Global Hypershift: The Causes Of Dramatic Instability And What Lies Ahead – Analysis

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2022 is the year of events that I call the HYPERSHIFT. This year is characterized by the fact that the accumulated contradictions and inefficiencies in global and domestic processes have developed intensely, entered an active phase and accelerated, increasing turbulence, uncertainty and risks to the stability of the world order. I should say right away that these processes should not be perceived as something extraordinary. As an evolutionist, I can say for sure that any new feature or phenomenon is a dialectically and evolutionarily grounded consequence of adaptation under the influence of changing internal and external factors, accumulated into a critical mass and becoming triggers of change. And in this sense, today is no exception.

For developed countries – economically advanced liberal democracies – today’s socio-economic problems in the form of an obviously worsening recession and extraordinary inflation are the consequences not of a forced policy to neutralize the risks of the Covid pandemic, but of a general and sustained leftist bias over the past 20-odd years. The leftist discourse in socio-economic policy has been one of permanent etatism – the expansion of the state’s power to redistribute public resources. This automatically and inevitably means paternalism and increased government spending, extrastimulation of demand and accumulation of leverage, distortion of market competition through the effect of government squeezing out private business and increasing burdens on productive agents. But the main thing is the vertical exchange of goods between members of society and the expansion of the power of government and bureaucracy, which inevitably leads to economic and ultimately social problems. This, of course, risks changing ethical narratives and institutional meanings and, ultimately, decreasing prosperity and freedom.

For authoritarian regimes, the year 2022 is the beginning of active activism both inside and outside their territories. On the one hand, some of the largest authoritarian regimes have accelerated their shift from the modus of soft autocracies to the pole of tyrannical dictatorships. This does not mean that they are already there. But the shift is evident: society’s rights and opportunities are being eliminated while the dominant power elite and the population groups serving it are being empowered with increasing use of repressive mechanisms to coerce subordination.

On the other hand, these regimes have reached an important point where they have reached a conditional ceiling on their existence, which dictates the need for significant policy change. Otherwise, the regime begins to collapse: all previous factors of sustainability and potential have been exhausted.

At the fork between liberalization and authoritarian tightening, the key autocracies representing emerging economies – China, Russia and some other countries – apparently made their choice to shift to dictatorship with all the relevant domestic and foreign policy consequences of such a transformation.

Of course, the division of the world community into two unambiguous categories – for example, developed and undeveloped economies, liberal democracies and autocracies, civilized and archaic societies – is a way of simplification, which to some extent distorts the real picture. Some autocracies are not shifting to a dictatorship at all, but to a liberal modus vivendi. At the same time, on the contrary, major developed market economies have been centralizing redistribution and expanding the state in recent decades, leading to a host of complex and negative consequences.

All of these transformations are responsible for the overall geopolitical erosion of sustainability and mutually beneficial socio-economic interaction, resulting in the intensification and multiplication of aggressive conflicts and overall geopolitical and macroeconomic turbulence.

The important question is to what extent such global cooperation was initially sustainable, are the problems of today inherent in the very beginning of globalization, or did things go wrong at some point?

An equally important question is the range of perspectives that can be articulated and defined from today, and how likely a sustainable trend toward the global development of free markets, individualism, liberal institutions and democracy as the foundations of material, ethical and human progress is to emerge.

To try to answer these questions at least, it is reasonable to examine in more detail the essence and connections of the relationships of the key countries, primarily from an economic perspective. The reason for this point of departure is obvious: the economy has ceased to be an integral part of social relations, becoming their unconditional basis and the basic determinant of virtually all socio-political processes. Among others, C. Polanyi rightly pointed this out, arguing that earlier the economic system was embedded in social relations along with the family and kinship system, religious and cultural, political and legal, etc., and was not the primacy among them. In the modern world, on the contrary, all other social systems of relations are embedded in the economy as the basis of the social order: the contract has replaced status, society has replaced community, income is not determined by status, but determines it itself, and so on. This starting point and angle of view will make it possible to understand more clearly the causality and functional connections that have led to the present state of the global world.

GDP, as the sum of the value of all transactions in economic exchange, and the balance of trade are perhaps some of the most obvious criteria for assessing the place and condition of the exchange participants, in our case country economies. A country that sells, i.e. exports more than it buys, i.e. imports, will obviously have a trade surplus, and vice versa. Among other things, this means that in such a country productive capacity clearly dominates consumer power.

At the same time, countries that export mainly industrial and consumer goods are production donors for countries that import these goods, while countries that export technology and services will be a source of technology for producer countries that focus on production, but do not have the corresponding technological capacity.

Finally, countries whose main export subject is resources will inevitably import both technologies and goods, because their production and technological potential and resource focus do not allow them to have developed technological production of goods and services.

Thus, in simplified form we can present the world economic exchange in the form of specializations as a result of globalization of economic chains and identify three established prime clusters of countries: consumer countries, producer countries and resource donor countries.

It should be noted that such specialization does not imply equal benefits for each party, and a country receives exactly those benefits that are possible due to its institutional-economic and socio-political structure. The distribution of benefits is obviously unequal and cannot be so by the definition of market exchange. In addition, it should be understood that this configuration was formed evolutionarily under the influence of processes within each country and under the influence of the results of global macro-interactions. In the end, as a result of global macro-competition, countries got those “places” in global specialization and had those benefits which corresponded to their socio-ethical, cultural-geographical, political-institutional and other macro-competitive capabilities.

Of course, this gradation into three clusters is conditional, since, for example, most of the developed economies are to a large extent both producers and consumers, and some, like Norway, are resource donors. At the same time, countries with developing economies may earn more from services than from resources or production, such as the UAE. However, I will talk about this some other time; here it makes sense to trace the details and actual consequences of the economic exchange of the three main country clusters in question.

First of all, let us look at the flows of goods among the three clusters. To do so, let us imagine these clusters as a triangle, with consumer countries as the apex, producer countries as the right corner, and resource donor countries as the left corner.

The flow of goods and resources flows from the producing and resource donor countries, hereafter “extractive” countries, upward to the consuming countries. At the same time, resources from the producing countries also flow to the producing countries, and goods and foreign exchange earnings flow back. From consumer countries to producer and resource countries, the flow of currency of account flows back down, including investments as well as technology that producer and resource countries buy.

Because producing and producing countries are not as rich as consuming countries, they consume less and produce more and have trade surpluses. An increase in the amount of foreign exchange received for goods reduces the relative volume of national currency and increases its relative price, i.e., the exchange rate. An increase in the exchange rate of the national currency increases the cost of goods produced and resources extracted, reduces margins, leads to a decrease in export earnings and, consequently, reduces the country’s competitiveness in the global production cluster.

In order to keep the national currency exchange rate at levels favorable to production and export earnings, producing and producing countries create reserves from incoming foreign exchange earnings and maintain the balance of foreign and national currency in favor of the national currency by regularly expanding the national currency mass and repurchasing foreign currency from their market with it. Thus, there is less foreign currency, it becomes more expensive, and the national currency becomes cheaper relative to the foreign currency.

Foreign-currency reserves received for exports by producing and producing countries are invested mainly in the debts of consuming countries. Such instruments are seen as the most reliable investment objects in the world – and here’s why.

Investing the reserves of producing and producing countries in the debt of consumer countries is a way for producers and miners to credit demand from consumers, and thus to ensure the growth of production and exports, i.e., their own income. The issuance of debt by consumer countries is a way to ensure the growth of their demand, and hence to increase welfare, consumption and other GDP growth factors corresponding to consumer countries.

Thus, consumer countries are the dominant beneficiary of international exchange, its driving force and the basis for the development of producer and resource countries. This is exactly why all consumer country liabilities – currencies, debts, corporate stocks, etc. – are the most reliable instruments for the preservation and passive income of capital, particularly producer reserves.

The demand for consumer country debt invariably increases with the growth of foreign exchange earnings (i.e. with the growth of demand in consumer countries) in producer and resource countries, which on the one hand need to absorb foreign exchange from export earnings to restrain the appreciation of the national currency, and on the other hand actually finance demand in consumer countries through the purchase of their debt. This means that the demand for consumer country debt is expanding: the price is constantly rising and the yield is falling.

Low government debt yields and high demand mean low funding rates for commercial banks within consumer countries and expanding lending to the private sector with accompanying rate cuts. First, banks are looking for more profitable investments than government debt, particularly lending to the private sector, and second, the flow of liquidity and the volume of the country’s currency is very large: money is available and cheap.  Lending is growing, demand is increasing, providing, accordingly, production and export growth in the producing countries.

But where, then, is value added in consumer countries, which meet commodity demand at the expense of producer countries?

Added value is created in services and technology, i.e., in the brain economy. In order to focus on technology creation, all other needs must be met, and they are met by the exchange of demand and technology for goods. In addition, there is a demand for services, as the main and most important part of the economy of technological creation: people do less physical work and receive an expansion of the need for services. Intellectual work and creative creation require personal existential and domestic satisfaction, i.e. security, security, social trust, freedom, opportunities for initiative, etc., and this leads to the development of a service economy as the primacy of the modern economic system.

The development of technologies and the growth of the service sector allowed the consumer countries to intensively develop a humanized and liberalized institutional and political environment, where law is inclusive and equal in application, regular electability is the principle of hiring social managers by society through elections in any large social groups up to the state, and competition and free market are the basic paradigm of economic and any other social exchange.

In service-technological economies, the individual is the main object and principal, while all other social components play the role of an agent. This makes it possible to create new civilizational leaps, where S (sacred) increases intensively relative to P (profane).

Thus, liberal democracies are the dialectical product of a competitive victory in the process of historical macro-evolution.

The situation in producing countries is quite different. Here, the physical production of material goods is at the head of the agenda. This means the obvious primacy of production over demand. This determines the institutional focus: corporate interests are higher than personal interests, because production is collective physical labor (regular physical efforts of a limited variety within a certain framework), stacked in a hierarchical system. It follows that the main beneficiaries at the top of the hierarchy – the state bureaucracy, monopolies, and private owners of big capital – will receive all the main benefits.

Effective and widespread creation of advanced technologies is impossible in production autocracies because of a different socio-institutional and political structure, as a consequence of economic “production” specialization: a human production unit with big responsibilities and little rights is more important than a creative individual with big rights and little responsibilities.

However, the growth of production efficiency requires a competitive market environment and a corresponding, at least in part, institutional system, which triggers the formation of basic liberal institutions, or at least their initial forms, in producing countries.

The market environment, proto-liberal institutions and the growth of the physical production of goods as the main economic driver mediate the growth of the welfare of the population and complicate social processes, gradually triggering demands and expanding the rights of the population.

At the lowest level of global socio-economic relations and ethical development are resource donor countries, or extractive countries. Since natural resources and products of the first processing are the main base for obtaining benefits, allowing the extraction of rent, their control is concentrated in the hands of those who have maximum rights and opportunities for rent enrichment – i.e. the power elite and affiliated groups related to the state budget as a source of welfare.

In fact, for them, the country budget and the rent resources, the income from the use of which fills the budget, are property, the maintenance of which is handled by the workers – the population. The population is controlled by instruments adequate for its subordination or loyalty – ideological information manipulation or direct physical repression, or both in various proportions.

Resource extraction and export provide an inflow of foreign exchange earnings, which is used either intelligently, as in Russia, to maintain competitiveness, stability, and prolong the life cycle of the regime, or unwisely, as in Venezuela, where the regime no longer has any other leverage over the population except violent coercion.

Thus the power elite in resource autocracies has a full and uncontested mandate to redistribute public goods. All other economic sectors and their participants are mere agents serving rent-seeking sources of income, including satisfying the population’s needs for services and consumer goods. Accordingly, in resource-donor countries the individual is a productive unit, not an individual with rights, as in consumer countries and partly in producer countries. But unlike producer countries, there are not even incentives and prerequisites for the creation of proto-liberal institutions and real established equally applicable rules: there is no sophisticated production, and, consequently, no normally functioning market environment, where horizontal exchange requires rules and rights.

Resource donor countries are, in a sense, feudal states, because both the object of enrichment and the way they accumulate wealth and retain it is natural rent, not the product of human capital. Accordingly, there is no basis or incentive for the development of technology, services, and even sophisticated production as products of intellectual human activity and creativity.

This also causes a lag in institutional-political and ethical-humanistic development: the overwhelming majority of resource-donor countries are shifting to a dictatorship of autocracy with vertical subordination to a superior agent and, ultimately, to the domain. All of the above does not mean that resource autocracies do not possess some human capital, production, technology, or more or less developed services as well as market relations in general. But all these components of the economy are a tool to serve the rent-seeking enrichment of the power elites, are deliberately limited in their development, have little weight in country success, and are not factors in economic growth.

This is the average nominal landscape of the global world order in terms of economic exchanges and the institutional and social structure they define. In reality, each country occupies its own competitive niche, while trying to occupy a new, more efficient one, or, conversely, falls into a different, less profitable niche due to institutional and political degradation. Some countries occupy more polar positions next to the vertices of the proposed triangle, some are more hybrid.

There is a fourth cluster of countries that do not fit into the global exchange and form a group not based on the macro-function of common exchange, but on essentially a single attribute – corked and virtually useless for the global economy autarchy. All these countries are tyrannical dictatorships with an archaic institutional and ethical structure, where the population is as powerless and forced to perform the imposed duties as possible, economic exchanges with the outside world are minimal, and internal exchanges are primitive and monotonous. In connection with the topic at hand and in the context of this essay, such countries are not of any significant importance. Therefore, we will exclude this cluster, which is outside our triangle, and focus on three basic groups of participants in the global economic process.

So it is obvious that as a result of macro-competition in general, the main driver of economic development – the complication and expansion of economic exchanges – and technological progress were countries with liberal institutions, a democratic political regime and a free market economy. It is in these countries that the environment promoted the development of a brain economy – an economy of creativity and service, where technology and intellectual creation, as well as the institutions mediating them, became the main factors of economic growth.

In commodity-producing countries, investment and human labor continue to be the main drivers of growth, suggesting a correspondingly restrictive institutional and societal environment.  The rights and opportunities of the population are expanding by virtue of the development of the market and its corresponding institutions, but are insufficient for the intensive development of human capital and personal initiative, their dominance in economic growth.

Speaking of resource autocracies, we can say that the main factors of economic growth are natural resources and labor force, and this obviously determines the archaic nature of the sociopolitical structure frame and the level of social development: their own technological potential is insignificant, economic exchanges are primitive and linear, social relations have a feudal tint, ethics and morals are archaic, and humanization is in an embryonic state.

As of today, all three clusters of countries under consideration have reached a so-called development ceiling, which changes the interaction between the countries and triggers significant and almost simultaneous changes in internal sociopolitical and economic processes, which can be called HYPERSHIFT. The factors of formation of such a ceiling, a kind of set-point, are different depending on the cluster and country on the one hand, but also have some common genesis on the other. 

Let us first consider the specific factors of formation of the setpoint hypershift from cluster to cluster, trying to find common features and regularities, while avoiding detailing to the country level.

For producing countries, we can list several basic specific reasons for triggering the hypershift.

First, the low-base effect is depleting. Urbanization, industrialization and investment-intensive economies have reached a stage where these factors can no longer be engines of economic development and growth – their diminishing returns arise.

Second, the growth of household incomes and welfare in general causes wages and production costs to rise, which reduces competitiveness.

Thirdly, the institutional and political framework has obviously failed to transform along with economic development, continuing to play the role of a restriction in the expansion of social rights and freedoms. This leads, in turn, to a slowdown in the humanization of social rhetoric and ethics, a retardation of creative and entrepreneurial initiative, and thus of internal technological development.

Fourth, the inevitable partial liberalization of the institutions and rules necessary for the market, the most effective organization of production and – inevitably – consumer relations, creates a demand on the part of the emerging middle class for opportunities to develop human capital. This entails integration into global humanitarian communications – educational, consumer, cultural – which does not correspond to the restrictive policies inherent in autocracies and causes disequilibrium factors in the political-institutional regime and social interests.

This also mediates the emergence of a fifth factor – civic passionarity and self-organization, when educated and socially successful population groups desire greater freedoms, opportunities and rights for self-realization. These desires do not always and not immediately translate into protest activity, but they are a significant trigger for the endogenous or exogenous transformation of the political regime, either toward tightening or toward liberalization.

If we talk about extractive countries, then in general the situation is largely similar with one exception: the rent-based source of enrichment of the power elite and the corresponding system of institutions do not allow to achieve even that level of inclusiveness in the distribution of benefits, rights and opportunities, as in the producing countries.

The encapsulation of social thinking and its focus on archaic ethical and cultural attitudes, narratives, and values is an important factor in the survival of regime interests. This situation does not presuppose liberalization of the institutional-political and economic structure as a process that runs counter to the interests of the regime. At the same time, market relations, being the most economically efficient, and the minimal rules that help to maintain these relations, nevertheless lead to the same potential political passionarity among the conditional and small middle class born in a few megacities. 

In addition, resource donation loses its usefulness in the global context as technology advances. This means that the competitive advantages of producing countries in the macro sense are declining, and specialization is the least effective among the three major clusters of macro-specialization. This leads to lower efficiency of the whole socio-political system and the emergence of serious social imbalances – in rights, in incomes, in opportunities, etc., that is, to the instability of the regime and the possibility to observe the interests of its beneficiaries to the same extent.

Participation in the global economic exchange inevitably opens, to some extent, windows for the development of human capital and generates a demand for liberalization on the part of the most economically and socially successful population, albeit few and geographically fragmented in several industrial and logistical centers. Given that in a rent-based resource autocracy such success is born mainly at the expense of proximity to a redistributive source and a network of affiliates built into the bureaucratic vertical, this desire for global opportunities creates even greater, endogenous risks for the regime and further undermines its stability from within. 

In short, the autocracies of extractive countries are less elastic in their post-feudal political structure for effective adaptations than the autocracies of producing countries, the risks are greater for them, and the possible actions to neutralize these risks are more linear and one-dimensional…

Finally, considering the consumer countries – developed economies with a humanized society and a liberal-democratic political structure, we can say that it is in this cluster that the most important reason for the hypershift, triggering processes within other participants in the global geopolitical and macro-economic order, is hidden.

Let us see why.

Production and resource autocracies are socio-economic systems led by developed countries, as less developed and less competitive agents in the general global socio-economic system. What I mean here is not that anyone is subjugated to anyone under direct coercion. Simply, the processes within the main and most adapted actors of global macro-competition depend on the internal processes of less successful actors adapting to this competition. 

As it was mentioned earlier, consumer countries trigger progradational processes in the economies of producer and extractive countries through global exchange of goods, technology and capital, providing productivity in such countries with growth of demand at home. The development of the economies in the producing and producing countries mediates the corresponding changes in the socio-institutional structure, necessary to increase efficiency within the adopted specialization or to move to another, more competitive and attractive niche. When such changes do not take place, are late or move in the opposite direction – for example, when the institutional and political order is tightened – the country loses competitiveness or slips into a weaker niche.    

The growth of demand in consumer countries is provided by credit, which is a natural multiplier of economic growth: someone gets money today, and this allows him to meet his needs today, but according to the possibilities of tomorrow. Credit, among other definitions and explanations, is a way of obtaining today for a certain fee what is to be obtained tomorrow. The resulting time lag between today and tomorrow is a way to increase consumption and productivity.

So, credit is a natural multiplier of economic growth, i.e., expanding the diversity and quantity of economic exchanges of goods. But for organic economic growth, it must be secured by existing or created goods. In other words, growing needs must be provided with opportunities to meet them. The degree to which such productive possibilities are realistic, i.e. the degree of risk, determines the value of credit, that is, its availability. 

Let us return to global exchange. Producing states, in buying the debts of consuming countries, actually credit them with an amount that is more or less the same as what they received as foreign exchange export earnings for goods sold. This means that consumer countries are issuing debt for the amounts purchased from producers of goods, i.e., for the amounts that producer countries receive from them for the goods supplied. An increase in needs nominally corresponds to an increase in capabilities, which is also true in the opposite direction.

At the moment when consumer countries expand their debt, i.e., they actually expand credit through its availability beyond the equilibrium mentioned above, needs grow rapidly, while opportunities to meet them grow much more slowly or do not grow at all, and sometimes decline. 

At some point, credit accelerates consumption to such limits that there is a shortage of goods: needs, i.e. money, are greater than the possibilities to satisfy them, i.e. goods and the volume of their production. Inflation arises, an increase in the quantity of money against goods. As a result, the marginal utility of money falls and goods rise, money depreciates and goods become more expensive. 

This leads to a fall in the use power of money, i.e. the purchasing power of consumers, and an increase in the cost of goods, i.e. a decrease in their availability. On the producers’ side, on the other hand, the growth of consumer power over production capacity leads to an increase in the cost of labor and production components, which obviously leads to an increase in the cost of production. In order to maintain their margins, producers are forced to pass their increased costs onto selling prices, which is the most important pro-inflation trigger. 

The acceleration of inflation leads, on the one hand, to the need for producers to cut costs in order to control price increases, and thus to cut labor and other input costs, i.e., to reduce the consumption capacity of working people and the volume of production. On the other hand, high commodity prices and then falling employment trigger a decline in consumption. A recession arises, a process of decline in business and consumer activity, causing deflation until needs meet capacity, after which a new credit cycle begins.

Governments of consumer countries, driven by electoral and political interests, promote the acceleration of credit and consumption, i.e. they expand needs beyond their ability to meet them, primarily by reducing the rate on federal funds, from which economic agents are funded, and by increasing the volume of government programs by expanding public debt, which the productive side continues to buy. This means that producing countries are financing demand in consuming countries in excess of what they receive as foreign exchange earnings, i.e., in excess of their productive capacity. 

Thus, credit grows much faster than productive capacity. At some point the global system of exchange reaches a point where a critically large amount of consumer-country debt is accumulated and destructive inflationary processes are triggered. This changes the economic and socio-political situation within all participants in global exchange. 

Growing demand beyond supply causes inflation and increases the cost of production, while rising government spending increases the fiscal burden on private business and reduces the competitive opportunities of the private sector, changing the competitive focus and reducing global competitiveness. Purchasing power declines, production becomes more expensive, and production shrinks as it adapts to the tightening environment.

Debts are accumulating not only in consumer countries, but also in producer countries. They need intensive expansion of production, investment and technology to somehow keep up with the intensively growing, outstripping production capabilities demand in consumer countries. 

The imbalance in the balance of supply and demand generates imbalance in financial flows: the demand and public debt of consumer countries expands, so the investment of producer countries in them grows: the reserves formed from export foreign currency earnings should be parked, i.e. invested in the debt of consumer countries as the main source of their own production growth. At the same time, foreign exchange earnings and investments do not grow at the same rate, because production capabilities cannot keep up with the demand that outstrips them. Producing countries are forced to accelerate their productive supply capacity to catch up with demand. They enter the international capital market and accumulate debt as well. 

This is the case until demand in consumer countries begins to fall. And then the leverage, that is, the accumulated debt in excess of the ability to repay it, begins to destroy the global and domestic economies. A reverse spiral is set in motion.

Consumer central banks are forced to tighten credit conditions and raise funding rates, and sell government debt from their balance sheets to reduce the amount of money, making it more expensive. This cools consumer activity. 

Since consumer country currencies are reserve currencies, i.e., currencies that producer countries receive for their goods, primarily the dollar, producer country currencies become sharply cheaper as consumer country currencies, i.e., the dollar, rise, losing purchasing power within their countries. This causes inflation within the producing countries and thus risks a future decline in manufacturing activity with worsening expectations of competitiveness. 

In addition, the appreciation of the dollar as the base currency of settlement means a rise in the cost of credit, and thus its availability and the cost of servicing the credits already taken by producers, which creates the potential for production compression and economic stagnation in producing countries.

There is a demand for liquidity, which is limited by government policies to combat inflationary risks and externalities, causing a deep recession. 

As producing countries begin to sell less because of the cooling of demand due to the rise in the cost of credit and the rising cost of money in consumer countries, the inflow of foreign exchange earnings into the producing country decreases, i.e. there is a shortage of dollars relative to national currencies. At the same time the growth of dollar value against national production currencies causes undesirable inflationary processes inside producing countries, which means the necessity of alignment of the exchange rate, i.e. the reduction of the money supply of the national currency. Large debts of producing countries are also denominated in dollars, and as the value of the dollar, i.e. interest rates, grows, so does the cost of servicing the debt. This forms another driver of demand for the dollar. 

In such a situation, producing countries are forced to sell off their investment reserves – the debt of consuming countries. First, they need to do this in order to start buying up their currency and increase its value against the dollar in order to buy inflation. Second, they need to cover the rising value of their debt in dollars. 

To fight inflation, the producing countries cannot raise borrowing rates as intensively as the consumer countries, the issuers of reserve currencies, do. First, their national currencies are tied to reserve currencies-they depend on the value of the reserve currency, primarily the dollar. Second, a sharp rise in credit rates would simply make factors of production so expensive and demand so insignificant that it would kill production-the basis of the productive economy-and, among other things, create social instability and threaten the existing political regime. Accordingly, the main instrument of inflation containment and solvency is the sale of reserves, i.e., the debts of consumer countries. The sale of these debts makes their yields even higher, rates rise, while the dollar becomes even more expensive as the supply of these debts and, consequently, the demand for the dollar rise. 

Thus there is a difference in the rates of consumer countries, which intensively fight inflation by cooling demand, which has become toxic for their economies through a sharp increase in the cost of credit, and in the rates of producer countries, which tighten rates less aggressively so as not to kill production, the basis of their economy and income. 

A disequilibrium arises that is generally called a rate inversion: more reliable investment instruments, like consumer country debt, become more profitable, and less reliable ones, like producer country debt, become less profitable. That is, high risk now yields less than low risk. 

Accordingly, if the debt of the most reliable issuers – consumer countries – yields more than the debt of producer countries, then there is a demand for these reliable and profitable debts, and thus there is a growing demand for reserve currencies, primarily for the dollar. An increase in demand for the dollar entails a fall in the value of assets – stock markets, real estate, etc. – because of the change in the denominator of asset values to the dollar. 

Assets depreciate, which means that banks’ mortgages depreciate, insurance and pension funds’ balance sheets shrink: so-called margin calls arise, i.e. the need to revalue and deposit additional funds to preserve balance sheets. The demand for the dollar continues to grow.       

The above-described processes need to be understood in detail, because it is they that give rise to socio-political and civilizational externalities, because, as already mentioned, in the modern world the economy is the main determinant of individual, social and macro-country (global) behavior.  

In general, initially cheap production of producing countries allowed consumer countries to use it as a kind of resource, allowing them to form and expand their own added value. But the growth and capitalization of technologies and services in consumer countries, as well as their exports, lagged behind consumption – they had to expand debt and borrow additionally from the global capital market, primarily from producer countries.  

This is in fact the situation today. Given the previously described ceiling of possibilities, which all clusters of countries that make up the system of global exchange and world order, it is clear that the root trigger of increasing turbulence and hypershift was the expansion of the state in the balance of relations – mutual rights, opportunities and obligations – of the state and the individual.

The ceiling gives rise to hypershift also because resource dependence determines the state of all countries of all specializations. And resources here should be understood not only as natural resources, on which extractive countries earned money, but also as all other objects of specialization – production of goods in producing countries and human capital in consuming countries. 

The producing countries did not change their institutional and political system to move into a new, more productive niche – commodity production. The producing countries failed to liberalize their institutions and political frame sufficiently to move into the niche of technological specialization. Consumer countries failed to limit the expansion of the state mandate to ensure equitable consumption and demand consistent with global and domestic capabilities. 

Credit and the increasing excessive “borrowing from tomorrow” have led to a global strengthening of the state in all country clusters of specialization. This means, in essence, a reduction of individual freedoms of rights, opportunities and the importance of individual initiative in favor of public distribution, which is possible only in one case – the empowerment of political elites. In the end, we can safely call it a return to the sedentary bandit model. We can call it institutional and economic degradation. 

Paternalism and endogenous demand stimulation beyond the measure of global and domestic production capabilities and interests in advanced liberal economies have led to the expansion of the state and distortion of the competitive market environment, increased fiscal and regulatory burdens on the private sector, reduced business efficiency, the emergence of technological and financial bubbles, and investment in phantom illusions. More importantly, the perception of producer and resource countries as an inexhaustible resource of cheap production, commodity filling and resource provision has led to the overdevelopment of social sharing narratives and the reduction of values of individualistic consciousness and meritocracy, and, ultimately, to the compression of competitive efficiency. The dependence on state redistribution became apparent: in a state where little is produced and much is consumed, the value of personal effort inevitably diminishes. The illusion of eternal prosperity and irreversible social change emerges, where production is eternally cheap and inexhaustible, innovation can grow exponentially, replacing labor effort, and inclusiveness, social equality and the reduction of individual competition inevitably expand with technological development. We can safely call this a utopia. 

However, any utopia always leads to an anti-utopia: heaven is always paired with the existence of hell, an existential dichotomy as inevitable as the evolutionary dialectic. 

In fact, this above-described view of the state of affairs and prospects led developed countries, first, to fall into that very utopian trap, and, second, to let the genie out of the bottle – productive and resource autocracies, forced to survive under the tightening of the above-described economic circumstances and external factors. And since the processes within such countries were multidirectional, the clash of different interests within them gives rise to significant risks of either the strengthening of their authoritarian regimes or long-term domestic instability associated with the desire of society or individual interest groups to liberalize. 

This will affect both the provision of developed countries with goods and resources and change the whole paradigm of global exchanges, reducing the level of integration and strengthening the production and resource sovereignty of developed countries or triggering the formation of new clusters and macro-country regional groups in accordance with new interests and the state of affairs. Of course, all these processes will involve a decrease in value-added and welfare, the need for greater labor participation in expanding production and, as a consequence, increased competition.  

Such changes may cause a new movement to the right, since in order to develop more production versus consumption, developed countries will have to reduce the level of etatism – to reduce the state – and increase incentives for supply related to the relaxation of state pressure in all forms, to bring back the classical market narratives of social rhetoric about the importance of individual success, entrepreneurship, hard work, competition, self-organization, etc., etc.

The only trouble is that the process of such a transformation now appears to be extremely painful for both the micro-country and the macro-geopolitical world. The era of wars, turbulence and institutional-economic crises seems to be an inevitable prospect for the purification of a world that has played with socialist utopia and global prosperity. 

The stronger the utopia, the darker the dystopia, and the harder the purification to return to equilibrium. The return to equilibrium from hyper-volatility is neither neat nor painless. We reap the rewards of what we ourselves created and agreed to. 

As Churchill said, I have nothing to offer you but sweat, tears and grueling labor. 

Let’s face it. The party at Gatsby’s is over. 

Paul Tolmachev

Paul Tolmachev is an Investment Manager, Economist and Political Analyst. He is Certified Professional in Philosophy, Politics and Economics (PPE Program), Duke University. Having more than 20 years' experience in the financial markets, Paul held management positions in leading international investment and wealth management firms. Paul is serving as a Portfolio Manager for BlackRock with more than $500 million in personally managed assets. He also is a visiting scholar at the Stanford Institute for Economic Policy Research, where he researches institutional and political economy, decision science and social behavior, specializing in the analysis of macroeconomics, politics, and social processes. Paul is a columnist and contributor to a number of international think tanks and publications, including Duke University, Mises Institute, Eurasia Review, WallStreet Window, RealClear World, Investing.com, The Epoch Times, L'Indro, etc.

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