Once again, the economic system is trying to adjust to political and monetary interventions. The year 2023 marks the end of a historical period characterized by zero-cost credit.
The monetary expansion that began in the early 2000s led to the great financial crisis of 2008 and the emerging markets boom. Exaggerated demand expectations and easy access to capital caused an overexpansion of production capacity and the subsequent industrial restructuring between 2015 and 2018.
Later came covid, with a further reduction in production capacity while demand was sustained with new money. The result was the highest inflation since the 1980s and a drastic rise in interest rates in response, which precipitated the current recession.
The possible duration and intensity of this difficult period is unknown. Although some believe it is a classic stock liquidation process that is bottoming out, it is highly probable that the adjustment could extend well into 2024. We could even be entering a long period of deleveraging and austerity.
This recession has shown that new money does not create wealth, but rather misallocates resources. There is no wealth without capital, and there is no creation of capital without savings. And there is no saving without reduced consumption. In addition, new money creates the economic inequality that often precedes social disorder.
Normally in a recession, there is an abundance of malinvested capital. But for the moment, it seems to be the opposite: there is a shortage of labor, cars, roads, energy, batteries, semiconductors, food, and water. When governments take control of our domestic economies, the result is chaos, discoordination, and poverty. To all this chaos is added a global struggle for resources, with even military confrontation between countries.
It is evident that, in the absence of an unlikely radical technological transformation, we will have to prioritize things and give up others, and the rosy picture of a thirty-five-hour workweek, two electric cars, vacations abroad, disposable clothing, and eating healthy, cheap, and outside the home will not be possible.
However, there is a limit to intervention, and people together—businesses—have enormous adaptability. This has consisted in recent years of flexibility, efficiency, consolidation, and rationalization.
The producer who has been able to adapt is better positioned than ever and, in many cases, enjoys unprecedented market power. From a chemical company that has consolidated the market we hear:
Our pricing is a ratchet. Our pricing only turns one way and does not reverse. If necessary, we will sell zero volume into the freely negotiated market to preserve our ratchet principle and the value of our broad downstream chains based on those linchpin products. (Scott McDougald Sutton Olin Corporation—President, CEO & Chairman in Q2 2021 results, conference call July 28, 2021)
The owner of a shipping group made the following comment a few weeks ago:
Our time has come; the market owes us a lot of money. And for us to be able to go to our stakeholders—to our shareholders to build new ships, these are the rates that we require. We’re not being arrogant; we should never be arrogant. We never say take it or leave it. We are always willing to provide you the service and the reliability that we are known for, but we need higher rates. (Niels G. Stolt-Nielsen Stolt-Nielsen Limited—CEO & Director Q1 2023 results, conference call March 30, 2023)
Economic, political, and climate-change uncertainty, along with financing difficulties and pressure from shareholders asking for dividends suggest that this position of strength will not change in the short term.
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