As the kids ran riot across England on 8 August, traders nursed a one-month stock market loss of 15%. I don't suppose the rioters were thrown into panic by their Bloomberg screens, but this was a striking coincidence for long-term investors to ponder.
English and Greek youth, Spain's ‘indignados', Israel's ‘tentifada' - all are tomorrow's providers of labour and builders of capital and they are discounting their futures as severely as the financial markets. Have both begun to recognise that this is no ordinary recession?
"Your future dream is a shopping spree," snarled the Sex Pistols in ‘Anarchy in the UK'. I don't know about anarchists, but Marxists are no longer alone lamenting that English youth used its newfound power to go ‘shopping'. However, Marxists (Nouriel Roubini!) also noticed that one internal contradiction of consumer capitalism is its tendency to excite equal aspiration while necessitating unequal wealth distribution.
Theft is one way to square that circle. For three decades credit was another. Given an artificially low cost of capital huge cash flows can be dragged from tomorrow into today. But this can be pernicious: it makes tension between capital and labour increasingly intergenerational; and causes misallocation of capital into non-productive assets with zero-duration (gold, owner-occupied residential property) or ‘negative' duration (defined retirement benefits).
The average UK house sold for £29,000 (€33,450) in 1983 fetches £160,000 today. Inflation alone would merely have doubled it to £60,000. That credit has to be repaid, right? Wrong. A recent survey by Barings suggests that almost 40% of the UK's non-retired adults have no pension at all, including a staggering one-in-five over-55s. No wonder 13% said their house was their pension - up from 8% in 2009. This is a homely microcosm of the dreadful macroeconomics of the West today: a mountain of debt that will never be repaid.
The clamour for austerity is building, and while even Keynesians could identify good pro-cyclical austerity measures, we seem doomed to the ‘wrong' kind: infrastructure and eduction restricted; healthcare and social security protected.
To balance this out, the cost of capital gets pushed lower. Orthodox tools long-exhausted, the US still has its weakest recovery from its deepest recession since the 1930s, and even Germany judders to a halt. Cue the ECB's monetisation of Italian and Spanish debt; and the Fed telegraphing two more years of zero rates. That is not pro-growth; the market response suggests it may not even be pro-carry anymore.
Welcome to Japan and the Great Bull Flattening - where zero rates make zero-duration assets superficially attractive, even as slowing growth drags nominal rates down further.
That will keep debts serviceable even as they expand as a percentage of GDP - until one day money simply can't get any looser and debt deflation dynamics take over. Some say this is what Japan faces today: a steepening curve there would be a blueprint for the same in Europe and the US. The timing is anyone's guess - but if, and when, that happens, the resulting crisis will make 2008 seem like a picnic.