Economist Dr Howard Nicholas foresees
Record-breaking audiences listened to Dr Howard Nicholas’ seminar on “The Current State and Future Directions of the Global and Sri Lankan Economies” at the Lakshman Kadirgamar Institute in Colombo on 11 July, as well as to a subsequent lecture at the University of Colombo. His two-part presentation dealt firstly with the trends in the global economy Dr Nicholas has had a long and distinguished teaching career, teaching business economics and financial markets in academic institutions in various countries – including most recently China and Vietnam. He is invited regularly to give lectures on the global economy. At a time when the world economy appeared to be riding high, Dr Howard Nicholas forecast a recession. Soon afterwards, the Global Financial Crisis (GFC) of 2007 occurred, as he had predicted. He is also known for his early warnings of the Asian Crisis of 1996-8, the global recession of 2001-3 and a little-known crisis in the Chinese economy in 2015. Now, once again, he envisages a global recession, driven by a world-wide debt crisis.
Dr Nicholas points out that there has been a massive shift in global economic power, “as the place of the West is being taken over by the Rest.” Underlying this is a massive shift in global wealth over the past three decades. The advanced economies’ share of global gross domestic product (GDP), as measured by purchasing power parity (PPP) has declined from over 60% in the early 1990s to 40% today, while that of the developing countries (including emerging markets) has increased, reversing the previous relative position.
There has also been a regional shift in the distribution of GDP between the developing countries, with the shares of Africa and South Asia stagnating around the 10% mark, while that of Latin America has declined from 35% to converge on the South Asian level. Conversely, East Asia’s share has almost doubled from the below that of Latin America to almost 60%. Within East Asia itself, there has been a shift, with China’s share rising from 10% in 1992 to nearly 60% in 2017. Hence, it is clear that China has been driving the shift in global wealth.
It has also become the world’s largest manufacturer, pushing the USA, the Eurozone and Japan into second, third and fourth place. Manufacturing, Dr Nicholas explains, underlies “living standards, which are about the material basis of our existence – the material products (and services) we purchase to improve our well-being, and most material products are manufactures. Services, such as catering, tourism and the like are founded on the production of manufactures, while others such as finance support the reproduction of the material base of the economy.”
Countries that dominate the world economy are those that manufacture, and manufacturing has been driving global growth. By building on manufacturing, China has become the world’s largest retail market, displacing the USA. Thus, world economic power has shifted to East Asia, led by China.
Dr Nicholas also referred to “long cycles”, a concept explored first by the Dutch economists Jacob van Gelderen and Salomon de Wolff, and expanded upon by Soviet Economist Nikolai Kondratiev, after whom the Austrian economist Joseph Schumpeter named them “Kondratiev Waves”. A typical business cycle, he explains, consists of a business cycle peak and a business cycle trough, on either side of the equilibrium level with expansion above and recession below. He itemises two types of cycle which he finds relevant: the Juglar cycle, which last 7-11 years and are driven by fixed capital investments; and the Kondratiev wave, which last 50-60 years and are driven by major innovations.
Dr Nicholas asserts that combining the shorter Juglar Cycle with Kondratiev cycle provides us with a long cycle of about three Juglar cycles. describes four such long cycles so far, starting with the Industrial Revolution, based on different technologies as prime movers.: First, 58 years from 1790, peaking in 1814, with a trough in 1848; Britain being the hegemonic power; and the primary technology being canals.
Second, 45 years from 1848, peak 1872, trough 1893; hegemonic power Britain; technology: railways, steam. Third, 47 years from 1893, peak 1917, trough 1940; hegemonic power: Britain; technology: steel, combustion engine, electricity, chemicals, telephone. Fourth, 80 years from 1940, peak 1975, trough 2019/20; hegemonic power USA; technology: electronics, plastics, aerospace, nuclear energy
This model can predict the direction in which the economy will move: the next long cycle should be less than 50 years starting in 2020, peaking about 2040 and with a trough about 2065, with either China, or an East Asia led by China as the hegemonic power. The technologies of this “Fifth Technological Revolution” he forecasts as the internet, biotechnology, and robotics. However, before the technological revolution marking the start of a new cycle, the previous long cycle ends in a trough, signifying a depression or recession. The US economy, Nicholas points out, has been in a de facto recession for the past decade.
“The problem is,” he says, “that at the bottom of all long cycles when you have a major technological change, you have a lot of unemployment. The skills we used to have which gave us jobs in the previous generation are no longer valid.” The true unemployment rates are being hidden by statistical manipulation. For example, the US government gives a figure of about 4% for the unemployment rate. However, the official statistics do not count the unemployed who, being discouraged at not finding jobs, stop looking actively for employment. Taking these numbers into account, the actual unemployment figure is closer to 21%.
Elephant in the room
The elephant in the room, Dr Nicholas states, is a great monetary and fiscal experiment in deficit spending, especially by China and the USA, which is propping up the global economy, but which has been making it increasingly unstable.
Central banks have been “printing money”: the assets of the “Big Four” (The US Federal Reserve, the European Central Bank, The People’s Bank of China, and the Bank of Japan) have risen from less than USD 5 trillion to USD 20 trillion, representing growth from less than 15% of GDP to over 40%.
The Central Banks do not control the quantity of cash in the system, but only the rate. Putting money into the system cause interest rates to fall. With global GDP growth at 2% over 9 years, printing money grew at 300%. So global debt is at historic highs, but interest rates are at historic lows because of printing money. The quality of debt has fallen, as has corporate yield. For the first time in history, people are paying governments and banks to hold their money. Economic growth is predicated on fixed capital growth, not working capital, overdrafts or loans. What is happening at present is that borrowing is taking place for speculation, when there should be lending to businesses for productive investment. A huge “asset bubble” has been created, making the rich richer, but hurting the poor and creating global financial instability. Pension funds are being, most dangerously, invested in speculation on the stock market. All the world’s wealth funds (including oil-rich Norway and the Middle East countries) are investing in only a few US firms, such as Google, Apple, Microsoft, and Amazon.As a corollary. Governments and central banks are increasingly controlled by finance sectors. All the US presidents who are elected are those receiving the highest amount of funds for campaigns. Hence, there is no incentive to reduce the bubble by increasing fixed capital investment.
Therefore, in the next couple of years, he predicts a massive recession, massive budget deficits, more quantitative easing and a rise in protectionism. The USA and China may try to delay the deluge with a trade deal, and there might be an agreement on more budget deficits. However, the writing is on the wall.