A few thoughts on economic nationalism

I want to talk a little about the political economy. A few months ago I added the topic tag “nationalism” to the topics this blog covers because I believe this is an issue which becomes relevant during global economic crises. So far, I only see two posts labelled with that tag, but I may go back and re-tag some other relevant posts that way.

Here’s the depression macro thesis I have developed prominently featuring a kernel of nationalism:

  • Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
  • Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
  • As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
  • Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
  • From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.

In one of the two posts I wrote now tagged “nationalism” called “Rising economic nationalism” the thoughts of SocGen’s Dylan Grice for Europe feature prominently. Dylan wrote:

So “in-group bias” can cause wrong ideas to persist longer than they should. But persistence isn’t actually the problem. Any distribution has extremities at any point in time and there will always be some people with bizarre opinions about why one out-group or another is the cause of the world’s wrongs. The problem is when such thinking gains traction …

And this is why I’m worried about where the euro is going. Most experimental evidence clearly shows that while in-group bias is common, we do a good job at suppressing the distorted perceptions and prejudices it creates. Social norms, empathy and the adoption of more rational value systems all help to mitigate our tendency to discriminate against out-groups. However, on a personal level that suppression requires an ongoing supply of what is essentially a highly scarce resource: mental energy. And in a fascinating literature review of recent work into the psychology of prejudice by two academics at the University of Kansas a detailed picture emerges of how mental stress and emotional fatigue increase our susceptibility to “in-group bias”. Thus, the rise of aggressive nationalism throughout the world in the 1920s and 1930s and the consequent breakdown of global trade all occurred under conditions of extreme economic distress.

I believe what we are seeing is the beginning of the eurozone’s credit crisis, not the end. The historic and psychological evidence clearly links economic dislocation with the scapegoating of out-groups and, of course, the eurozone edifice stands increasingly lonely and tall as a lightning rod for the latter. I believe the likelihood is that over the course of the next decade or so, the trend will be towards greater fiscal problems and greater economic problems. I believe these problems will increase the temperature of debates about whose fault it all is, and that as the conclusion to these debates becomes more polarized they will play into the hands of nationalist, anti-immigrant and increasingly, anti-euro sentiment.

I saw three separate pieces today that prompted me to write about nationalism once again.

First, James Fallows had a piece called ‘When Will They Take a Stand Against Their Own Crazies? He hits on two threads. Writing about the boos a homosexual American soldier in Iraq received during a recent Republican debate, Fallows says:

One of the earliest political histories I remember reading was on why it took Dwight Eisenhower so long to condemn Joe McCarthy and his destructive, bullying "investigations" during the Red Scare years. I can’t now be sure just where I read it, but I remember the mounting sense among Eisenhower’s admirers that he was shaming himself by not taking a stand (and indeed for campaigning with McCarthy during the 1952 election). Ike finally turned on McCarthy late in 1953, after McCarthy began attacking the patriotism of Army officers and challenged Ike’s own Secretary of the Army. The situation now is different now in many ways, but as the reader suggests the basic dynamic is the same. The hateful side of a party is showing itself, and the party’s leaders are either pretending they don’t notice or else are actively pandering to the haters.

But also notice how Fallows leads talking about the muscular approach the police took to anti-bank demonstrators this past weekend. This is exactly what I am thinking of when I talk of an “unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government”.

The point is that in-groups will always demonise out-groups, which gives economic nationalists strength. Interestingly, this concept of demonization ties in nicely with the second piece about the Le Pen’s National Front in France. The Telegraph writes:

Miss Le Pen, 43, a twice divorced mother of three and lawyer by profession, is disarmingly amiable and unusual among French politicians in cutting straight to the chase.

She is less punchy – metaphorically and literally – than her father and uses a sophisticated, gentler vocabulary but has the same combative character. Like him, she gives the impression she says what she thinks and thinks what she says.

"I believe I have succeeded in de-demonising the party, perhaps not among the elite, because the elite are very attached to the system that feeds them but among the ordinary people. When you see how I am approached by people in the street and treated with kindness and affection even among those who don’t vote for me, you can see that in the space of ten years things have changed enormously," she says.

"Of course people say I am the soft face of the devil and suggest that nothing has changed, but that’s their only way of maintaining the wall to keep us out. If that falls, then we will be elected and they know that."

Asked what she believes is the greatest menace to France, she is quick to respond and unequivocal: the European Union and immigration.

"The greatest threat is the loss of our freedom as people because we can see that in reality the European Union has become another Soviet Union constructed without the people and sometimes against the people. It makes decisions and our democracy has disappeared; we French people cannot decide on our own future, it’s a bureaucrat or technocrat who decides in our place.

"The other great danger is massive immigration that will result in the loss of our identity. I am madly in love with the idea of there being a diversity of nations, but for nations to be diverse their people have to stay together. It is not a lack of respect or hatred for foreigners, but I want Malians to remain Malians and defend the language and identity of Mali, Americans to stay Americans, the Chinese, Chinese and the French, French."

Marine Le Pen: Is the ‘devil’s daughter’ right? – Telegraph

Miss Le Pen wants to “de-demonise” her party so that it can in turn demonise the European Union as “another Soviet Union” and warn of the dangers of a “massive immigration that will result in the loss of our identity.”

The third piece is actually a video of Hans-Werner Sinn, the head of Germany’s well-regarded ifo Institute. He was on Bloomberg talking about the prospect of recession in Germany, and,  surprise – he doesn’t see one anywhere. He sees the current situation in Germany as rather robust. I think his characterisation of the German economy is noteworthy for two reasons.

First, I just wrote a post called “S&P: More bailouts will lead to Germany’s eventual downgrade”, which says pretty much the exact opposite. In Sinn’s defense I would say that I focus on expectations and Sinn described the current situation as robust in contrast to more worrisome expectations. However, in noting a week ago that Nouriel Roubini agreed with Sinn that Greece should default and abandon the euro, I specifically remarked “Where Sinn is concerned about German taxpayers paying the part of the bill left for bank creditors, Roubini is concerned about Greek taxpayers and workers also paying that bill.” My point was to focus on the nationalistic interpretation of the sovereign debt crisis to which Dr. Sinn gives voice. His view is a softer version of the morality play which says that Germany is a virtuous, prudent country which should divorce itself from Greece, which is a slothful, reckless country. That view of the sovereign debt crisis brings to mind this editorial quote which I tacked on to the end of a post about Europe:

P.S. – Economics is not a morality play. Hopefully, you will have noticed that I don’t write about this in moralistic tones (using language that conveys undertones about ‘evil’ Germans, ‘lazy’ Greeks and so on). Anyone who does has an axe to grind and you should be very wary of the biases this creates for their analysis.

I thought Sinn’s analysis on the eurozone breakup made sense. And in listening to his analysis of the German figures below, I believe he is careful to distinguish the ‘rather robust’ current conditions from less robust expectations. But, it has always been clear to me that he sees this economic crisis in nationalistic terms which can cloud analysis. When Dr. Sinn says, “no, no, no, no, no, no, I don’t see a recession for Germany” just after the 2-minute mark, this is what I am hearing. I would appreciate any comments on whether his comments give you this same impression.

Bottom line: Economic nationalism is back.

I see nationalism as a force which rips the civilised veneer off of society and reveals the metaphorical reptilian brain qualities lurking underneath in all of us. As always, it is the language and the narrative, appealing more to emotion than reason, which produces a click-whirr response in voters. And politicians know this. Politicians like Rick Perry that use emotionally-charged language like ‘Ponzi scheme’ or ‘almost treasonous’ as a descriptive narrative make it safe for previously fringe thinking in the mainstream, permitting government-sanctioned and government-controlled extremism to become ever more acceptable.

  1. Dave Holden says

    So your not going with my “Bonkers” idea then ;)

  2. G C Mays says

    Yes, I get the same impression that he certainly has a bias. He seems to want assert Germany’s strength in the face of what is eventually going to amount to large financial expenditures and indebtedness. To be fair I may already be biased towards a recession for Germany because of what the data is showing me for many western european countries.

    Also, I really like your referring to rise in populism and the eventual emergence of a “more muscular” form of government.

    IMO the American public at large has not really caught on to the new tune yet but they are slowly becoming aware (2010 elections and subsequent buyers remorse in Wisconsin and Ohio). If and when they do (this may take awhile) it will be interesting to see how the American government reacts.

    Nice thought provoking post.

  3. geerussell says

    That was a great read and a lot to think about. I stumbled though, trying to reconcile the first two bullet points with each other (and with the idea of a balance sheet recession).

    I may have misunderstood the sequence but it seems to say a country would retreat from deficit spending/stimulus in the face of 2-3% growth, leading back to recession. Then, moving on to the second point, would engage in money printing (more spending/stimulus?) again during an upswing causing a false boom.

    If deficits/stimulus are withdrawn at the first whiff of growth, leading to recession how does the scenario of “money printing” during an upswing follow when the upswing was undermined by the withdrawal of stimulus?

    1. Edward Harrison says

      The sequencing is somewhat concurrent, but I think you have it largely right.

      Bullet one says that large scale deficit spending is always going to be unsustainable politically. The desired outcome is a revival in the economy, employment growth and tax receipts to close the gap. But, if it doesn’t close, the deficits become the focus.

      Bullet two says that currency creators will expand the money supply and deficit spend to the degree they can politically (the key exception being the eurozone where deficit spending is constrained by national governments not being currency creators). This will ‘work’. But unless the bad debts are wiped away the boom causing asset prices to rise will be false. Monetary expansion and negative real rates also cause real assets to rise as a hedge.

      Bullet three says this will create biflationary pressure (wage stagnation and debt deflationary, commodities inflationary) where the secular force of overindebtedness makes any inflation deflationary by causing recession and giving the lie to the false boom.

      Bullet four says this will cause social unrest which will lead to both the rise of populist nationalist politicians and governments making authoritarian moves to quell disturbances.

      Bullet four says none of this is good for equities.

  4. Henri Myllyniemi says

    Europe shines on troubled stagelights. Europe seeks justice, Europeans seek justice. The US and the UK offer tyranny. Let’s see:

    The Washington-based organisation named IMF told the fund is uncapable to handle the crisis in Europe should it spread. IMF consists perhaps the top line of firepower, if it is given that. However, the Britons and people in the states have condemned this European banking crisis alone as “EMU’s fault”. I am not to defend the mistakes made by the ECB, but I can see the Versailles treaty rising here. It was as just and fair.

    So, in reality there aren’t enough artillery in IMF, but instead you can expect economic powerhouses like Malta and Slovenia to be buildind multitrillion fund to save the world economics. As the US Treasury Secretary Timothy Geithner has been repeating that the world economics will fall off the cliff if the crisis is not contained. Excuse me, doesn’t it matter at all for the US to prevent global crisis? Doesn’t it matter to China, to the UK or anyone else but few European nations?

    That would be understandable should the eurozone countries be sole to condemn. But they are not. How are British banks and US banks connected into this crisis? According to BIS statistics these two countries hold lots of risk, in addition to France and Germany. France and Germany pay a lot (via EFSF) and receive a lot, otherwise they needed to recapitalise their banks.

    But so do the US and the UK receive a lot, without participating hardly at all (they do a bit via IMF). Therefore the fall of the countries would mean direct losses to the US and the UK, but as well to France and Germany. How things differ? Instead of fueling EFSF France and Germany would pay to their banks, not much change.

    Europeans will start to realise this unjustice. I’d recommend mr. Geithner using less threatening rhetoric concerning handling this crisis. If he wants to give his advice he should first show how much he is willing to put effort to save the world on his behalf. I’d recommend this same to the mr. Osborne in the UK.

    1. David Lazarus says

      The UK and US benefit immensely from the EU bail out. If there was a collapse in debt then the UK would face the prospect of £46 billion losses on RBS involvement in Ireland alone. Then add in the loans to France and Germany. A collapse of the Eurozone banks would devastate UK banks. The US banks would also be severely impacted, hence the involvement of Geithner. He is desperately trying to avoid any defaults because its previously re capitalised banks like Citibank and Bank of America will be facing insolvency again. Will the US public tolerate TARP 2?

      1. Henri Myllyniemi says

        Every country should consider to recapitalise their banks, first by owners but if they are not interested the state should go and offer capital. In exchange of stocks, no need to fund without return.

        But as the countries like the Netherlands, Finland, Estonia and Austria start to give the botox-treatment to international and reckless banks this can turn very ugly.

        My solution to this mess is that Greece will receive the default. French banks say they can absorb losses. Even if they didn’t France will be ready to help French banks. Germans will do the same on their own banks. The UK and the US take care of their own banks.

        ECB can be on alert as well to help Greek banks to survive the first shock. Some of these banks do not deserve to see another day. Euro-zone nations will offer another type help for the Greeks: how to collect taxes, how to build land registry, how to eliminate rampant bribery. They can also help with education so that the Greeks will eventually get back on their own feet. I don’t expect this to happen overnight. It can take years.

        This “more austerity” won’t help. People loses homes, electricity, jobs… everything. It’s not fair and it will cause serious unrests if this method is strictly used.

        Another possibility is to divide EMU as half. Some great topics have been written on this portal of it, too.

        1. David Lazarus says

          I think that the past bailouts have been very badly managed. The odds of Citibank or Bank of America collapsing have increased and these are touted as safe. Here in the UK the tax payer did not wipe the shareholders out because the government had hoped to sell their shares in a future privatisation. Though when these banks collapse in the next wave of defaults it will be the taxpayers shares that are wiped out. So re-capitalising the banks should have been completed by now with no government funds involved.

          I agree austerity has been a failure and the people should come first. Politicians will pay for forgetting that fact with their careers and even their lives if things deteriorate into anarchy.

          The EFSF should only be used to capitalise new banks. Old banks that fail should go through the Swedish good/bad bank clean up. Shareholders and bond holders wiped out and customers get a newly capitalised bank to trade with. Then big banks should be broken up once and for all. Investment banking should be split off. It worked for centuries before deregulation.

  5. Keating Willcox says

    First, let me thank Malcom for the excellent piece on Iceland. Second, I really enjoy the reptilian brain example although it really is quite a slur. Third, if Iceland tells us anything, it is that bailouts of big banks are what this is all about. European citizens need to unite, make sure the big banks and their investors eat the entire debt. Permit smaller smarter banks to pick up the pieces, and let any country with a 3% deficit automatically get the boot from the Eurozone. Hey, I thought that was already the rule.

  6. stephan says

    Dear Mr Harrison, I think that many, many articles of yours are excellent and enlightening. Unfortunatelly I do not get this one.

    How can it be nationalistic to say that you do not see that your country will be in a recession? The way I look at it you _perceive_ this as being nationalistic because you have expectations as to the behavior of Mr Sinn. And if -as you obviously do- Mr Roubini and you subscribe to the logic of Mr Sinn’s statement that a Greek exit is very likely or even necesarry – how can this statement be inflammatory out of the mouth of Mr Sinn caring for German lenders but not if written by Mr Roubini caring for Greek creditors? Both of them forget to mention that it takes two to tango and only care about the damages that may arise to _one_ party of the debt contracts. Either both are inflammatory in that they argue in an imbalanced way or neither of them is inflammatory.The proper way to argue for Greece exit in an unassailable and hypercorrect way is to argue that _both_ German _and_ Greek poeple might be better of. But you meassure with two standards if you acuse Mr Sinn to be inflammatory but not Mr Roubini.

    Neither do I see the nationalism or inflammatory nature of the quoted statement of Ms Le Pen. To compare to the Soviet Union is scary but in no way more so than the pictures European idealists dreaming of ever more integration paint of civil wars and decade long misery if an ever so slight reversion of European integration should ever happen. She has every right to respond in kind. And by criticisng Ms Le Pen as harshly as you do by writing those adjectives you demonise her as much as she demonises others which is a bad thing if you’d like to teach anybody that this is the wrong way to communicate. Moreover, she is basically right to warn that the EU lacks democratic legitimacy. The European parlament is a parlament in name only as its members are far too removed from the worries and the thinking of their constituencies. Moreover, in a true democracy it should be possible that the poeple of the biggest region that is part of that democracy get elected for powerful positions. Would Poles or French poeple elect some German President of the United States of Europe? The answer is no. They’d be afraid of empowering the German poeple. Would Germans elect a Fench man? No. They’d perceive him to be arrogant. Ms Le Pen is right to name the problem we face if we integrate further and the German constitutional court is right to enforce limits of European integration because of doubts regarding democratic credentials. It is very telling that the UK with its democratic credentials that reach back to medievial times does not really want to be within this construct. Neither is the majority of German poeple happy and the Fench are thinking poeple as well.

    Concerning immigration you should finally remember that European immmigration equals muslim immigration and the common experience of continental Europeans is that integration of muslims is difficult and often fails.
    B.t.w the share of muslims in France or Germany is (more than) twice as high as in the UK and is many times the level of the US. Yet I remember heated US discussions regarding a project to build a mosque near ground zero. I’d like to see the white core of America or Scotland handle the levels of muslim population many regions of continental Europe have.

    Kindly heed your own advice: Do not be preachy, please. Delete that tag called nationalism up to the point where defense budgets across Europe rise. I am sorry to be preachy about that but I am much more convinced of your analysis if you explain the value of inverted yield curves as leading indicator of recession to name but one of your better articles.

    1. Edward Harrison says

      Stephan, that is quite a tome. I cannot possibly respond to it in its entirety. However, I do want to respond to the major points briefly.

      When it comes to economic nationalism, “Nationalism is a political ideology that involves a strong identification of a group of individuals with a political entity defined in national terms, i.e. a nation.”

      There is nothing wrong with a strong national identification per se. In fact, as you suggest some of the ideas expressed by Le Pen make sense, particularly her finding fault with the lack of democracy in the whole EU apparatus. If you re-read the post, you will notice I never demonise Le Pen for her IDEAS any more than I demonise Sinn or Perry. In fact I also agreed with Sinn and agreed with Perry that I believe social security is unsustainable politically and in use of real resources. As I was careful to say in the post, “As always, it is the language and the narrative, appealing more to emotion than reason, which produces a click-whirr response in voters”

      Clearly, in language Le Pen is ‘demonising’ when she makes comparisons to the Soviet Union because that is an emotive analogy. As you say, “To compare to the Soviet Union is scary” and that is exactly the point just as it is with Perry and his talk of Ponzi schemes and treason. It is the LANGUAGE and the INTENT of that language to draw an emotional, non-fact based response which is extremely dangerous.

      Your suggestion that I have demonised says to me you are reading something into my comments that isn’t there- perhaps based on your personal emotional identification with Sinn and Germany. I can’t know.

      However, the sweep of human history tells us that protectionists, demagogues, ideologues, nationalists and the like are emboldened by economic climates like these and it is EXACTLY THE KIND OF LANGUAGE these three people are using which allows this to happen. The ideas are irrelevant; it is the language and the intent to sway based on emotion. Sinn, for example, speaks in very moralistic terms that any Greek or Spaniard would see as extremely arrogant and condescending. Behind it is a view of the situation that I have seen from him time and again that is nationalistic, pro-German. When he says no SIX TIMES about Germany going into a recession it is very telling — to me at least, and I suspect to others — that nationalistic pride and emotion plays a large part in why he believes Germany will continue to do well.

      In sum, I don’t need to be preachy. I am making a forecast about the role of economic nationalism. What I see is three individuals using the language of emotion rather than reason to make fact-based appeals. To me that is a clear sign that the INTENT of their message is not to appeal to reason. And in troubled economic times I definitely see this as a harbinger of things to come. History will either prove this right or wrong.

    2. Edward Harrison says


      I also should add that you know full well the difference between an emotional appeal and a reasoned analysis. Yet you fell right into the trap.Nowhere in my statements here or in the post above have I used the emotional appeals that I am calling attention to.

      I also noticed you said nothing about Perry or Fallows. I should add that nowhere would you be able to divine my view on European immigration, German competitiveness, homosexuality, or the need for anti-bank protest. That makes it clear to me that your response and its length were galvanised by emotion rather than reason. This post was NOT at all about the validity of arguments one way or another. My personal view on social issues is not the point. The point is that nationalism is an us-versus-them formulation of politics that is a destructive force in crisis and creates the pre-condition for depression and/or military confrontation. And this will be a defining element of the coming economic environment.

      Stick to comments about how the political environment impinges on the economic one.

  7. Roland says

    Myself, I would willingly endure a two or three generations’ worth of reduction in aggregate economic efficiency, in exchange for a vigorous re-assertion of the economic and political prerogatives of independent nations.

    Even though one gets much further ahead when rolling in high gear, doesn’t mean a driver doesn’t engage the reverse gear from time to time.

    This version of European integration, and the current mode of global economic integration generally, has gone badly awry. The great benefits of improved global economic efficiency have not been well shared within the participant nations.

    Political renegotiation needs to take place, both between nations, and within nations.

    Being able to walk away is a key element of all kinds of negotiations. People are entirely justified in entertaining the idea of their nation’s withdrawal from integrationist schemes.

    As for migration and multiculturalism, a global cosmopolitan society may very well prove not to be multicultural. It could eventually, perhaps even inevitably, become a global monoculture. Is maximizing global economic output and resource utilization worth such a risk?

    The only people who can determine the value of their local or national culture in the global marketplace of ideas are those who possess and partake of that culture. If they choose not to do a merger, or to withdraw from a merger to which they previously agreed, then that is their prerogative.

    The great error of the Euro particularists, however, is that they blame the immigrants, rather than those who urged the mass importation of foreign labour to suppress wages.

    But all this is just my unfortunate subhuman “lizard-brain” at work. Off to the liquidation camp for me, I guess, once the lords of global cosmopolitan capital have triumphantly used their One Ring to bring and bind everyone into one supreme market.

    1. Edward Harrison says

      It may be your “lizard-brain” at work. That’s for you to say. There’s nothing wrong with asserting currency sovereignty. The Brits, the Swedes and Danes have done. Anyone can be anti-Euro, pro-democracy without demagoguing the issue. That’s the point.

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