Are we on the cusp of a “bottomless” recession? As everyone and their dog predict a downturn in the coming months, it is useful to consider how we got here, why we got here, and what the way forward is. To start with, we are now witnessing an “unwinding” of decades of “easy money” brought on due to the ultra-loose monetary policies followed worldwide. Interest rates have been hovering near or at zero since the early 1990s, and the highly celebrated Central Bankers (including the “maestro”, Alan Greenspan) have flooded the world with liquidity to spur growth and, at the same time, to “fatten” the corporate and financial overlords.
When interest rates are kept so low, the resultant boom in lending and flood of easy money finds its way to investments in tangible and intangible assets where the former includes houses, factories, land, and other fixed assets, and the latter includes stocks, bonds, and financial instruments of all kinds. However, this “funny money” (a term used to refer to artificially created money that has no “basis” or a “peg” to an underlying asset such as gold) can also lead to inflation, asset bubbles, and a flurry of investments in the much-hyped Startups, such as the Unicorns (those with Billion Dollar valuations). Anyone who remembers the early 2000s would attest that the Dotcom bubble burst once the downturn set in and the Fed raised rates. I see a similar “correction” happening now, as well as other “triggers”, which I believe can lead to a “bottomless” recession.
The main reason I believe the coming recession is for the long haul is that the pandemic (a once-in-a-century event) has severely “disrupted” the way we live and work to the extent that the times we live in now do not resemble anything of the lives pre-pandemic. With the New Normal and the New New Normal being proclaimed now and then as each variant announces its arrival, I fear that the extreme volatility and disorder are bound to increase rather than decrease. From global supply chains to the trade between nations, including how we work, with Work From Home becoming the norm and with record numbers of Millennials quitting the workforce, the pandemic has been the “trigger” that has sparked a crisis of “historic” proportions.
Next, Putin has certainly raised the stakes with the Ukraine war, and as the conflict drags on, it is clear that the “Double Whammy” or the Twin Shocks of the Pandemic and Putin are leading us all into a bottomless recession. Moreover, the Law of Diminishing Returns has also set in, meaning that returns from productive capital investments are lower than from speculation, leading to capital and funny money finding their way to the markets rather than investments in old-world brick-and-mortar companies. Coupled with the overall rise of the services sector due to the onset of the Digital Age and the sunset of the Industrial Age, what this means is that the “period of adjustment” between the New Order, that is being birthed and the Old Order that is dying, is likely to be painful and prolonged. Much like Childbirth is a wrenching yet, fulfilling process, the present “zaniness” must be seen as the harbinger of a New World Order.
Of course, I am not downplaying the impact of the “cascade of defaults” rocking the Emerging Markets, with Srilanka being the prime example of what reckless economic policies can do to nations. Moreover, most of the world, which embraced Neoliberal policies, is now finding that they have been left high and dry. So, the coming downturn is indeed a bottomless recession, as the Western-led order gives way to a new alignment of forces, and the “transition” from the Industrial to the Digital Age takes its toll on all of us. Expect more lawlessness and chaos as humanity adjusts to the New Weird and the Post-Pandemic Blues play out worldwide. However, I also caution that this is the Age of the Unexpected, and so any and every prediction of what’s coming next is fraught with the risk of the Unknowns being more than the Knowns, and hence, must be taken with a liberal dose of scepticism.
I am not too sanguine about the Digital Age, or the New Eastern-led order is better than the one it is replacing. For instance, we thought that technology would be our saviour and, instead, found that it has enslaved us all. Next, any alignment of forces that includes China have to be wary of its “hidden agendas”, as Srilanka found out, and China has its problems to deal with, including a likely “slow motion” internal implosion. In addition, there is no real alternative to Neoliberalism, and though Europe has tried several alternatives, they did not stand the test of time. So, this is where we stand, and as the climate, as well as the coronavirus, becomes more unpredictable by the day, markets and our systems too are caught up in a bottomless recession that can take a long time to unravel and, hopefully, lead us to a more sane future.