The animal spirit of economics

(To Luca Pacioli)

Any aspect of knowledge, when concretely applicable, offers more than one perspective. The more the single topic is complex, the more its declinations veer towards multiple points, ranging from the conceptual to the concrete and vice versa. If on the one hand abstraction makes perfect, under the taddema1 of the Divine Provide2, the scientific nature of the writings of the double match, which fixes the economic and financial nature of each accounting movement, on the other the animal spirit Keynesian economics, thanks to predictable disappointment of optimism, remains an indispensable factor for understanding how economic and market activity changes in its pragmatism; for Baron John Maynard financial crises are a recurring feature, given the physiological instability of the context.

The same term globalization offers various interpretations attributable to the possibility of using capital by those who were most able/willing/know how to compete by attracting resources. Reverse side of the coin: on the other side of the looking glass, Lewis Carroll's economic rival has placed side by side with Alice, like the spirit of future Christmases, the specter of recession, concrete and imminent according to David Rosenberg, who already predicted the 2008 crisis and who is now recommending a reasoned investment strategy, both in the US and in the EU, where economic activity is suffering and consumption is falling.

But that's not all, because in Alice's rabbit hole, persistent and high inflation is also waiting, fought with a significant increase in interest rates, the ideal remedy for the scourging of both large sections of society already in itself prostrated by the consequences of the pandemic, both of states with indebted economies such as the Italian one, however required to ensure the yield of the securities auctioned.

After all, what to do? To hope that the patient survives, also because the recessive effects, in the long run, would have far heavier consequences than the inflationary ones: of course, it would be desirable for the patient to still breathe.

If in the West we cry, in the East we sob; in China, once the driving effect from Evergrande's real estate segment has ended, a huge bubble has remained, the extent of which is being attempted, given that the repercussions on the territory are rooted and ramified. Pending effective state intervention, the crisis has infected private savings by dissolving the liquidity of companies and threatening the savings products placed by the parallel banking system. In short, in China the increase in savings, necessary to repay debts, is freezing an economy accompanied on the one hand by deflation3 of consumer prices, and on the other by the fragmentation of supply chain caused by friction with Washington.

Is it over here? Let's hope. 4 of the 10 funds generously spread between Ireland and Luxembourg and most exposed to Evergrande are managed by the English Ashmore group; considering eternity, these are limited exposures, but still exposures, as there is too limited growth in European GDP in the face of the American recovery.

Take a couple of notes: Europe could fall ill with a recession; ECB and Bank of England will continue to raise rates; There is no guarantee that stopping the rate increase will avert a recession. In short, the global economy is in a phase of stalemate and weakness.

The multilateral geopolitics inspired by the revived spirit of the non-alignment of Bandung 1955 could not be missing; In 2001, Jim O'Neill of Goldman Sachs created the acronym BRIC(S4) to highlight the potential of a group of emerging countries which, despite having the ambition, cannot be an alternative to the G7 despite the inclusion of the first 6 new nations5 out of 23 applicants: a meeting of loving geopolitical senses that does not erase divisions and rivalries.

India, belonging to the QUAD6, and China clash militarily in the Himalayas and the Indo Pacific; Saudi Arabia and Iran, centuries-old rivals, support opposing factions in Syria, Lebanon, Yemen; Ethiopia and Egypt dispute the waters of the Blue Nile, with Cairo threatening to bomb Ethiopian dams. With the new co-optations, the BRICS have oriented themselves towards the Chinese hegemon who, with Moscow and Tehran, intends to strengthen an anti-American axis supported by two sanctioned states, thus preluding a future and certain difficulty in negotiating any compromise within the G20 framework.

How long will these pure-interest marriages last? It is impossible to satisfy a group of quarrelsome would-be hegemons in highly unequal conditions, who aim at the exploitation of low-cost energy and the abandonment of the dollar in commercial transactions. The choice of the new countries that will join starting from January 2024 was therefore preceded both by a geographical assessment of the areas outside the western limes and by a geopolitical transversality that summarizes different geostrategic positions, cultures and sensitivities.

Il global south Is it ripe to challenge the G7 West with a new order? It doesn't seem like it, given both the international arrest warrant issued against the Russian president, perfectly executable in South Africa, a state belonging to the International Criminal Court, and the Brazilian reluctance in assuming positions of open break with the mercantile West.

It is useful to note that, even if the BRICS are worth as much as 32% of the planet's GDP, the breakdown of the aggregate data highlights that the Chinese GDP is worth more than that of the other 4 united partners, a useful element to understand who really intends to command, and who owns the currency that you would like to make unique.

Cinematographically dreams remain wishes, and the economic-productive structures of the various countries continue to be too divergent from each other. Given that the dollar would still remain as a reserve currency, it still seems too early to sing its requiem or call for a weakening of the IMF. In summary, for the moment, no new currency, but a start of control, thanks to Saudi Arabia and the UAE, of the energy supply which would slow down the transition from fossil fuels to green. This was therefore the target that China had promised itself to achieve by mediating Iranian-Saudi diplomatic relations; at the same time the countries of the Persian Gulf take note of the diversification of partners without having to renounce the relationship with the USA, once holders of the Washington Consensus and now forced to chase after having had to undergo a downgrade by Fitch.

The most concrete result is the New Development Bank7, a Shanghai-based multilateral lender, chaired by Dilma Rousseff, a former Brazilian president deposed by an impeachment. However, the Bank faces several problems; international bonds in local currency, which should facilitate bilateral BRICS trade, already exist; the presence of sanctioned Russia makes dollar markets inaccessible; the risk of escaping dollar interest rates is unavoidable; it is decidedly rash to lend money without conditionality. Everything falls within the scope of the Chinese strategy aimed at internationalizing the renminbi, a currency that is not yet fully convertible. In short, net of proclamations, it is reality that beats the pace; those who think, like Argentina, of saving dollars to repay the IMF, actually resort to swaps in renminbi, or Chinese loans, without counting Russia, forced by exclusion from the SWIFT system, to resort to Chinese currency or, partially, to the rubles now in serious suffering.

Is everything easy for the USA? No, given the reactions to the monetary policy of the Fed held responsible for the fluctuations in both capital flows and exchange rates, especially in emerging countries that have tried to develop bilateral cross-border systems in local currency8, a method which, however, although fragmenting the global payments scenario, cannot undermine the primacy of the dollar given that no fully convertible alternative currency has been proposed. 

It would be essential to anchor the exchange rate to a solid value constituting the pivot to which to link the currency trend, a requirement of 1971 with the end of Bretton Woods and which has come back into fashion with the 2024 US electoral campaign9. Missing a Gold Standard old-fashioned, it was assumed that monetary stability could be linked to cryptocurrencies, especially bitcoin10; after all, if the FED had linked the dollar exchange rate to the price of raw materials, already on the morning of February 25, 2022 we would have witnessed an increase in rates necessary to offset the higher price of the basket of raw materials, heralding an immediate double recessionary shock .

So the problem is the dollar? More than anything else, the need to de-dollarize now takes center stageor to abandon the dollar as a reserve or exchange currency, in favor of the renminbi11.

The idea that the influence of the greenfinch whether it is waning is not new, but the real chances of it really going down, without a sudden and violent exogenous shock, are slim; US dominance is demonstrated both by foreign exchange reserves and by the fact that more than half of global trade and cross-border lending is backed by the dollar12 which must fear, possibly, the return of gold as a reserve safe haven asset13 and the fact that historically the dogma of the single currency does not exist14; How can the yuan/renminbi grow without liberalizing the markets, renouncing capital controls? And then: how could China agree to absorb foreign trade deficits as Washington does? Difficult for a communist-based regime that accumulates surpluses by depressing wages and internal consumption.

It is clear that China is surrounded by the spiral of a structural economic crisis, just as it is clear that, given the indebtedness of families and businesses, any purchase or investment request by the Party State cannot be satisfied, as Beijing finds itself in a budget recession situation. Even more doubts arise about the ability to succeed in beating a single and strong BRICS currency, unless the cognitive and propaganda aspect of the joke is taken into account.

Meanwhile, the stock market conveys uncertainty, shaken as it is by the Chinese real estate crisis15 which, far from facilitating the dreamlike 5% of GDP desired by the Politburo, will affect the global economy over the years, given the doubts about the effectiveness of the Party's official maneuvers16, and then some shadow banks, financial intermediaries who raise funds outside official channels to invest them in high-yield assets; all unless, selfishly but understandably, the shock spills over into the Great Wall and stays there.

While Evergrande files for offshore debt restructuring in NY17, and Country Garden with Zhongrong International Trust subsidiary of Zhongzhi Enterprise Group threaten to spread contagion with Lehman Brothers-effect chain bankruptcies18, in order not to miss anything, the stock market risks bursting the bubble of technological products in the midst of Asian fears for yet another US rate hike.

In summary, China has slowed down dramatically, amid demographic decline and deflation that depresses profits and threatens social well-being, an element that makes us understand why Beijing is pushing for more trade and currency openings abroad, where, however, the substantial traction can be insured (look bad luck) only from the USA, inspirers of the decoupling.

Washington and Beijing, among other things, in addition to the production containment decisions of OPEC+, are influencing oil prices, conditioned by the Chinese slowdown which pushes downwards, and by the FED's rate increase which would lead to a recessionary reduction in consumption . From Frankfurt, even the ECB is not alien to this economic policy, given that the objective of bringing inflation back to 2% has not yet been achieved, and that the season of shocks linked to both supply and energy transition does not seem to have ended exhausted.

And now some geopolitical pocket change... According to Nobel Prize winner Robert Schiller, the Evergrande crack could lead China to invade Taiwan, as a consequence of the sudden e necessary contingent change of narrative - from loser to winner -, and in the light of the equity backlash, given that China holds 1000 billion of US and other countries' government bonds, including Italy, but continues to produce debt by paying higher interest than Italy's19 also due to the poor administration of local authorities.

Even Moscow has little to rejoice in view of the collapse of the ruble due to military spending20, and the rise in rates from 8,5% to 12%, a rise which is not ruled out being the only one, a deterioration which places the Russian currency among the worst currency competitors such as Nigeria, Argentina and Turkey. The Bank of Russia has identified the contraction of the trade balance as the cause of the decrease in the current account surplus; in money, the Ukrainian conflict raised the budget deficit with an increase in imports, and was accompanied by a domestic currency famine21 contrasted with an acceleration of capital flight abroad.

The apparent resistance to Western sanctions has not spared the Russian uniform, weakened by previous structural problems: if it is true that there have been no Hollywood collapses, it is however true that over time an increasingly militarized and autarkic economy has taken a downward slope .

It is useful to remember that, in times of war, GDP is not a good indicator, as it is anesthetized by war production which certainly does not invest in the future although, as will be remembered, for some as long as there is war there is hope.

Minimum immorality: I'Institute for the Study of War reports of electronic material produced in the US and found on 82% of Iranian drones shot down by the Ukrainians.

In essence, while an anoxia China dictates the rules, the war wears out everyone, especially those who provoke it, and it is not prudent to place the consequences of poor political choices on any Central Bank governor. Despite governor Nabiullina's reassurances, the Russians may try to set aside more stable and valuable currencies, while the adoption of a digital currency with which to circumvent sanctions is being considered.

In the USA the banking crisis is becoming more complicated, with the downgrades of Moody's and Fitch which, in addition to stigmatizing the growth in rates, have feared a growing cost of the bonds sold by credit institutions but with an Uncle Sam who is unpredictably more tenacious than expected; Tokyo, on the other hand, turns out to be an anomalous actor, with low interest rates, manageable inflation and a GDP pushed upwards by the decline in imports.

New Delhi, while reaching the point where the Russians are crashing, seeks the balance between Washington and the Sino-Russian pairing which must take note of the rise of Modi who points to the next G20 and cannot fail to be opportunistic looking at the difficulties of a country, the China, which mocked India for the fires lit for the victims of Covid and which still spreads distorted geographical maps by appropriating Indo-Russian areas.

Skipping Argentinian and Lebanese neo-peronist defaults, presumed return to Turkish post-election accounting orthodoxy22, Egyptian instability and Dutch recessions, we cannot fail to arrive, albeit briefly, at Italy.

According to Istat, the GDP trend in the second quarter of 2023 was subject to a drop of 0,3%, a decline widely expected both as a function of the crisis in Germany, dprimary extinction of Italian exports, and the increase in interest rates; it is inevitable to hypothesize a new recession, also given the decrease in the domestic market.

If it is presumable that the markets want to reward the current executive, there is no doubt that the budget law, which will have to drain funds, will mark a watershed, taking into account the wealth of electoral promises, the tax reform, the contracts to be renewed, the pensions, the various Superbonuses and the dangerous loose cannon of the Chinese BRI23. The comparison with the United Kingdom brings to mind what happened to the Truss executive, overwhelmed by the violent reaction of the markets, caused by the intention to create deficits with a strong tax cut intended to favor recovery.

PROJECTED IMPACT. The economic dynamics, even if so summarily outlined, have nothing to envy of Clausewitz's war studies; it is a war, albeit fought in a double-breasted suit, with all the consequences of the case.

Multipolarity has in fact shuffled the cards, created new centers of power, while globalisation, with an increasingly accentuated financial liberalism which has flattened the social intervention of the State, has multilayered the perspectives by restricting spaces and reaction times. It has also been ascertained that populism, of whatever brand, is not among the useful remedies, as is propaganda, which prevents most people from going beyond the narrative epidemics of Robert Schiller24.

Looking now at the Brics with the pique of finding antibodies to the USA prevents us from seeing the Chinese structural crisis, the Russian currency weakness, the inconsistency of many other economies, however geopolitically necessary, even if sanctioned, to occupy key geographical positions on the bridge of a Risiko where to use coins and not armored vehicles, and where balance of power and hegemony seek a difficult balance in filling the gaps left in recent years by Washington's bipartisan a-policy.

It is no mystery that the rise of a hegemon is the cause of instability which generates temporary alliances which strengthen the return to a balance aimed at once again guaranteeing a fair (and hopefully wise) distribution of power; Unfortunately, it is not even a mystery that the road to get there is dotted with more or less violent frictions.

Impossible to predict a new world order, given the ideological superstructures that portray with filters a China in crisis on the markets, and a Russia in crisis in the Ukrainian trenches; much easier would be to reexamine and keep alive the old, albeit net of certainties from Gold Standard and that it would need a return, in a moment of crisis like this, to a Keynesian perspective of recovery.

The problem is that there was only one John Maynard.

1 Halo in Sicilian dialect

2 Luca Pacioli

3 China may have entered a period similar to that experienced by Japan, whose economy stagnated after a period of growth; this is accompanied by progressive isolation from Western trade. 

4 South Africa entered later

5 Saudi Arabia, Iran, UAE, Egypt, Ethiopia and Argentina.

6 India USA, Australia and Japan

7 NDB shareholders are the 5 BRICS countries plus Egypt, Bangladesh and the UAE. The central banks of China, Hong Kong, Thailand and the UAE have collaborated on the mBridge - Bank for International Settlements project, to develop a digital currency platform to facilitate interoperability and connectivity. This would make the renminbi and digital currencies of other member countries usable for cross-border payments in a multilateral context. India has also promoted the use of its currency in cross-border payments. As India's share of global trade is small relative to China's, the use of the INR will be less extensive than that of the RMB. 

8 The renminbi was the most used currency for bilateral cross-border payments, facilitated by the network of bilateral agreements that the People's Bank of China has entered into with the central banks of 41 countries (the balance of activated funds reached the amount of 15,6 $.XNUMX billion). Recently, the renminbi has been used multilaterally to pay third parties (India has used it to pay for Russian oil imports, and Argentina to pay part of its debt to the IMF).

9 Vivek Ramaswamy has proposed reforming the FED to give stability to the dollar and the economy, taking as a reference not the consumer price index but a basket of raw materials.

10 The BRICS are intent on creating a new international currency which should take the form of a digital currency backed by gold and rare earth reserves.

11 According to the IMF's Currency Composition of Official Foreign Reserves (COFER) database, renminbi reserves for the fourth quarter of 2022 stand at 2,7 percent of the global total allocated. Net of the share of Moscow which holds 1/3 of all reserves, the renminbi drops to 1,6%, therefore there is no generalized orientation towards the Chinese currency. THEand Chinese assets and liabilities do not yet constitute a serious alternative to the dollar.

12 Globalization requires fast and secure trade with as many partners as possible. In case of exports using USD, the country concerned accumulates USD. If it exports more in USD than it spends on imports, the country accumulates currency reserves in USD which must be guaranteed for safety and liquidity.

13 China, Uzbekistan, the Czech Republic and Poland are increasing their gold reserves

14 The US has long run a trade deficit, offsetting the purchase of goods and services with the sale of securities. If the advantage of dollar investments is their liquidity, there is the possibility of ultimately turning them into consumer goods

15 Evergrande, in very serious financial and management difficulties, returned to the Hong Kong Stock Exchange after a 17-month suspension, with an initial drop of 87,88%; add to this the difficulties of Country Garden China

16 China's central bank has urged banks to make more loans to improve credit policies on home mortgages

17 The debt restructuring would take place in the Cayman Islands and Hong Kong to protect the company's US assets

18 For Robert Schiller, there is no risk of a global crisis like the Lehman Brothers one, given that the Chinese financial system is more closed than the American one.

19 11% of revenue

20 Increase in imports and decrease in exports

21 No hard currency entered Russia

22 Hafize Gaye Erkan was appointed, the first woman in Turkish history, Governor of the Central Bank

23 As reported by "Formiche", the Global Times, produced by the official newspaper of the Chinese Communist Party, interested in international affairs, published an editorial written by a pro-Chinese analyst under the pseudonym Eusebio Filopatro, already used in the seventeenth century. by the Jesuit Giuseppe Sanfelice. The author was extremely critical of Italy after the PdC's visit to the USA and above all because Italy is now close to deciding whether or not to renew the MoU on the Silk Road. The Global Times reports the fears nourished by the author given his different beliefs compared to those supported by the Government, a thesis also subsequently reiterated.

24 Economists must understand that theories become influential not because of their accuracy or consistency, but because they are attractive. The diffusion of a theory is determined by three factors: emotional component, constellation of related narratives, relationship of the theory to celebrities

Photo: US Air Force