Our theory of economics is less than 100 years old and it is time to tear up all of the textbooks because work has changed
2020 was a year that upended a lot of things. I think it upended what we call Economics today.
The last time a large number of people were put out of work was in 2008.
At that time, few people knew what the mobile internet was, and even fewer had access to it. A person who did not have work was forced to look for work with organisations that could hire them. In the intervening decade, a lot of things changed. Taking advantage of the internet in everyone’s pockets, a lot of new businesses (platforms) including Uber, Doordash and the like erupted. This made it possible for people to work as contractors and get paid. In fact, quite a lot more than minimum wage.
Then there are sites like care.com which allow one to list their services for home care, elderly care, pet care, etc. Let me tell you, they comfortably beat minus wage.
This has had a dramatic effect on the workforce especially in the US.
After the layoffs made in 2020, corporations found that the supply of
Slaves Workers had radically changed. They had done everything in their power to ensure that these people would not be able to rub two dollars together to dare retire and the sudden shift was perplexing.
To add to the woes of the policymakers, Inflation shot up. I had written a piece on what Inflation is.
Traditional economic theory says, that interest rates are a tool to control inflation. Rising interest rates dissuade people from borrowing and thus demand comes down and inflation cools.
Well here is the thing -
Apple, Microsoft, Ford and the like don’t go to a bank to borrow money, they float bonds on the market if they want to raise money.
The poor are not even in the system. They have poor credit ratings and can’t raise any capital from the banks. They get all that they need from payday loan sharks who lend at between 50% and 500% per annum.
This leaves the small businesses, who are getting screwed and ceding their turf to conglomerates. So the small cafe is replaced by Starbucks. Home purchases get hit and along with that the people who like to play with “margins” like the good people at Silicon Valley Bank are hit.
So as a net result, all the increases in interest rates have not caused job losses. In fact, the US economy continues to add more jobs each month. Also, unemployment is at historic lows. This in turn has translated into greater worker action, read strikes, against corporations demanding better wages and facilities for them. Auto Workers, Hotel Workers, Casino Workers, Logistics Workers, and all kinds have found this window where they can take advantage of the shortage of workers to make their demands heard.
The non-stop increase in interest rates was going to result in other second-order effects at some point. We have arrived at that point.
Welcome to Treasury Bonds
The Treasury Bond (T-Bond) is how the US government raises capital mostly to finance wars in other countries and provide tax breaks to the rich; but also to pay for healthcare, education and other such things that put most poor Americans in a debt trap for life.
US Bonds are considered safe assets to hold on to because the US government never defaults. The reason it does not default is that the bonds are all dollar-denominated and the country can print its currency at will to meet the payments that need to be made.
T-bonds have a face value (think of it as principal) that the government will pay back when the bond matures and a coupon rate (think interest) that the government will pay every year.
As the interest rate rises, people will trade bonds only if the returns are superior to the interest rate.
Say the US issued a $1000 bond at a 3% coupon rate. As the interest rates slip past 3% the bond market will see a decline in the price of the bond. Instead of $1000, people will have to sell it at $990 to attract buyers. This results in an increase in yield - 3% plus a 1% discount. So a 4% yield.
The 10-year treasury bond recently hit a 5% yield.
This is part of the reason markets in India are being routed at the moment. If you can get guaranteed unhedged returns which are that high in the US, why invest anywhere else.
While interest is one side of it which is the result of the actions by the Fed, the other side is selling action. Someone needs to be selling for buyers to be able to demand a lower price.
China and Japan seem to be the culprits here. Between the two nations, they have dropped a combined $350 billion in US Bonds. All the interest rate action was meant to curb inflation but the inflation is headed in the other direction.
US Inflation month-on-month
Source: Trading Economics
The current situation makes it rather difficult for the Feds to continue to increase the interest rates since the sword seems to be cutting both ways. It is coming out of the wallet of the exchequer. Borrowing costs are likely to rise if the bond yields continue to appreciate and demand is likely to become tepid.
There is another government shutdown looming on the 15th of November. The bone of contention - Do we finance both the Israeli Genocide as well as the Ukraine War?
The increased interest rates have already dealt a huge blow to the real estate industry which has been witnessing continued decline.
Home Sales US
Source: Trading Economics
The numbers are at levels that were seen during the outbreak of the pandemic in 2020. Real Estate contributes up to 5% of the US GDP.
Obviously, the cause and effect do not seem to be playing out as hoped.
The change in the nature of work is abundantly clear.
There used to be few corporations which hired a large number of people but a small percentage of the workforce. Also, there used to be many small and medium businesses that used to hire a smaller number but a larger percentage of the workforce. And finally there used to be a small number of freelancers.
The pursuit of gifting benefits to the rich and allowing monopolies to thrive has ensured that several large corporations hire a large number of people but also a considerable percentage of the workforce. Small and medium businesses are dying as platforms make it possible for a large number of individuals to freelance and sell their services directly.
The economic theories are not apt to keep up with these changing times. The nature of the economy itself is changing. The greater the number of policies made with the fundamentals of the old economy, the worse the outcome will turn out to be.