The reason people are screaming so loudly about Corbyn is not because he can’t win in England, it’s because if he did, and he’s serious about his policies, he will inevitably have to confront them. And an English PM with a majority he controls is pretty much a dictator.

"A LOT IS AT STAKE HERE," SAYS IAN

And he explains this stake in a way I don't think you'll be seeing in your regular infotainment nooze outlets:

Our elites are losing control over the electoral apparatus and the common narrative. In both cases, the signs aren’t terrible yet, but they are there; the rise of the old right and the old left is visible.

"So," Ian says, "there is more pain to come,"

but there always was. The decision was made in 2008 and 2009 to not allow an actual recovery and to protect the rich at all costs. There was a cost, it has been paid for the last six years, and this is yet and simply another one of those costs. China, as an exporting power, cannot carry the world economy when the people to whom it exports insist on various levels of austerity (be clear, the US is in austerity too, just not as bad an austerity as Europe).

Ian can't help but take note of "the way the Chinese are fumbling this crisis," which convinces him, he says, "that they are now past the point where enough competent people who remember poverty and fear remain in power."

Ian concludes: "We continue to live in interesting times."

#