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The Rules of the Game are in Play

Don Curren May 10, 2019

Imagine the economy as a game of chess.

Just as in chess, the moves that any “player” in the economy can make are determined by a set of rules. The rules are much more complex in the economy and come in a variety of different forms – laws governing fraud and corruption, and securities markets, the ethical codes specific to individual companies, professions and industries, health and safety regulations, etc.

Underpinning those rules is a broad conception of what the economy is and how it should work – a “paradigm,” if you will. There have been a number of such paradigms through history – theocratic, mercantilist, socialist and capitalist, to name some of the major ones.

Unlike chess, the rules of which have been locked in place for centuries, the rules of the economic game can be altered, and that can happen rapidly.

We’re in a period of rule change now. Just how the rules will mutate and evolve isn’t clear – it never is during the process of change. But some of the possibilities are coming into view.

In the world’s advanced economies in the last few decades the dominant paradigm or policy framework has been called “neoliberalism” – the agenda of globalization, trade liberalization and deregulation that politicians and economists deemed the most effective route to prosperity and stability.

The events of the last three years arguably represent the first cracks in the TINA doctrine – the assertion that “There is No Alternative” to neoliberal capitalism ascribed to Margaret Thatcher – that has dominated policymaking in the major advanced economies since roughly the 1980s.

The first stage in the transition began in 2016 with the triumph of Donald Trump in the US election and the victory of the pro-Brexit forces in the UK referendum.

Both of those events reflected an at least partial rejection of globalization and trade liberalization.

The avowed agenda of Trump and his fellow travelers in other countries didn’t represent an attack on the entire neoliberal paradigm. On some of the key elements of neoliberalism – most notably deregulation – the populist/nationalist movement urged an intensification of neoliberalism’s basic tenets rather than a retreat from them.

But tugging on the globalization thread of the neoliberal tapestry risks unravelling the entire thing. It sets the stage for “brave new worlds” of economic and social policy, the details of which will be conjured into existence by the magi of the political world.

Politics is a pendulum. It proceeds by action/reaction, and the recent emergence of populism on the right is provoking an equally strong – or perhaps stronger – reaction on the left. And that’s brought a plethora of new policy possibilities into play.

One of them is the “Green New Deal,” the idea of launching a comprehensive set of policies aimed at addressing climate change and the rise in inequality that many believe helped kickstart the initial populist “crusade.”

Another is something called Modern Monetary Theory, or “MMT.” It’s a relatively new and highly controversial approach to monetary and fiscal policy – and the relationship between. One of the key assertions of MMT is that a nation that can issue debt in its own currency – if that currency is sufficiently in demand on financial markets – it can fund government by issuing effectively unlimited amounts of debt.

Perhaps most tellingly, the Word That Cannot Be Spoken in American political discourse – “socialism” – has resurfaced and been embraced by some US lawmakers.

Even some high-profile billionaires, the ultimate benefactors of neoliberalism, have started to raise questions about the sustainability of the current model of capitalism.

“I’m a capitalist and even I think capitalism is broken” high-profile hedge fund manager Ray Dalio tweeted recently.

Interestingly, Warren Buffett, long considered an exponent of a more benign version of capitalism, avowed strong support for the embattled ideology at Berkshire Hathaway’s annual general meeting over the last weekend.

“I’m a card-carrying capitalist,” Mr. Buffett said, according to the New York Times. “I don’t think the country will go into socialism in 2020 or 2040 or 2060.”

My intent here is not to advocate for – or reject – any of these ideas (although the old saw that there’s no such thing as a free lunch does come to mind when that idea of unlimited issuance of sovereign debt is raised).

Nor is it possible to enumerate all the policy possibilities that will be unleashed. When the boundaries of accepted discourse and conceivable policies are extended, there’s no telling what bizarre – or brilliant – policy innovations may surface on the peripheries and then swim to the mainstream.

The only thing we know for sure about what will happen is that we don’t know what’s going to happen – that’s one rule of economic change that itself will never change.

But it’s going to be fascinating to watch it unfold. And it will have major consequences for all players in the great game of the economy – and that, of course, is all of us.

Don Curren
Market Strategist and Content Editor
dcurren@cambridgefx.com
@dbcurren

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