The Return of History

Francis Fukuyama penned what became the provocative essay “The End of History?” in 1989, following the fall of the Berlin Wall and the end of the cold war.
 
In this he argued that the progression of human history as a struggle between ideologies was largely at an end, with the world embracing liberal democracy.
 
“ What” he wrote, “we may be witnessing is not just the end of the Cold War, or the passing of a particular period of postwar history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”
 
Looking around the globe today leaves Fukuyama’s view of history somewhat tattered.
 
However, the evolution of Russia and then China away from Marxism and towards capitalism did hold out a skerrick of hope for Fukuyama’s thesis. This evaporated with the 9/11 attack on the Trade Center in New York.
 
The end of history had lasted just 20 odd years.

Global peace and the so-called Great Moderation

Fortuitously this window of global peace coincided with another historical era, the so-called ‘Great Moderation’.
 
Ben Bernanke, former chairman of the US Federal Reserve, devoted a speech to this development in 2004.
 
He pointed out that the variability of quarterly growth in real output in the US had declined by half since the mid 80s. At the same time, the variability of quarterly inflation had declined by about two thirds.
 
Similar declines in the volatility of output and inflation occurred about the same time in other major countries, with the recent exception of Japan – a country that faced a distinctive set of economic problems.
 
Japan is still exceptional, though not to the same extent that it was back in 2004.

Benefits of reduced macroeconomic volatility

Bernanke has since told audiences that reduced macroeconomic volatility has numerous benefits.
 
Lower volatility of inflation improves market functioning, makes economic planning easier and reduces the resources devoted to hedging inflation risk.
 
Lower volatility of output tends to imply more stable employment and a reduction in the extent of economic uncertainty confronting households and firms.
 
He said “the reduction in the volatility of output is also closely associated with the fact that recessions have become less frequent and less severe.”

The end of the Great Moderation

We can time the end of the Great Moderation to the collapse of Lehman Brothers in October 2008.
 
As to severity of recessions Bernanke – a prominent student of the Great Depression – contends that the 2008 financial crisis was actually worse than its 1930s counterpart.
 
He stated this in a document filed on August 22 with the US Court of Federal claims as part of a lawsuit linked to the government bailout of insurance giant American International Group.
 
“September and October 2008 was the worst financial crisis in global history, including the Great Depression. Of the 13 most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
 
Former Secretary of the Treasury, Timothy Geithner, was equally apocalyptic in his filing stating that from Sept 6 through September 22 the economy was in “free fall”.
 
The ‘Great Moderation’ and the triumph of Western liberal democracy were not functionally related in any obvious fashion, though each helped create a favourable environment where both, for a time, flourished.

A historical aberration

The lesson I take from that era is that it was an historical aberration and one unlikely to be replicated in another lifetime.
 
The US has emerged from the worst of the global financial crisis but it can hardly be said to be home free. As Yale’s Stephen Roach points out, “though annual growth in gross domestic product is estimated to have rebounded to 4 per cent in the second quarter, following the 2.1 per cent first-quarter contraction, that still leaves average growth in the first half of the year at a measly 1 per cent”.
 
That still left it the best performing of the major economies.
 
Actually, the US looks almost robust compared with the major economies of Europe.
 
The bond market usually provides a quick read on the general health of an economy. By that proxy, most of Europe should be in intensive care.

Historic bond lows

Last week German and Spanish 10 year bonds along with those of Austria, Belgian, Dutch, Finnish, Irish and Italian debt of the same duration fell to historic lows.
 
German 10 year bond yields dropped to 0.895 per cent but yields on one, two and three year securities fell below zero. In other words, investors holding these securities until maturity will receive less back than they paid to buy them.
 
Germany actually recorded negative growth in the second quarter. It is bearing the brunt of the economic sanctions imposed on Russia.
 
There is concern that the eurozone as a whole is slipping into deflation with the latest inflation reading being 0.4 per cent, well below the target level of close to, but less than two per cent.
 
The specific nature of these numbers is somewhat misleading, in that it implies deflation arrives when the consumer price index ticks over into negative country.
 
Even the German economy does not march in lock step. Deflation not only falls unevenly across the economy, the population at large is aware to what is happening well before the negative reading appears.

Central Bankers conference

The speech delivered at the Jackson Hole, Wyoming central bankers conference last week provided a glimpse of the frustrating inhibitions imposed on the European Central Bank.
 
The bank’s President, Mario Draghi, pointed to the absence of monetary and fiscal tools which had enabled other economies such as the US and the United Kingdom to return to positive growth with declining unemployment.
 
The tensions created by the stagnant provide a breeding ground for political extremism.
 
A recent opinion poll in France placed National Front’s Marine Le Pen as the frontrunner in any race for the presidency.
 
The NF has long been a critic of what it sees as France’s excessively liberal immigration policies. Nationalism is a strong theme of emerging rightwing and populist political parties.
 
Last weekend the AfD (Alternatives for Germany) party polled nearly 10 per cent of the primary vote in the Saxony state elections, giving it 14 of the 126 seats.
 
AfD is a single-issue party with the platform of “orderly unraveling of the euro”.
 
History is alive – perhaps too alive in Europe.

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Max Walsh

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Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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