20 October 2022
Pasaules tirgus
Ziņas un Viedokļi
The Two Most Important Variables That Determine Your Economic Well-Being

The Shortest Possible Course of Economic and Financial History of the Last 60 Years

This week the bond market has again demonstrated that the most important variable in the world of finance is the PRICE OF LONG-TERM MONEY (see the charts below).

The Bond Market Shows Again Who Is the Boss in Financial Markets
The Most Important Variable in the World of Finance Is the Price of Long-Term Money

And the most important variable in the world of real economy is LABOR PRODUCTIVITY. Did you know that the growth rate of real wages is determined by the growth rate of labor productivity? Now you can see why the growth rate of real wages has been so slow for decades.

The Most Important Variable in the World of Real Economy Is Labor Productivity Source: “The Global Productivity Slowdown: Diagnosis, Causes and Remedies”, Georg Erber, Ulrich Fritsche, Patrick Christian Harms

If we are not sufficiently productive, then all financial exercises — monetary and fiscal — will only help us buy some time before we are forced to curb our consumption (see the charts below).

More Private Debt Cannot Support More Consumption Forever
More Government Debt Cannot Support More Private Debt Forever

On the basis of the above charts we are able to present the shortest possible course of economic and financial history of the last 60 years (please follow the charts above):

Stage 1. From the late 1960s to the early 1980s. Technological Slowdown. The growth rate of technological progress and labor productivity started slowing down. This led to a slowdown in the growth rate of real GDP. A loose monetary and fiscal policy aimed at supporting the faltering economy fuelled demand-pull inflation. The gold standard was abolished. Now fiat (“paper”) money was no longer pegged to gold. This spurred inflation even further. Negative supply shocks (two oil crises) paved the way for shortages and cost-push inflation. Inflation was soaring, long-term interest rates were soaring, stock prices were languishing.

Stage 2. From the early 1980s to the early 1990s. Financialization. The US central bank started to follow a shock therapy strategy by hiking interest rates sharply, thereby slowing down inflation and inevitably causing a deep recession in the economy. To support the economy and consumption a loose fiscal policy was initiated. Most importantly, the financial sector was liberalized to make it easier for companies and private individuals to borrow money. The growth rate of real GDP started to accelerate. Long-term interest rates were falling sharply and stock prices were rising. The growth rate of labor productivity was still slowing down.

Stage 3. From the mid-1990s to the mid-2000s. Globalization Unlimited. A positive supply shock following the opening up of China, the former Soviet bloc, and other emerging markets. New supply chains, the outsourcing of manufacturing facilities to poorer countries, and the global migration of labor reduced costs and eliminated the threat of cost-push inflation. This allowed to lower interest rates even further, thus encouraging private individuals to borrow more to support consumption. Finally, demand-pull inflation started to reappear. Stock and other asset prices were rallying due to rising profits, since the demand-pull inflation for final products was far above the cost of resources, labor, and borrowed money. The growth rate of labor productivity was still slowing down.

Stage 4. From the late 2000s to the late 2010s. Financial Hangover. The declining marginal economic effect from additional private debt reached its tipping point: more private debt could not support more consumption and higher asset prices anymore. Asset prices started to collapse, thus undermining the creditworthiness of private borrowers and their lenders. The governments started to refinance the private sector through stimulus programs, while the central banks started to refinance the governments by buying public debt and lowering long-term interest rates to zero and below. The private sector stabilized its debt situation, but at the expense of consumption. Inflation was subdued. The growth rate of real GDP was meagre. Stock prices recovered and resumed its meteoric rise since: first, input prices (resources, labor, and interest rates) were falling down; second, the amount of liquidity was substantially exceeding the amount of investable opportunities. Cryptos, fintech and other alternative assets were thriving for the same reason. The growth rate of labor productivity was becoming negative in some countries.

Stage 5. From the late 2010s to now. A New World Order in the Making. A protracted period of low economic growth was undermining political stability around the world. Geopolitical and domestic tensions were visibly on the rise. Cracks began to appear in global supply chains due to trade wars, the pandemic, and military conflicts. This led to the resurgence of cost-push inflation. The central banks started raising interest rates, while asset and stock prices are falling significantly. It is quite probable that the growth rate of labor productivity has become negative in most countries.

What can we expect in the nearest future? There are three possible scenarios: please check out my article “Why History Never Ends.”


But don’t worry too much. The good thing is that the purpose of life is to BE HAPPY rather than to be rich or to consume more. So, life still goes on!

Autors: Oļegs Jemeļjanovs, LinkedIn profile

SWEDBANK FINANŠU TIRGUS DAĻAS INVESTĪCIJU JOMAS VADĪTĀJS Oļegs Jemeļjanovs Latvijas Universitātē ir ieguvis maģistra grādu uzņēmējdarbības vadībā, kā arī doktora grādu ekonomikā Roterdamas Erasma Universitātē Nīderlandē. Arī ir ieguvis sertificētā finanšu analītiķa (CFA) kvalifikāciju. Ir strādājis finanšu jomā gan privātajā, gan valsts sektorā (Latvijas Banka, FKTK, Finanšu ministrija). Finanšu tirgus jomā ir strādājis kopš 1999. gadā, tirgus risku vadības, finanšu aktīvu pārvaldīšanas un pārdošanas sfērā. 2019. gadā kļuvis par Swedbank Finanšu tirgus daļas investīciju jomas vadītāju.