THE KING SPEECH
EDU DDA Jan. 22, 2025
Summary: The past is prologue? There are a lot of similarities between now and 2024. In light of what Korea and Japan just reported, it’s worth going back to revisit six years ago, featuring one of the few honest (former) official reflections from that period. A reflection whose sentiment (pun very much intended) still stands to this day. In fact, that’s what all the incoming data keeps showing. Even before the latest “trade wars”, we’re seeing the same results from the last one.
HE TOLD THEM THEY SCREWED UP AND THE WORLD WAS GETTING SCREWED BECAUSE OF IT. OF COURSE, NO ONE LISTENED.
After what had been a day with a completely clear macro calendar – there was absolutely nothing reported by anyone anywhere - it ended (or the next day began, Asia time and all) with a flurry of reports. Troubled South Korea got more so with its GDP estimates. That makes three quarters in a row, meaning output from the country is really starting to resemble Germany. It may only be a quarter of the length of time the Germans have been stuck in their rut, it’s the same rut anyway.
Next door to Korea, despite the Bank of Japan almost certain to raise rates again on Friday, the Japanese released their own sobering trade stats which dovetail too nicely with what the Koreans have published. And that also features a lack of demand from the United States.
This is a topic, and a familiar one, former Bank of England Governor Mervyn King had warned about in 2019. No one heeded his admonishment because COVID erased all economic and financial history from before 2020. Now more and more it appears the world is indeed heading back into the 2010s anyway.
China Update 5
This will be the last regular update since, as expected, the situation in Chinese money markets does appear to have at least stabilized. Rates are steady though still elevated, particularly the 2-week rates. If something does change over the next few days before the Golden Week begins, I’ll make sure to add it here to the DDA.
O/N SHIBOR remains ~20 bps high compared to before this all began. The 2-week tenor hasn’t budged in a week, more signs that it’s the illiquidity of the holiday what has markets on edge. Same for the 14-day repo rate, sticking right at 2.70% for the fourth day in a row even as the benchmark 7-day rate slid to 2.15%, its lowest since the 13th.
Why it is so difficult to see the truth 3
In the middle of 2019, the entire global economy was on the edge of recession, a startling development for pretty much everyone in it. Long before anyone would invent the term COVID or the public would come to appreciate coronaviruses, the economy was heading for a big one. Markets had blown up the prior fall, with interest rates falling sharply in between.
Economists and policymakers were, at first, totally blindsided (the Fed was still raising its rates in December 2018), leaving most of the public to learn about this global weakness the same time officials would. Once it became clear it really was serious, immediately everyone blamed “trade wars” because, to the official world, what else could it have been?
Yet, even Economists, the honest ones, had to confess the imposition of a few billion dollars in tariffs on a few tens of billions of goods could hardly account for so much widespread and worsening weakness. Instead, they surmised it wasn’t the actual trade restrictions themselves so much as souring sentiment caused by them.
As in the markets, there were numerous clues from all over the macroeconomic world this was wrong, leaving anyone curious enough to venture off the mainstream path quite a bit to go on. In April 2019, for example, South Korea provided a pretty big one:
South Korea, a bellwether for global trade and technology, cast doubt over hopes for a quick rebound in the world economy by reporting its biggest contraction of gross domestic product in a decade.
Asia’s fourth-largest economy shrank by 0.3 percent in the first quarter from the previous three months, versus estimates for a 0.3 percent gain. That’s a big worry for other manufacturing and technology-driven exporters, including Japan, Germany and Taiwan. A separate report showed global trade volumes are falling at the fastest pace in a decade.
A WARNING FROM 2019 FOR 2025?
Since so much of that growing downturn seemed to have been driven by flagging trade, frustratingly it made “trade wars sentiment” appear plausible at least on its face.
Part of the problem started with China. Everyone had expected the Chinese were in the middle of turning things around after a “surprisingly” soft 2018. There was the vaunted and widely-hyped “credit impulse” which allegedly signaled authorities in Beijing were taking the weakness seriously, and already by the start of 2019 setting about to fix it.
That’s the thing; authorities in China did want to fix their woes. All the questions the PBOC, for example, is fielding these days were already being formulated six years ago; the issues with “transmission” of its policies since neither banks or the real economy seemed to respond to those policy changes. The whole system was breaking down and would have been a major issue (see: China GDP after Q3 2018) by 2020 if not for that “other” thing.
South Korea’s wild GDP miss was a serious piece of confirmation about China and beyond.
The whole reason why Economists could not conceive of any reason for the global recession beyond trade sentiment was QE and the American unemployment rate. With the jobless rate falling to a 50-year low, the US economy was believed to have been rock solid. Combined with China undertaking “stimulus”, from the perspective of orthodox Economics, what else could it have been other than that dastardly Trump?
A few months after South Korea tried to warn them, one of their own would come out and state too much truth – so much it predictably fell flat. This was former Bank of England Governor Mervyn King who made his way to Washington, DC, to attend the IMF’s annual get-together at the same time the Fed was cutting interest rates and installing a permanent repo facility, same as when the ECB had restarted its endless QE. It was a strange sort of juxtaposition given that the organization’s just-prior leader, Christine Lagarde, was busy at the same time preparing for her new role as head of Europe’s central bank.
King, the former dean of central bankers, was interested in talking about how much authorities had failed. Yes, failed. The latter, Lagarde, fresh off yet another such in Argentina was on a whirlwind press tour (which included, for some absurd reason, a stop with CBS’s 60 Minutes news program) denying that very thing, decrying the very notion anyone anywhere would ever question central bank independence. Or central bank performance.
What King said was:
Conventional wisdom attributes the [post-2008] stagnation largely to supply factors as the underlying growth rate of productivity appears to have fallen. But data can be interpreted only within a theory or model. And it is surprising that there has been so much resistance to the hypothesis that, not just the United States, but the world as a whole is suffering from demand-led secular stagnation.
I dearly wished he would have used the D-work, depression, yet no one ever dares.
Authorities are always so certain, King noted, sure the long run economy always has to have a supply side problem, R*, because all their models assume it has to be a supply side problem since they were created in order to analyze potential problems on the supply side. Central banks, it is always assumed, have the demand side covered, so what else is there? Therefore, any notion of other factors that might be of a cyclical nature, even those which could even stretch out for a very long period of time, far beyond the usual boundaries of recession, aren’t so much dismissed as never even considered.
Economics suffers from lack of imagination as anything.
The most damning criticism by King was in recognizing how stale and static theory and convention was in the wake of 2008. Right or wrong, after the early 1930s Great Crash and then far into the Great Depression nobody sat still. The whole discipline, government, even civil society was lit up by questions and intense endeavors to find answers (and it would take decades to get complete ones). Every assumption including, as noted above, those about central banks and the role of monetary policy was reassessed and then reassessed again. The tremendous failure, and the tremendous costs of failure, led to radical rethinking.
If anyone would know failure it would be none other than Mervyn King. He was “in the room” during all those secret conference calls in 2007 and 2008 calling upon coordination among all the big central banks as the crisis unfolded; not that anything halted the slide into the abyss. Central banks, we had been told for decades, were all-powerful. Seeing it firsthand from the inside in 2008 and 2009, in 2019 King levels a startling indictment:
No one can doubt that we are once more living through a period of political turmoil. But there has been no comparable questioning of the basic ideas underpinning economic policy. That needs to change.
No tremendous burst of scholarship, no radical reexamination of fundamental assumptions. As I just published in EDU’s Classroom Video #31 (btw, for any DDA subscribers that don’t also have a membership and who might want one, let us know and I’ll gladly hook you up; there is a ton of material available on the background and inner workings of the eurodollar world), we still know next to nothing about the majority of the repo market despite that very 2008 crisis being as much about a collateral shortage and repo breakdown as any other factor.
How in the hell could that be? You’d have thought there would have been an all-hands effort to tear everything apart, to illuminate and understand every last thing previously hidden and grossly misunderstood. Yet, the point of yesterday’s DDA, the Fed and Economics is all about maintaining the lie.
And here was “one of their own” saying so if in his own way (rather than using my characterization), and doing it publicly. King should have pointed to the 1991 conversations, but that would have been admitting a tad too much starting with his own complicity. Instead, for Economics, 2008 was a minor and very much temporary blip. They threw a bunch of QEs at us then celebrated that unemployment rate (even as a few of them were worried more in private that number really was terribly flawed exactly the way Candidate Trump, the first time, described on the 2016 campaign trail).
For the models and Economists, that then eliminated any idea lackluster demand – meaning a depression economy – could have explained the “surprising” downturn in 2019 and a lot more beside.
South Korea in 2019 was really just a reminder of everything King was talking about, because of all these long run faults. For the real economy, the unsolved demand question meant any upside for the world was always going to be limited, all too brief.
That absolutely described 2017’s “globally synchronized growth” and given South Korea’s status and importance in trade, that also meant taking account of China on top of all else. After all, the Chinese plight was itself a byproduct of depression (King referred instead to “stagnation” though intentionally that term doesn’t care the same gravity). Korea was a warning not about trade wars but demand failing.
KOREA NEVER RECOVERED FROM 2020, EITHER. AND NOW, LIKE GERMANY, IT STOPPED RECOVERING.
The Koreans only an hour ago reported that GDP stagnated in the country for the third straight quarter. It had fallen by the same 0.3% rate in the second quarter of last year as it had posted in the first of 2019 which got everyone worked up six years ago. Only, this time that drop was followed by two consecutive +0.1% q/q rates which mean real GDP in the final three months of 2024 was still lower than it had been in the first three.
Why?
Same thing; long run demand questions. What ultimately defeats economic recovery from depression economics is distortion, imbalance. The economy, because it is not operating freely, flexibly, efficiently, owing to the problems in money, banking, circulation, not to mention long run destroyed potential (which also answers the supply side R* question, too), it can never get going for very long before those distortions and imbalances reign it back in again.
Risk taking never goes far enough, then quickly reverts back to aversion reigniting the self-feeding downturn doom loop. Contrary to Economists assertions, these demand problems can be drawn out for long periods of time thanks to those limitations.
The 2020s price illusion didn’t erase them in the same way pre-2019 seems to have been.
South Korea joins Germany and so many more in demonstrating this fact. It isn’t coincidence we see yet another key piece of evidence which indicates the same major worldwide inflection along from around last March and April. That inflection fits with the timeline of global labor market deterioration, too, a point we never got to in 2019 before the corona got loose.
In short, rising unemployment entering 2025 is merely another symptom of this same process, these same deficiencies.
Japan’s trade stats not only align with South Korea’s economic downturn, they also add the element of the price illusion, the one big difference to the 2020s so far. What they show is that it all ends up the same even when the nominal economy (price illusion) behaves differently. The supply shock and the official response to it didn’t alter the long run potential and trajectory, they merely distorted and clouded it for a time under that same price illusion.
This post-2008 economy simply cannot sustain itself for very long, the legacy of depression. Or stagnation, if you’d rather. Not soft landing. No recovery. Unemployment has to go up. Trade has to fall. All of this familiar and it happened before we even got to more “trade wars” and surely “trade wars sentiment.”
No need for imagination.
