Populism is an amorphous reaction to a system in deep crisis. This was very much true in the 1890s, in the 1930s, and it is certainly true today. WWI and WWII were the answers to the deflationary tendencies of the past because unemployed workers became cannon fodder and government spending ballooned to unprecedented heights. But WWII ended with the dawn of the nuclear age. And the prospect of a WWIII is unthinkable.
The Jewish people suffered immense tragedy as populism morphed into fascism and the global geopolitical order of the 1930s dissolved into the utter chaos of the 1940s. The modern nation state of Israel was born in the very shadow of the Holocaust. In fact, in the aftermath of the war, the so-called “Jewish problem” — many tens of thousands of Jewish refugees — was solved through the international acceptance of Israel as the legitimate homeland of the Jewish people.
Once again, the tendency of deflation has brought to the forefront a strong populist political reaction against globalization. Equally, an unmistakable desire from large elements of the working classes in America and Europe has emerged for a return to national priorities over international ones. This has been true on both the economic and geopolitical levels. But can national priorities work within an integrated system of global capital? And what will replace the current international geopolitical order, an order now in deep crisis across the Euro-Asian landmass? Aren’t the global banking and credit systems far too fragile for another massive increase in government debt? After all, the debts run up by government since the last bubble burst in 2007-2008 have been enormous.
In fact, most observers now consider the sovereign debt bubble to be far more serious than the housing bubble of the last decade. Also, can the global banks withstand a rise in interest rates? Because with such a rise in rates, the inevitable appreciation of the US dollar is certain to cause large balance-of-payment distortions and the distinct possibility of a massive trade war. And what about the effect of emerging market inflation? Currently 3.5 trillion dollars of emerging market corporate debt (some of it Israeli) must be repaid in US dollars and therefore balanced against a collapsing global bond market, a vastly appreciated American currency, and the prospects of a deepening deflationary impulse.
However, the extreme monetary policy of the Obama Fed — that has brought us to both Brexit and the populist election of Donald J. Trump — has worked to usher in an era of tepid economic growth, yet an unprecedented amount of global debt. In the last eight years alone, the balance sheet of the US Federal Reserve (the central bank) has grown from 800 billion dollars to 4.5 trillion! This vast money printing expansion has left interest rates at near zero or below, as the banks have become awash with money. However, most of that money has not been invested in productive enterprise but instead has circulated toward riskier and riskier bonds (in search of higher yield). Some of the new money has tilted toward corporate stock manipulation — a huge stock market bubble caused by corporations borrowing cheaply to repurchase their own stocks. Low interest rates and cheap money have stimulated gigantic mergers and acquisitions and many other forms of financial hedging and speculation. Meanwhile the working people of America have seen their wages deteriorate, their benefits decline and their job security diminish.
In other words, the vast money expansion from the Obama Fed’s zero interest rate policy has remained almost exclusively within the deep financial canyons of Wall St. In essence, the US has become two nations — the haves (the distinct minority) and the have-nots (a vast majority). The election of Donald Trump was triggered (through the electoral college) within the geographic area of the country that I am most familiar with, the old industrial Midwest. Globalization has caused this region to become hollow, as its previous strong labor power was stripped through the transfer of good-paying jobs to China, Mexico and other sources of cheap labor.
Michigan, Wisconsin and Minnesota have been reliably Democratic Party states for three decades. But Michigan and Wisconsin went Republican this time, while Minnesota (probably the most Democratic of all Democratic Party states in the union) came within a whisker of going Republican. The industrial states of Ohio, Indiana and Pennsylvania also went Republican. The reason being that, unlike Hillary Clinton, Trump offered this region the distinct promise of a return to good-paying jobs.
But now, global bond markets have realized that, in order for Trump to fulfill his promises to the US working class, either the US budget deficit has to be ballooned (massive amounts of new debt) or Trump will have to engage in some manner of a global trade war. Neither prospect is very appetizing to the world’s financial markets. Already since the election, the very prospect of such action has meant that over two trillion dollars have been lost on the global credit markets. But this could be just a drop in the bucket compared to how low bond prices could fall if an enhanced fiscal policy negatively impacts the global bond bubble.
For instance, take just one fairly middling example. The Italian sovereign bond market alone has a 2.5 trillion dollar exposure. Italy — which has an anemic economy, a very high public debt-to-GDP ratio, the political prospect of a shaky government (challenged by a populist referendum, which on December 4th could destroy the entire EU project) and a banking system of great fragility — has been able to issue bonds on long-term loans at the minimal interest rate of 1.5%! This extreme misallocation of the price of money (interest rates) has been caused by the global impact of the Obama Fed monetary policy.
In Italy alone, a new Trump policy, which actuates a rise in interest rates, could cause an unprecedented bank liquidity crisis (a run on the banks). Already 18% of Italy’s bank assets are considered nonperforming. Then, of course, there are Greece, Spain, Portugal and France with poorly performing banking sectors. Even Germany, as Europe’s chief exporter, is not immune from a European banking crisis. Already two major German banks are struggling, and future shocks would mean a huge problem within the German banking system. In fact, throughout the world the crisis of 2007-2008 has merely been papered over by record low interest rates caused by massive central bank money printing. This reality is especially true of China and Japan.
The monetary policy of the eight-year Obama Fed was the catalyst for a further and extreme debt expansion of financial globalization. And it did stave off a full-fledged depression, but at what price for a future and probably deeper crisis? In reality, the policy led to an eight-year global stagnation and now a political populist crisis caused by what has become a severe monetary dead-end. This has led the new Trump administration economic team (led by the billionaire class) to dramatically swing from monetary expansion toward a new deep fiscal uncertainty, and perhaps unsustainability. To say that more and more fiscal debt (Keynesianism) can NOW save the day, is a leap into uncharted waters. After eight long years, we are still mired in the crisis of globalization.
Keynes said that “in the end, we are all dead”. He was referring to capitalist monetary and fiscal policy economics. His opponents within the Austrian School would have us wait for Depression cycles to magically wither and bring about a period of new growth. But as the Jewish people know, Depressions can have very ugly political consequences and often lead to wars. But nowadays who can afford wars or economic depressions? Financially, they have become impossible, and with weapons of mass destruction, everyone will lose. But fundamentally, the inaction of the Austrian School flounders on the limits of growth to expand beyond globalization and the dire political consequences this would entail.
Although these are very perilous and dangerous times, in the Jewish spirit of history, they are not without hope. What the world needs is a vision for a new world order. A geopolitical order based on global peace and cooperation. A global economic order housed within nations but especially within localities and built upon a foundation of equity and security for all. And finally, a global ecological order organically integrated within a community-based democratic rural renaissance.
This new order must meet the essential needs of people and replace greed as the organizing principle of society. It must be generated from the land itself and powered by the benign forces of solar-hydrogen energy with its green biological product. The very creation upon which we live, mother earth herself, should give us great pause as to the power of any species to achieve its ends isolated from an enduring holistic system. The mechanization of nature, through a vast urban web of dangerous material assumptions regarding the limitless nature of human existence, is outside the bounds of the Jewish value system. In other words, our sages teach us that in a burning fire, our priority must be to save our dogs, cats (or any other living creature) before even attempting to rescue a Torah scroll. Certainly the same must be true for the earth upon which we all depend.
Judaism remains a land-based agrarian system, and it is as relevant today as it ever was. Our new world order must be created on a model which represents a 21st century agrarian civilization. Sustainability, economic security, enhanced community democracy and the conservative impulse toward real conservation will become the hallmarks of this new age. Every generation faces its challenges. In this sense, the crisis of globalization brings about an opportunity to move humanity toward the ideals of Judaic thought. From America, Happy Thanksgiving to all!