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That the global economy is slipping into recession is self-evident. What’s not yet known is the eventual depth and length of the recession. Given that the extreme policies needed to avoid recession over the past 15 years have reached extremes that are now the problem, not the solution, there won’t be any more fiscal-monetary “saves” this time around.

What’s also not yet known is how far the few winners will advance and how far the losers will fall. Recall that when it comes to wealth and power, what matters is not absolute gains or losses, but relative gains or losses: how well we do in relation to our peers and competitors.

For example, among 10 households with $1 million in assets, if one household experiences a decline in net worth to $900,000, that’s an absolute drop of $100,000–not exactly welcome. But if the other 9 households experienced losses of between $500,000 and $900,000, leaving their net worth between $100,000 and $500,000, the household that lost only $100,000 gained tremendous ground in relation to the rest of their peers.

This will also play out on the grand stage of nation-states and alliances: those nations / alliances that weather a deep, lengthy global recession with modest losses will be much stronger post-recession that those who suffered losses that cannot be replaced that then tipped the nation into destabilization and eventual collapse.

I have long held that in this sense, recession can be weaponized by those with superior core assets in resources, flexibility and adaptability: Weaponizing Global Depression (2/23/23).

Every nation can print money, but the trick is to be able to do so without unleashing currency debasement / hyper-inflation. There are only a few levers that can be pulled to get away with printing money out of thin air to support one’s economy in recession, and none are easy to sustain:

1. Print the money by issuing bonds that pay higher yields than competing bonds. Capital flows where it’s treated best, and higher yields are attractive–but only if the following two conditions are met:

2. The bonds and the currency are highly liquid and can be traded in size so major players can enter and exit at will. Illiquid securities are inherently risky, as when the time comes to sell and the exit door shrinks down to the size of a dormouse, hefty gains reverse immediately to catastrophic losses.

3. The collateral for the newly issued bonds–the underlying economy and governance structures–are transparent and trustworthy. The collateral for newly issued bonds and currency is the nation’s economy and governance structures: the greater the diversity of economic resources and activity, the more transparent the markets, data and regulatory structures, the greater the trustworthiness of the collateral and thus the lower the risk profile and premium.

This is why nations with poor transparency, narrow economic bases and regulations that change without warning with regime zig-zags have to pay extraordinarily high bond yields to attract capital: the risks of default, regulatory reversals or illiquidity are intrinsically high.

You see the problem: it’s impossible to broaden one’s economic base and establish trust overnight. It takes years or even decades to establish liquid, trustworthy markets that remain trustworthy even as political winds shift.

Those nations that have broad economic bases and trustworthy financial systems are few, and their choice is simple: either squander this collateral by using the newly issued money to prop up unproductive, rentier BAU (business as usual) elites, monopolies and cartels, or use the recession to divert resources and money away from dead-weight BAU and invest it productively.

Those nations that create money to prop up rentier BAU will slide into potentially terminal stagflation as creating new money and giving it to unproductive monopolies, cartels and elites increases the supply of money available to “invest” in asset bubbles–unproductive elites outbidding each other for the pool of productive assets–without increasing the productivity of the economy. This deflates the value of the currency (what we call inflation) even as it guarantees systemic malinvestment that keeps growth of productivity stagnant.

The trick is to use the newly created money wisely, which requires limiting the greed and power of BAU elites–something few nations (if any) can manage, as the BAU elites put their own interests above the interests of the nation and its citizenry.

Those nations that are largely self-sufficient in energy, food and technology will obviously weather recession better than those that depend on other nations for the essentials of life. Those nations that depend on selling resources such as oil and minerals for their national income are also extremely vulnerable, as recessions depress demand which then leads to lower commodity prices. Those selling the resources can attempt to restrict supply to keep prices high, but a deep global recession will suppress demand to the point that restricting supply may not be enough to keep prices high enough to maintain Business As Usual.

Since the easy-to-extract resources have already been exploited, what’s left is more expensive to extract. The costs of extraction remain stubbornly high while revenues plummet, leading to a severe compression of net income. Those nations that depend almost entirely on selling resources will face a collapse of net income that will test their status quo to the breaking point.

The story of civilization is BAU elites will do everything in their power to maintain the status quo as it is because this configuration is the source of their wealth and power. Given the power of their self-interest, this configuration is brittle and thus prone to cracking in unpredictable ways.

To survive challenges like deep, lengthy recessions, nations must have the structural flexibility to enable competing elites to replace the BAU elites whose exploitive, unproductive grip has fatally weakened the nation’s social, political and economic orders.

Just printing money to prop up a brittle, exploitive, unproductive BAU elite of bureaucracies, monopolies and cartels will not reverse the recession, for just squandering new money can’t fix what’s broken. Rather, creating more money to maintain the corrupt, extractive BAU can only increase the brittleness and the risks that stagnation and rising debts will lead to unanticipated stresses that break the status quo.

The few winners of global recession will use the decline as a means to break the chokehold of unproductive BAU elites and divert resources to more productive uses. The losers will squander their diminishing resources on propping up the source of their national decay: self-serving BAU elites.More By This Author:Rates, Risk And Debt: The Unavoidable Reckoning Ahead
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