The Bear’s Lair: Death spirals

The U.S. Consumer Price Index ticked up again this week, to 1.2% in the latest month (15.4% annualized) or 8.5% in the last 12 months, making the 10-year Treasury bond rate at 2.7% even more inadequate to restrain it. As the negative real rate of interest gets more severe, it pushes inflation up further, causing a death spiral that is eventually solved by a sharp surge in bond rates and an economic crash. However, that is not the only death spiral visible today; their prevalence makes this column even more pessimistic than usual.

The price/interest rate death spiral is easiest to explain. With each strong inflation number, the differential between the prevailing rate of interest and the inflation rate increases, making the interest rate more sharply negative. That makes the Fed’s task in restraining inflation harder, and means it needs to rise rates more sharply to have any effect on inflation. However, a sharp raising of rates, as we are undoubtedly going to see shortly, will cause a collapse of values in the stock and real estate markets as the assumptions used to justify today’s absurdly high valuations are exposed as a tissue of lies. The crash in stock and property markets will then crash the economy. Death spiral 101!

Another simple one, much discussed since the 2020-21 pandemic is the crime death spiral in major cities. The overstuffed left-wing electorate of those cities elects District Attorneys, often backed by George Soros. Those District Attorneys then institute policies such as abolishing bail that allow criminals out on the streets and tie the hands of local police. This results in a rise in crime, which causes all the rich wokies to move out of the major cities. That increases the taxes payable in those cities and starves them of the resources needed for policing, which worsens crime still further.

New York is currently undergoing this death spiral; in theory it can be reversed by electing a “tough-on-crime” Mayor like the blessed Rudy Giuliani. In practice, Giulianis don’t grow on trees, and may be ineffective even if by some miracle they can get elected. In last November’s New York mayoral election, the Republican candidate Curtis Sliwa, the founder of the “Guardian Angels” vigilante group in the late 1980s, might have been a Giuliani, but he never came close to election, New York voters being far down their death spiral to destruction and the voting system being substantially rigged. New York got unexpectedly lucky in 1993; it may not do so again. Unless it is blessed with such a stroke of luck, the death spiral will continue and the city will become a wasteland, as it was in the 1970s only much, much worse. If there was a way to go short on Manhattan apartments, I would seize it!

In the corporate sector, there is a government/corporation death spiral that has had immense adverse effects on the global economy in the last few decades. Governments impose endless damaging regulations, then large corporations learn to manipulate their regulatory environment, ensuring that new regulations block potential competitors. As a result, small companies are frozen out of the market, entrepreneurship does not happen because of the regulatory thickets, which entrepreneurs have no means of navigating, and the large corporations become even more entrenched in their position.

This can have two downward-reinforcing effects on the economy. First, it slows growth and innovation, as the large corporations, no longer threatened by innovative competitors, become ever more sluggish. Second, it disillusions young people even further from capitalism, so as a result they support ever more useless candidates, with damaging regulations in pursuit of fanciful and chimeric environmental or social goals. The spiral effect is very clear; it also clear that to anyone freedom-loving, or even who wants a quiet life and modest prosperity, that spiral is pointed firmly downward.

Finally, there is the death-spiral caused by ever-rising immigration, legal and illegal, and global population. As this column has noted in the past, the natural level of world population before industrialization was about 1 billion. While it is clear that industrialization has made us all immeasurably richer, it is becoming increasingly less clear whether that increasing wealth and comfort can be spread to a global population that is now nearing ten times the size it was in 1800. Welfare and regulatory burdens are eroding living standards in the West; they have already caused a substantial decline in EU living standards since 2007.

The immigration death spiral produces a flood of low-skill immigrants at the border of every rich country, who demand welfare and are empowered by publicly-funded leftist lawyers. These people produce a downwards ratchet on domestic living standards in two ways: by demanding ever-increasing welfare payments and by allowing rent-seeking low-wage-lobby employers (which have always existed – some of the early Industrial Revolution textile manufacturers, notably the Peels, were not nice people) to undercut domestic labor and force wages down to subsistence level.

The population pressure in Third World countries then produces additional immigration pressure at the borders of rich ones. Two decades ago, it appeared that we were solving this problem through globalization, so that the differential between rich-country and poor-country wages would narrow gradually, while allowing even rich countries to grow richer as global wealth increased.

It is now obvious that, thanks to the appalling drag of socialism and environmentalism, the world is not growing richer fast enough for this benign arbitrage to work. In any case, we have now begun re-erecting tariff barriers; the globalism dream is all but dead – rightly so to the extent that it empowered a clique of overstuffed leftist global bureaucrats who themselves acted as a huge drag on the system.

In this environment, rapidly growing Third World populations and sloppy immigration policies combine to produce a death spiral for Western living standards, the ones with which Western politicians should be concerned. The result will be universal impoverishment, unless tighter immigration controls are combined with more fully capitalist economic policies, to produce faster growth that can absorb the extra superfluous people without wrecking everybody’s lives.

In this context, the admirable British Home Secretary Priti Patel’s new scheme to vet illegal immigrants and refugees in Rwanda is most welcome and should be protected from the inevitable leftist denunciations by the United Nations, the Guardian and others. By protecting the few genuine refugees and killing off the atrocious people-smuggling business, it offers genuine hope – which is why the loathsome globalist lobbies will attempt to kill it and remove Ms. Patel, the only British minister since Lady Thatcher with strength and conviction.

The other alternative would be forced population control in countries with high birth rates, an international form of the “one-child-policy” successfully instituted by China in the 1970s. However, that is unlikely to be instituted and would have grave coercive implications if it were.

Death spirals, if left unchecked, will ruin the future for humanity. Strength and conviction are needed to battle them; do we have any politicians with such qualities?

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)