Despite strenuous efforts the global economy stubbornly stays in the lower range of growth – at least compared to the decades before 2007/2008. And it will stay like that for a number of years, probably this decade and maybe even longer. Events have shown that economic policy is impotent when confronted with a crisis of this character and magnitude. Neither fiscal stimuli a la Keynes nor monetary expansion now known under the label of Quantitative Easing has managed to pull the global economy out of the doldrums.
There are several reasons for that. The first and obvious one, even if not so popular among economists, is that high growth over a longer time unavoidably means that most people have acquired durable consumption goods on a longer term basis. New gadgets like audio-visual communication may stimulate consumption, but not permanently buck the trend. Investment has been geared to an unsustainable consumption level (overcapacity) – so both consumption and investment have been ‘too high’ measured against a permanent trend. Or, in other words, there is no pent-up demand. A breathing space keeps demand and consequently growth low.
There is very little fiscal and monetary policy can do about this. The trend shift upwards through millions of people in emerging markets and developing economies entering the global economy cannot be repeated every decade. Many economists have called for a stronger fiscal expansion, but they overlook a crucial point in Keynes advocacy of such a policy. Aggregate demand is decisive, so pumping money into the economy to augment public demand only works if demand in other sectors does not react negatively – falling, preventing aggregate demand from rising. But this is exactly what took place. The rising debt and public deficits have led households and corporations to deleverage their debt putting a brake on aggregate demand. Public finances can only be rebalanced through higher taxes so better prepare yourself by keeping the money in your pocket or improve balance sheets.
Quantitative Easing (QE) overloads the economy with liquidity, but that will only go into consumption or investment if the real economy warrants such behavior – and with growth prospects not very encouraging it does not. So what happens? An asset inflation – as the gold price, share prices, and commodities have shown over the last three to four years. Taking the real economy as a yardstick, their prices should have been much lower, but aren’t because people must park their money somewhere and they buy assets. We face stable prices in the goods and services sector and rising asset prices – a nightmare for central bankers. This pattern is reinforced by a growing non-confidence in governments and central bankers, so better put your money outside the reach of these policy makers.
Behind the curtain lurk two other elements, which are not really taken into account. The first one is that debt has to be repaid. Repayment is not a monetary phenomenon, but consists of bringing consumption into line with production. In the good old days consumption was higher than production for countries running up debt, primarily the US, Britain, Japan, and the Eurozone. Repayment means that they must reduce the consumption/production ratio in the same way and of the same magnitude as it previously was ‘too high’. This rebalancing will be with us until a sustainable debt burden has been achieved and it will take time. As the debtor countries account for almost two thirds of the global economy, the effect is a lower global growth. The emerging market and developing economies can do something to maintain a high demand, but cannot escape the spill-over effect from the debtor countries – which is what we see now.
Resource scarcities have been on the agenda for many decades, but judged in prices for commodities, it is now a reality. Countries are confronted with a new challenge for economic policy having to figure in how to cope with changing terms of trade not any longer benefitting industrial, but resource rich countries. In principle, this should be manageable as global purchasing power does not fall, but is redistributed among groups of countries. In reality, the adjustment is far from smooth putting a lid on global demand.
All in all, we face two not very pleasant conclusions. First: Global growth over a longer term will be lower. Second: There is very little economic policy can do about it.
