THE term “Armageddon” has come to mean the final battle of “good” versus “evil” when presumably, good will win the war.
On another level, it is a coming together of forces each so strong and so opposite in nature that they cannot coexist without one eventually destroying the other. For example, we may have experimented as school-children with mixing a strong acid-vinegar—with a strong alkaline—baking soda. The violent confrontation between the two substances creates a rather innocent mixture of primarily plain water and sodium acetate. Sodium acetate is used to flavor snacks, like potato chips.
There are many strong forces in the world economy today. Unemployment is far too high in the developed nations. Various strong forces are causing that unemployment including wages that have outstripped productivity in the last decades, automation replacing human workers in a variety of industries, and contrarily, cheaper wages allowing for increased employment in undeveloped countries. This is creating forces of social and political unrest, as well as geopolitical upheaval.
Governments, corporations and individuals around the world are carrying way too much debt that is nonproductive in that this debt is not creating economic output or wealth for the borrowers. The lenders are not increasing their wealth either because the interest paid on that debt does not create any substantial monetary return.
The commodity market prices are under pressure from both sides of the pricing mechanism; increased supply or substitutes and declining demand. Stock markets are being torn between economic and corporate fundamentals and the need for capital to find an asset or assets that can offer a reasonable wealth-creating rate of return.
We have strong forces within other strong forces that are creating situations where severe damage is being seen as when that vinegar and baking soda initially explodes.
However, there is a much greater clash of forces that is beginning.
For countless centuries, people understood the natural cycles of the economy. Idol-making was a big business in ancient Greece. But the big problem for this industry was that the Greek pantheon of gods numbered in the hundreds. Statues of Agon—male spirit of competition—were very popular during the Olympic Games, but
after the games finished were then probably sold at bargain prices: “Buy one; take one.” The god Zeus was always a best seller, but how many Zeus statues could a person keep around the house?
The business cycle—booms and busts—caused by natural and man-made factors have been present since time immemorial. Remember biblical Joseph and his advice to the Egyptian pharaoh about seven fat and seven lean years?
In the 19th century, politicians and business leaders decided that the business cycle was either just a coincidence, or if it did exist, could be controlled by the government. One event that shook them was the US Panic of 1907 that saw the stock market fall by 50 percent. There were many causes including stock and commodity price manipulation, the San Francisco earthquake and—note this—a crisis of confidence in the government.
It was decided that the government could control the natural ups and downs of the free-market business cycle. It was also decided that any previous downs, like 1907, was the fault of the government simply not doing a good job of controlling the markets. Two world wars, the Great Depression, and the post-war booms came and went, and economic “experts” were convinced that all the bad ones were only errors in government judgment and all the good were proper decisions.
I was fortunate to live in a brief window when the business cycle gained respect before it was rebuked again leading to the mess we are in today. Chairman of the Federal Reserve (the Fed) Paul Volcker wrote a book in 1978 called The Rediscovery of the Business Cycle. Arthur Burns, Fed chairman before Volcker, wrote that the business cycle was really “invictus” or invincible.
Today marks the turning point at a peak in the economic confidence cycle that signals a downtrend of confidence in the government to try to control the business cycle. The Armageddon will be the governments trying to retain power and the markets trying to take the power back.
Governments will not give up their power easily and will do everything from curtailing the use of cash to ruthlessly penalizing people who want to save rather than spend. The free market will fight back with demanding higher interest rates to loan money to governments and by buying stock markets higher. Quantitative easing will begin again to try to stop interest-rate increases. Government and corporate debt defaults will occur.
The last two months have seen extreme market price volatility and lack of liquidity. This is just the beginning.
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