In recent years, Economics has become more of an enigma than a discipline. With derivatives, mortgage backed securities, specialized assets and a litany of other financial jargon flooding the markets, it’s no wonder that our money is making less and less sense. While one senior analyst from Goldman Sachs claims the economy is recovering, a professor from Cambridge is adamant of the contrary. Morgan Stanley touts Turkey as an investment hub, and an equally prestigious organization strongly urges a capital pullback. But it doesn’t have to be so. Economic theory remains sound regardless of biased and incentive-driven claims that have become the benchmark in this day and age. In this article, I will evaluate crippling deflationary pressures and the health of the current economy. I will follow the money rather than my gut and attempt to slash through the thick jungle that has become our media warped market.

Ever since the 2008 financial crisis, the U.S. government has set out on an aggressive path to expand the money supply with cheap credit in the form of bond and asset buybacks. This unorthodox form of monetary easing is called Quantitative Easing (QE). Albeit this dovish approach is often a point of contention among economists, it beats the bread lines of the Great Depression that were a result of austerity and hawkish measures. “As America Goes, So Goes The World,” is an iconic quote embedded in both pop culture and academia. The majority of the world shakes their head when they hear such inanity, but this couldn’t be more of a truism in our global economy. As America goes, so goes the world indeed. Monetary policy coordination is constantly kept in line with the U.S. Federal Reserve, and failure to do so would result in disastrous consequences for open economies.

Let’s take the case of Canada. If Canada were to keep interest rates high while the U.S. kept them low, capital would rocket to Canada, thereby greatly strengthening the Canadian dollar. But that’s a good thing right? Wrong. A stronger Canadian dollar means less global demand for Canadian manufactured goods and agriculture — two pillars that hold the land abundant and labor sparse economy sturdy in place. Instead, Canada is forced to keep interest rates low and suffers from a bubbling asset and housing market. One has to only look as far as Vancouver to be nauseated by property prices.

But the crisis was almost 7 years ago! Surely the economy must have recovered and the Federal Reserve can stop this $80 billion a month expansion. Wrong yet again. The goal of the expansion is to increase the GDP, a hallmark indicator that has remained relatively stagnant and actually fallen in the last quarter. If new money circulating in the economy hasn’t contributed to any growth then naturally there has to be a rise in prices since production has been lethargic. In other words, when more money is circulating through the economy but isn’t offset by increased growth, prices for goods and services should increase. But no, inflation has remained at an abysmal level of around 2% since the crisis.

To recap, the $80 billion stimulus a month has neither materialized as significant growth nor has it contributed towards inflation. So where is the money going? Let’s turn to the “supply and demand” workhorse of economics for a layman’s explanation. Deflation can simply be understood as a general decrease in prices due to either an aggregate lack of demand or an aggregate increase in supply, however more often than not, these two forces work in conjunction.

Following the 2008 crisis, people simply aren’t demanding capital the way they used to — the velocity of money, or the speed that money travels from hand to hand, has cooled down significantly and with appropriate reason. Terrible financial oversight that led to the crisis has paralyzed consumer faith in the world’s largest economy. Not only are credit-driven U.S. consumers the backbone of American growth, they are the headspring of growth for the entire world. To exacerbate this problem, those consumers and small/medium sized businesses that are finally coming out of their shells and willing to take on more risk are being shot down by banks who have to abide by extremely tight-laced regulations since the crisis. Thanks Obama.

So who’s getting the money? Simply said, only those with a good credit rating. Multinational corporations and the upper echelon of wealth accumulate more capital for extremely cheap and seek higher returns elsewhere. In a perfect world, the rich would reinvest money in the real economy and we would see growth, but wealth follows returns and unfortunately those are paltry almost everywhere. Demand falls further and deflation becomes a self-fulfilling prophecy. Instead MNCs and the rich invest in the equity and asset markets, with the S&P 500 reaching a new record high almost every other day. The more the rich invest in the stock market, the higher go equity prices, thus initiating a never ending rat race that results in little palpable growth. MNCs are no stranger to this either. With little opportunities for growth due to sluggish demand, stock buybacks have become increasingly common in order to hoist up the price of equities and take home a sizeable paycheck that is partially denominated in company stock terms.

On the supply side of things, MNCs are cutting costs faster than ever before. Remember the days of the amazing industrial revolution where manufacturing and employment really took off? Remember the days after WWII where the world economy was expanding at a remarkable rate? Those days are over. No longer do we need blue collar workers performing drudged tasks all day, we have machinery that does the same job more efficiently, cheaply, and with no disobedience or demand for social services. The world is becoming automated, supply is increasing, and an exodus of blue-collar workers is filing unemployment claims. But wait, aren’t decreasing supply-side costs a good thing? After all, during the era of Pax Britannica and Pax Americana the world flourished like never before due to deflationary pressures and technological spikes! Well yes, deprecating costs and increased efficiency are the ultimate economic goal — but who do we sell our products to when there is pitiful demand?

Unfortunately the solution to all these problems aren’t simple, especially in the short-run. The long-run implications are quite obvious — invest in education and infrastructure since menial jobs are becoming obsolete. Destruction is creation. Where a 100 jobs are lost to machines, a 100 are created for coding, maintaining, and running those automated processes. A quick glance at employment data since the economy shows that the little that the economy has recovered was not in manufacturing jobs, but in automated processes such as computer systems design and programming, software publishing, engineering and drafting services, data processing, electronic processing and etc. Every single manufacturing sector has been in a slump and shows no signs of recovery.

Across the globe, the powerhouse economies are all trying to stimulate demand through bottoming out interest rates. With rates almost near 0%, the ECB just this week announced that it would further decrease the cost of borrowing in order to target deflation, unemployment, and exchange rates all at once. On the other end of the globe, developing countries are competitively devaluating their currencies in order to get an edge in manufacturing — with labor and Western demand being the very blood and oxygen that keeps them alive. Some economists are even convinced that negative interest rates may provide the ladder out of this deflationary pit, a phenomenon that has never been tested before.

There is a silver lining in all this. With agriculture and manufacturing reaching economies of scale like never before, and vertical and horizontal integration making marginal costs practically nil, the current environment couldn’t be more ripe for change. Perhaps the Great Recession has set in motion the tides for whatever paradigm is to emerge next — much like Bretton Woods in 1945, structural change is needed. A world where food isn’t priced in dollars but is a ubiquitous commodity, and infrastructure development is recognized as a fundamental to growth rather than only in textbooks. Alas, it’s going to take another significant catastrophe to incite any palpable political change.

In the short run, let’s hope all these bubbles start bursting soon and come 2016, vote for Chris Christie.

 

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