Bracing for a big-bubbles burst

Last year produced more than its fair share of cliffhangers, both globally and domestically.

Globally, it was the year of big bubbles in the key equity, bond and property markets concentrated mainly in the developed economies. Paradoxically, for South Africa it was the opposite: a mostly underperforming stock market, falling property prices and pedestrian economic growth – all of which have been well covered elsewhere and the causes well-known.

Global bubbles have been underpinned mainly by record levels – and continued expansion – of debt and low levels of interest rates.

Where there has been economic growth, it has been stimulated primarily and continuously by central bank manipulation of financial markets and constantly declining interest rates.

Global debt now exceeds $250 trillion, with government debt alone exceeding 100% of gross world product.

In November, credit rating agency Moody’s issued an unprecedented debt downgrade warning to the entire world and US Federal Reserve board chair Jerome Powell, who can only be described as the greatest ditherer the board has had, has finally admitted that “… debt is growing faster than the economy and that is unsustainable”.

Some $20 trillion in bonds, some even of junk status, now have negative interest yields and it is only a matter of time until the pace-setting US bonds touch on zero to negative. In recent times, shortages in the US repo market have been filled by the Fed to the tune of up to $400 billion a quarter, effectively creating QE4 (the fourth round of quantitative easing), and at a much higher level than previous quantitative easing.

Largely as a spin-off:

• Income and wealth inequalities are still very much a critical issue;
• Geopolitical tensions have been rising, with open warfare threatened;
• Trade wars continue unabated;
• Frequent civil unrest and protests are widespread; and
• Deglobalisation and dedollarisation are shaping a new financial world. 

All of these, most economists would agree, have put the global financial system and indeed economics as we know it, in totally uncharted waters and has challenged many assumptions held by orthodox economists.

It’s a moot point whether 2020 will see these issues come to a head and plunging off the cliff.

More certain is that the decade of the 2020s will be a defining one.

To confirm the awareness and concern of world decision makers, I looked at what’s on the agenda of that most august economic gathering – the World Economic Forum (WEF) in Davos from January 21. It is there as the second issue as: ‘How to remove the long-term debt burden and keep the economy working at a pace that allows higher inclusion’.

The significance of the growth of the financial economy to the extent of squeezing out the industrial economy, however, seems to have been missed.

Financial markets tend to be parasitic and create little value in their own right, thereby being a hindrance to full stakeholder inclusion. It’s what Bloomberg has referred to as “capitalists without capital ruining capitalism”.

Others again, have argued that socialism has been deployed for the super-rich. The industrial economy where goods and services are being produced, is now commonly called the ‘real’ economy and is the creator of tangible value involving stakeholders.

Inclusivity and stakeholder cohesion have been the foundation of the WEF and, long since Ed Friedman’s articulation of the ‘Stakeholder Theory’ in the 1980s, have been incorporated into organisational theory and management school text books. But like the triple bottom line, it has had little traction, receiving more lip service than changing the strategic intent of enterprise.

Redefining the way we see economics

For it to really take hold it has to redefine the way we see economics, shifting from an institutional and money perspective to a people and relationship perspective – and the final accounts have to be less focused on shareholder value and more on creating value for all.

This can be captured in some forms of stakeholder accounting such as the Contribution Account or the earlier forms such as the Value-added Statement. The Contribution Account format has been around since the early 1990s and many new consultancies have subsequently sprung up promoting the same or similar formats. I have been writing on this theme for many years, including in my last book – Common Purpose; Common Fate – a free copy of which can be downloaded here.

What should be discussed at Davos

What the WEF should be discussing is moving from a fake financial economy to the real economy – from financial capital to industrial capital, which attracts less than 20% of investment, the rest going to financial instruments. That will draw in to a far larger extent the ‘stakeholders’ of customers, suppliers, labour, capital and government, largely ignored or bypassed by a financial economy.

It is not however as simple as to assume that this can be done by “removing the long term debt burden”. That means increasing interest rates, which will plunge the world into a deep recession.

On the other hand, one could argue that at least some of the froth blown off the financial markets will transform into investment in income-earning, real-value-creating industrial and commercial enterprise.

In the longer term this should favour emerging and resource-based economies such as South Africa – if it can get the basics right!

That cannot happen without some pain, the extent of which will be dependent on the degree to which the underlying principle – that ultimately true value can only be created by making a contribution to others – is followed.