Welcome to the Jungle – Core Engine Of Growth Is Faltering

This is an excerpt from Ben Hunt’s latest Epsilon Theory note:

There is one great positive – sum game in all of human economic history — trade. But there are periods of time in human history when this core engine of growth and prosperity falters, when it becomes , at best , a zero – sum game of equal winners and equal losers. We are entering one of those times.

Why? Because this is what ALWAYS happens as independent nations struggle with the domestic political consequences of massive debt. Debt begets wealth inequality. Wealth inequality begets political polarization. Political polarization begets shocking electoral outcomes as the median voter theorem fails and shocking market outcomes as the central tendency fails . So go ahead … ask Nate Silver how well his electoral models are working. Ask any Fed staffer how well their econometric models are working. Democracy is hacked, not in the sense of some Mr. Robot f – society conspiracy, but in the sense of what Sen. Lindsey Graham appropriately calls “ bats**t crazy ” domestic political behavior , behavior that ALWAYS emerges under these circumstances . It happened in the 1870s. It happened in the 1930s. It’s happening today. As George Soros would say, I’m not expecting it . I’m observing it.

Under the strain of domestic policy errors and domestic policy uncertainty (uncertainty in the technical sense of the word, where neither outcomes nor probability distributions can be known) , global trade volumes and global trade prices ALWAYS roll over. Again, this happened in the 1870s, it happened in the 1930s, and it’s happening today. And when this global economic pie begin s to shrink , the strategic interaction between nations inexorably changes f rom a Cooperative game to a Competitive game (read ” The Silver Age of the Central Banker ” for more) . This is the moment where trade activity – – in goods, services, and capital — shifts from a positive – sum game to a zero – sum game, where domestic political institutions ALWAYS shift towards protectionist policies . In the modern context, this political shift takes place primarily in monetary policy, specifically monetary policy that impacts currency exchange rates. Why? Because currencies are the linchpin for both trade in goods and trade in capital. Currency intervention is the quickest and most direct way to protect your slice o f a smaller and smaller pie, even though it’s exactly this currency intervention, when done by everyone, that is making the pie shrink.

I can’t emphasize strongly enough how this politically – driven shift in the equilibrium payoffs of global trade and capital flows — and its expression in monetary policy focused on currency exchange rates — changes everything for investors.

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