The GFC is with us for the rest of our lives


One of the more persistent hopes and dreams of officials, politicians and investors since the GFC is that we’re in some aberrant period and, so long we keep doing what we used to do, it will pass before too long. This can be seen in the general treatment of falling interest rates, which are always about to rise, in the discussions around asset prices, which are always on the verge of recovery, in the optimistic forecasts for fiscal policy, which are always set to benefit from the rebound.

It’s all based around the same false assumption. That the GFC was a cyclical event and we’ll be back to the good old days before you know it. Wrong.

The GFC was and is the pivot point in a structural adjustment that has only just begun, probably has decades yet to run, and before it’s over will likely change our world to something that looks more like the nineteenth century than our super fast modern version (in the sense of slower moving capital not widespread typhous!).

Put simply, we’re in a long term develeraging phase for the global economy following a long term leveraging phase. What this means is that pretty much for the rest of your working life, the world is going to be regularly convulsed as its debts are saved against, inflated away, defaulted upon, and even sometimes repaid! It will shake both private and public sectors repeatedly and will afflict both developed and developing economies.

This is neither good nor bad. It is neither bearish nor bullish. It just is.

I’m not alone in this diagnosis. In fact, outside of MSM commentary, which bizarrely maintains that planet earth is something outside of Australia, households know it already. That is why their savings habits have so fundamentally altered. No longer is there a free pass in “buying the dip” in any asset class. All assets are now equally unreliable. Simple stores of value like cash and gold are structurally on the rise.

Don’t get me wrong. This does not mean there aren’t business and asset price cycles to trade. We’re in one right now. In Australia it’s taking the form of financial repression which has both accelerated debt repayment and increased borrowing by speculators. It’ll run for a while but then either peter out or hit a wall much sooner than it would have in the past, like such surges will everywhere else.  It is, like just about everything else these days, a cyclical pulse within a larger structure that will always return to the same basic constraint, that most of the world’s major economies are past the point of debt-saturation, including ours.

I’m focussed on this today because the passing of the US debt-ceiling debacle has refocussed the world’s best thinkers on this topic and there are a couple of important dissertations for you to absorb. The first we published on the weekend was the video of Martin Wolf explaining his view of where the global economy is at and heading. The second, yesterday, was the fantastic interview by Chris Joye with Matthew McLennan.

Today there is more from FTAlphaville:

Fresh from having made $1bn impeccably timing the putative US recovery in the first half of this year (and Japan, natch), Andrew Law of Caxton Associates – one of the world’s most successful macro traders – has now turned bearish, and in quite a big way.

Caxton, a hedge fund named after the printer (its now-retired founder Bruce Kovner is a billionaire bibliophile), believes the Fed will keep running its presses:

We have been expecting the US economy to reach escape velocity led by housing and corporate capital expenditure… but for whatever reason that just hasn’t happened…tapering is off the table for the foreseeable future.

Caxton is long across the US yield curve (the debt debacle has been a good buying opportunity, if nothing else). Mr Law has spoken extensively with us about his view on the global economy and the state of the hedge fund industry. Tree-based publishing issues mean those thoughts came in truncated form. Below are some extended excerpts from him.

(Background: most people haven’t heard of Andrew Law. So go read our interview. Or, briefly: Mr Law runs Caxton Associates, the hedge fund founded by Kovner three decades ago that can lay some claim to being one of the most successful macroeconomic investors ever. Law has been running trading at the firm since ’08, when his own portfolio notched up a triple-digit gain, putting Caxton in the black for the year, and has been running the whole firm since 2011. By way of Caxton’s record: 15 per cent average annual return with half the vol (roughly 7 per cent) of the S&P 500. One losing year: 1992, -2 per cent.)

On the US economy/debt ceiling

People blamed the government debt negotiations last year for growth falling and no doubt they will blame them again this year… I just don’t see how the economy is going to accelerate in the foreseeable future. We’ve got more budget negotiations to come – what happened [last week] is just another can kicking exercise. It’s a disappointment to anyone who was expecting the US economy to grow and recovery. The problem has not been solved and the hopes for a grand bargain are in tatters… the lack of visibility is very damaging.

But Mr Law believes it’s not just Washington’s errors which are to blame. Caxton, which had been short US bonds in the first half of the year, went neutral as soon as Larry Summers dropped out the Fed chair race — a move that proved timely given the non-tapering decision weeks later. The FOMC minutes from that meeting, though, convinced Mr Law that tapering wasn’t happening any time soon.

Growth has averaged 2.2 per cent for the last 4 years. We have had zero rates and hugely stimulating bouts of QE and growth has not accelerated beyond that. So why now is it going to? Tapering is off the table for the foreseeable future. I think the Fed came to that decision at the last FOMC meeting – they saw that this economy was not standing up to the [then] prevailing interest rate conditions.

Data from the housing market and the corporate world were crucial.

There are no incentives for the corporate world to go out and spend – that, and housing, are critical. In the last few days alone we have seen earnings release statements from companies mentioning shutdown as a reason for a dropoff in orders. Sequester spending cuts have taken a toll and there is uncertainty about how plans for long term deficit reduction are going to prevail.

The Fed is very clearly now seeking to lower interest rates… Keeping rates low to keep the economy going is just another way of saying that the economy cannot be in a self-sustaining recovery.

There will be no self-sustaining recovery for the US unless it allows new bubbles to form in its asset markets, which is…oxymoronic.

A more esoteric take on the world’s structural position is available at this week’s episode of the Renegade Economist, which includes an interview with Anne Pettifor:

The bottom line is, the GFC was not an event, it was a doorway to a new world. The best investors know this, they are hedged for both deflationary and inflationary bursts, and are ready to move at the drop of a hat. Are you one of them?


  1. The inflationary bursts are going to be easier to handle. It’s what we’ve all grown up with; what is ‘normal’. The hard part is accepting that there will be periods of deflation, and having the courage or belief to act. (A well written set of thoughts. Thx.)

  2. With unprecedented change in the demographic profile of every Western nation, the future is economically unpredictable. The GFC will look like a minor rain shower compared to the overall storm that global ageing brings. So is the GFC the new normal? No, things get much worse economically and socially while the home planet adjusts to what really is the new normal, an aged world.

    The Chart on this pages tells the real story about want is ‘new’…

    • It’s not merely the age (demographic) issue. It’s also energy depletion, water depletion and climate constraints.

      The party’s over, boys and girls. 😯

      • The main one is energy depletion. Or better put depletion of the cheap energy sources. Oil at $100 plus per barrel is not going to go away. And in all likelihood it is going to go up permanently from the current $100 per barrel in the next couple of years. You only need to look at two things to realise this, first is the costs of the current oil projects being built around the world to sustain future oil production and secondly the need for OPEC countries to have higher oil prices to improve their countries economies and their infrastructure.

  3. Well said, H&H

    “…..Put simply, we’re in a long term develeraging phase for the global economy following a long term leveraging phase. What this means is that pretty much for the rest of your working life, the world is going to be regularly convulsed as its debts are saved against, inflated away, defaulted upon, and even sometimes repaid! It will shake both private and public sectors repeatedly and will afflict both developed and developing economies……”

    What almost no-one is noticing, is that the Great Depresssion of the 1930’s was the last significant cycle for decades, in which urban land values were involved. I believe that the economics profession has missed the significance of this.

    It took until the 1950’s for the nominal price of land in some places to return to what it had been in 1929.

    “This time round” is just as bad, because urban land values are involved once again.

    Unlike the markets for financial instruments, almost everyone is unable to avoid being a participant in urban land value bubbles. The total values involved are massive.

    The reason for urban land being involved in cycles prior to the 1930’s, was capture of urban growth processes by rentier classes who reaped considerable planning gains and maintained their high urban land rent levels. Automobile based development actually diluted land rent levels for several decades. Urban growth containment policies have now restored the 1930 rentier status quo.

  4. A great piece of writing. Not only does the US government have debt ceiling issues but much of the western world. If it’s not households then it’s sovereigns. The main issue that many people seem to miss is the debt binge undertaken in the early 2000s is still there and productivity hasn’t grown nearly enough to make an substantial hole in it. Hence central banks are having to work within an ever narrowing margin between monetary easing and tightening. I never seen such a long period of economists attempting to forecast the first interest rate rise here in NZ. History certainly isn’t repeating.

  5. I enjoyed this article as it pointed out the issues we face are structural rather than cyclical, something missed or simply ignored by most of the MSM. However, the view that we will see decades worth of readjustment makes the assumption that we don’t see a major event (planned or unplanned) change the entire financial / monetary system as we know it. It makes the assumption that after half a century of imbalances building we will be able to rebalance slowly, but surely, with only the odd crisis to contend with (none of which will spin out of control resulting in a larger collapse or a change to the status quo). I simply don’t buy it.

    • I agree.

      Debt is nothing more than accounting entries.

      It will not be long before countries will get tired of jumping to the tune and will start toying with the idea of relieving themselves of these very heavy and oppressive scribbles on paper. Just like individuals and corporations do when they miscalculate their borrowing and investment decisions.

      The sovereign debt eraser is not far away

      Governments have plenty of power to organise their communities to manage the short period of dislocation.

      What is holding them back?

      The fact that most people still perceive the benefits of the status quo exceed the costs.

      When that changes, change will come no matter what ( insert your conspiracy folk of choice) want.

      Patience my pretties.

    • migtronixMEMBER

      Our ability to “rebalance” is very strongly correlated to our fortitude in upholding and enforcing long standing laws re: fraud and coercion! Most of these “investment vehicles” are and always were fraudulent or bare minimum null and void ab initio because there was i) no consideration ii) no “meeting of minds” iii) no real party (human being) that can stand in court only fictions that are represented in court by other fictions.

      If we force this fraud to be dealt with we encourage honest participants back into the system with their capital and innovation, if we don’t we encourage more and more fraud until the entire judicial system is so corrupt no banker ever goes to jail but a 15 year old with 1 gram of pot goes to jail for 20 years…

    • PessimistMEMBER

      I agree with BB’s view point.The “new normal theorey” seems to be based on the fact we have managed to dodge the bullet for the past five years with a number of interventions. We have also seen that the QE effect is now beginning to wear thin.There is consensus that we are in unchartered waters and therefore there will be numerous unforeseen events that may cause panic and trigger a collapse.

      • migtronixMEMBER

        To add credence to your “uncharted waters” assessment just look what happening to the price of bitcoin. Its back to ~200USD, last seen when Cyprus shut its banks, meaning that a “currency” that is backed only by an algorithm and is less than 4 years old is seeing more confidence than the 200 year old USD. Crazy stuff.

  6. I agree, the GFC is the pointy end of a long term structural readjustment within our socioeconomic system

    I see automation and robotics playing a huge role over the next 20 years replacing real people in almost all aspects of manual work.

    If people are unnecessary than the whole societal mechanism of using “Work” to organize labor for the mutual good, becomes completely unnecessary.

    The rich dont need the poor, but you know what the poor also dont need the rich, so the purpose of money as we know it today changes. With this in mind, is it any wonder that average people are abandoning money and chasing real assets?

    Cheap robotics is not a one way street that rewards the only the rich indeed the low cost entry point will become a great societal equalizer. This raises the question for most of today’s workers, if I’m not your debt slave than what am I?

    Edit: minor change last paragraph

    • migtronixMEMBER

      Nice put CB as always. The only caveat I would add is that we went through this with the Industrial Revolution, and although there was some meritocracy involved there and the technologically savvy become more valuable than the landed gentry the bankers quickly found a way to own the whole world not by being technologically savvy but politically/demographically savvy and I don’t have much confidence it won’t happen again.

      In fact if you look at the facebook/LinkedIn/Twitter IPOs its already happening…

      • I think you can already see these changes happening within banking and investment community in general. The rise of Private-public-partnerships produces assets that in effect have a right to tax real people, for being alive. (Toll roads, private airports……)

        Miners now consider the underlying mineral deposits to be theirs. That’s a huge change from the original royalty scheme which rewarded miners for the work they did in extracting minerals from these publicly owned deposits. Our real world scarce Mineral deposits are now in effect private property and not even owned (in the controlling sense) by Australian interests. Our productive agricultural land is also being sold to foreign interests. This is all Real property leaving the system, it’s akin to the 80’s corporate raiders (aka asset strippers) they sold off (stole) everything of real value and left only a hollow corporate shell in place, long term bankruptcy was guaranteed.

        Today it might seem like an invisible hand is guiding decisions regarding capital deployment however that charade wont hold up for long. Our ZIRP bound financial system is the first sign that the “productive” deployment of capital is no longer the end-game. Logically Zero priced capital should be triggering huge investments in new businesses, but that is simply not happening, instead capital prefers to chase over priced monopoly style assets.

        The bottom line is that Capitals interests are being protected, the bankers may not understand the process or the technology but they definitely understand the system and their system is working to protect their interests.

        The $64K question is, How are the longer-term interests of Joe Average Aussie being protected?

      • NC thanks for the link, however I’m not a big fan of Socialism or any of it’s less savory Commie variants. I’ve lived in too many places where Socialism just does not work.

        I suspect we’ll see a future in Australia where labor simply gets slowly priced out of a job, in a way just a continuation of the existing Globalization MO, with Automation replacing Asians. This is precisely why I believe Australians should get fully behind this automation change and become the driving vector for change. Unfortunately to profit from change you must be its master!

        The real social problems will surface when manual Labor has no value because it is simply not worth the effort to employee someone. Social upheaval Strikes and the like only work when there is no viable alternative, look at the recent Transport worker strikes in the San Francisco Bay area. These strikes will be amoungst the first where traditional labor intensive “service” style jobs face off against increased efficiency through wide spread use of cheap automation. The “Safety” card is being played hard by both sides, but to what end? Clearly the “workers” have a point because it is impossible to live in SF on the wages the city pays unfortunately under today’s game rules that’s their problem!

    • DarkMatterMEMBER

      I think these are very important points. It does strike me that our economic and financial thinking is very conservative. At this stage of the game, robots and automatic factories are not science fiction, but pretty much a certainty. It is amazing that the future is seen as a continuation of the past. Any awkward facts are just airbrushed out.

      Apart from the transition to a type of post scarcity world where we struggle to know the value of anything, the other big change will be the transition to virtual and enhanced realities. Something between World of Warcraft and Google Glass. Most people probably think of this as fantasy, but the next generation will not bat an eyelid.

      It may be that in 50 years time money, work and economics has cycled back to be just the same as in grandad’s day. Maybe it will all be the same with a new coat of techno-paint. I guess we will find out.

      • I read somewhere that some ppl predict that in the future, from the moment you are born, a microchip is implanted into your brain. There will be no money and you cannot purchase anything without this microchip. total control like the Matrix

        It reminds me of the movie “In Time”…Time is the currency and everyone gets the same amount at birth but the rich can afford to be immortal and everyone else struggles for more time. when your time runs out, you die.

    • CB,

      “I see automation and robotics playing a huge role over the next 20 years replacing real people in almost all aspects of manual work.”

      Should be reworded so as only to apply to repetitive manual work. Over the rest of this decade we are going to see the end to the advantage of cheap labor in almost all manufacturing and much of our agricultural processes. By the end of this decade almost all our clothes and shoes will be made using robotics and automation and much of the food that we eat will be planted, picked, harvested and distributed using automation and robotics.

      Manual work that requires careful planning and one off (or only a few off) type actions, that humans can readily do, won’t in general be replaced by automation and robotics anytime in the next 20 years. While no doubt a automation and robotics system could be built to do these tasks it wouldn’t be cost competitive even against well paid skilled labour.

      • @Notsofast
        I agree BUT I have no real idea where the cut-off line will be. I know many Chinese firms that are perusing Automation strategies that are targeted at replacing functions performed by as few as 20 people, even today.
        Part of the problem is that the big name Automation companies (mainly US and Europe based) always win the big name accounts so to break into the market Chinese firms are intentionally targeting smaller opportunities. The engineering capability and cost structure required to target smallish volume functions is exactly what is needed to profit in a diverse multi-function robotics environment.

  7. Thanks so much for posting this H & H. As a creative writer that often wonders what the hell I am doing on this site I am really inspired by the guests and hosts. I’ve been trying to engage my arts community in these issues (to my mind the left was caught asleep at the wheel during the GFC), and it’s hard work here where the shit hasn’t hit the fan (yet). We need something like this in Oz . . . any ideas for a host anyone?

  8. Good piece. Two things missing IMO

    First is that the main issue is the structural imbalances between countries, in the past they all had the chance to grow as debtor nations took on more debt. Now they don’t because of the spectre of credit squeezes. This is implied in the article but not explicit, Martin Wolf is big on this point.

    The other point is more positive which is that technological change could bring about unforeseen growth. Can’t be ruled out and IMO this is what the technocrats are hoping for, but they know it’s a long shot.

  9. According to William White and others, we have only had the GFC MkI. GFC MkII is yet to come.

    Maybe we can talk about what follows once that is out of the way. Otherwise, a good post.

  10. Great post.

    Since before the GFC some Economists who include history in their study saw the mess coming as a variation on repeated cycles of activity in Political Economy. So cyclical over long periods like 100 years rather than the short business cycle the MSM can comprehend.

    Typically these cycles reach a failure point where debt or corruption or other waste siphon off so much that the host economy fails. Then eventually the system changes and revives to restart a slightly better incarnation.
    Sadly this has frequently corresponded with wars or sometimes revolutions at this point in the cycle.

  11. Michael Hudson has a saying ‘Debts that can’t be repaid, won’t be.’
    All that remains is to determine how the debts won’t be paid.
    Currently the creditors are opting for denial and attempts to recover 100% of debts.

    Greece is a fine example. Attempts to extract the full value of debts are having little success and are destroying any remaining ability of Greece to repay.

    Inevitably someone is taking the loss here. At the moment this looks to be overwhelmingly debtors. i.e. governments and the people, with the 1% and the banks not only regaining their losses but even coming off better.

    The victory of Wall Street is temporary, their winnings backed by the very economies they are burning.

    Attempts to return to business as usual will mean H&H’s prediction is likely our future.
    ‘the world is going to be regularly convulsed as its debts are saved against, inflated away, defaulted upon, and even sometimes repaid!’

    We need a new approach. Countries which act to protect themselves and their population will be the ones leading the next cycle. It won’t be the USA or the EU and it’s looking like Australia will follow the same path. But we do have the advantage of watching the other train wreck hit before ours, maybe we will wake up.

    • “The victory of Wall Street is temporary, their winnings backed by the very economies they are burning. ”

      It does feel like that.

      • Temporary in the sense that they are now winning so much that the host is dying and they will eventually go down with the rest of us.

        No much consolation really.

        Unless there is a revolution and the Wall St politicians replaced with actual representatives. Even an Economics revolution where the Flog wakes up and abandons the Chicago School farce and start listening to the MacroBusiness team or Keen or Mosler or Hudson or someone with a clue. Or a faction within the rich gets large enough to effect a change. Then they might lose without everyone else losing first.

  12. H&H great piece of work, what I want to flag is sadly a War that balanced these imbalances in the past, Jungle rules still applies. It always happened in the history if you cannot produce or buy something, then under life threatening condition, you steal it from your neighbour, friend or other country. The new war will balance it all quicker with a huge human beings life to pay.

    Can you do some macro-economic analysis that if War can fix the issue for indebted nations? Or at least can be the possibility.

    Just imagine US steal whatever it needs from the world by using the military. It happened in the past for slaves, wheat, gold, oil

    • Aren’t they already trying to do that? But trying to do it in a way that won’t spiral out of control.

    • War has pretty much been replaced with Finance. Greece is being carved up by it’s conquerors without a shot being fired.

      The problem with the idea of say the US going to war to re-balance debts is ultimately the US doesn’t owe other countries it owes Wall Street. And any country it invades is likely just as owned by Wall St or the City of London or the same banks. China is one of the exceptions but much of our finance empire is global, not tied to one country.
      So until things get to the point where the giants start fighting each other you won’t get war. No point invading a country you already own.