This would be bitterly ironic, since “patriotic” Russian economists
have been relishing the prospect of a US economic downturn for some time.
In the United States, there used to be a presidential
affliction known as Tecumseh’s Curse. Every American president elected in the
year ending in zero, from William Henry Harrison (elected in 1840) to John F.
Kennedy (1960), either died in office or was assassinated. Ronald Reagan (1980)
finally broke the spell, and George W. Bush (2000) confirmed that it was a
thing of the past.
But Reagan ushered in another vicious pattern. Starting with
him, every two-term US president would preside over a spectacular Wall Street
boom, which would then turn into a bust before he could leave office.
Moreover, each subsequent financial debacle was worse than the
one before. The Black Monday of 1987, which occurred on Reagan’s watch, was not
followed by an economic downturn, but the severe dot.com crash in 2000 led to a
protracted recession and tarnished Bill Clinton’s economic legacy. At the tail
end of his presidency, Bush saw the worst global economic and financial
calamity since the Depression.
Barack Obama is another two-term president nearing the end of
his stint in the White House. So far, his presidency has coincided with a
protracted rally on Wall Street. Major stock indices more than doubled trough
to peak, setting fresh all-time highs. And, by some measures, the stock market
bubble is even worse today than under his three predecessors.
As in 2007-08, the bubble on Wall Street is only one of several
asset price bubbles affecting a wide range of financial, commodity and real
estate markets around the world. This is not surprising: the US Federal Reserve
kept its interest rates at zero for an unprecedented seven-year period and was
pumping liquidity into the financial system for most of that time. Most other
major central banks around the world had to follow its example both because
their own economies were weak and because the dollar is a global reserve
currency. Money has been plentiful and extremely cheap, resulting in massive overinvestment.
The age of free money, however, is coming to an end. In 2014,
the Fed stopped the flow of liquidity and last month it began raising its
interest rates.
Over the past year and a half, asset price bubbles have been
popping one after another. The most visible deflation was seen in the oil
market, where prices tumbled by two-thirds since mid-2014. Other commodities,
Chinese stocks, emerging government currencies and, most recently, junk bonds
have also suffered major price declines. Stock markets were rocked by bouts of
severe volatility during 2015. Stock markets in the United States, Europe and
Japan are vulnerable to a major correction, and so are real estate markets in
New York, London and other cities around the world where the new international
class of the super-rich have been parking excess liquidity.
Bursting bubbles is the way markets annihilate excess liquidity
and punish overextended players. Trillions of dollars worth of wealth have
already been destroyed since 2014, and corrections in stock and real estate
markets are likely to speed up the process during 2016.
This could lead to a worldwide recession, which has a potential
of turning nasty and be protracted, since few of the major structural
imbalances identified by the Great Recession of 2008 have been eliminated.
The economies of both Ukraine and Russia suffered last year
even though the rest of the world continued to grow, albeit slowly. A global
downturn will create even more problems for those two countries. However, they
are facing a different set of fundamentals. Ukraine, however haltingly, is
clawing its way to health, whereas Russia, rather dramatically, is sinking
deeper into a self-made hole.
An economic crisis beyond its borders may actually benefit
Ukraine. True, it won’t be able to honor its financial obligations, but the
country is effectively bankrupt, anyway. On the other hand, if it is merely one
of several countries crushed by their debt burden during the next worldwide
recession, the international financial community may be forced to effect a
radical debt restructuring and debt reduction for heavy debtors.
At the same time, the ongoing military conflict has helped make
Ukraine’s economy more self-sufficient and reduced its dependence on Russia.
While progress on reforms and fighting corruption has been painfully slow, some
foundations have been laid, and it is an old truth that reforms are easier to
push through during economic crises. In other words, Ukraine may not have the
luxury of continuing to muddle through for much longer.
Russia is a completely different story. While Ukraine is slowly
building institutions of state and society, Russia systematically destroys its
own imperfect ones, which it inherited from the Soviet era or managed to create
during the 1990s. The disintegrating Russian state is increasingly dependent on
Putin personally and his small coterie. The country’s policy and economy have
become hostage to their spasmodic decisions.
Meanwhile, reality has been almost completely replaced by
television, which is the only place where economic reforms, diversification and
import substitution exist. Russia remains dependent on revenues from
commodities exports, especially oil and gas.
In this environment, corruption and stealing by kleptocrats
have intensified, taxes and other levies increased and the business climate .
There is less to steal and to divvy up among bureaucrats, since falling oil
prices and the depreciating ruble have reduced the size of the economic pie.
Everyone is busy stuffing their own pockets and shifting assets abroad like
there is no tomorrow. Indeed, there is a sense of an end of an era in the air,
and it could well come true if a global economic downturn further depresses oil
prices.
