Demand for the old normal

For the last six years the developed world has been suffering from a chronic shortage of demand: demand for goods, demand and services, demand for investment.  The need to deleverage personal, corporate and government debt has meant that there has been massive excess capacity and a huge shortfall in aggregate demand.  This lack of demand has been driving up unemployment and driving down prices.  All this has been complicated by the fact that we in the West are at the zero bound of interest rates this nasty cocktail has been characterised as secular stagnation.  Over the last six years wages in all normal income groups have flat-lined and living standards will now be lower at the end of this economic cycle than they were in 2008 – this is extraordinary, almost unheard of in the developed world.  Or is it?  Thomas Piketty, the French Rock Star Economist (is that an oxymoron as the French have no rock stars?) would have us all believe that we are now returning to a more normal state of affairs, where vast pools of wealth lie idle in the hands of a financial elite and the rest of us jog along at a steady but uninspiring rate.

A French Rock Star??

Cutting Taxes and Axing Osborne

In 2010 the Tories had plan A, deficit reduction, and by and large the British public bought the idea, which was simple, “We have to cut the deficit because sky-high public debt will kill growth and investment and lead to long term depression”.  Some of this proved to be wrong but enough of the narrative still works.  In all polls that ask the question “who do you trust to manage the economy?” the Tories are in a comfortably lead. We Brits have a long memory and the Brown / Balls bubble will not be forgotten and more recently Ball’s idiotic call for a plan B made him the laughing stock of Westminster.

Despite the Tory’s hard talk on deficit reduction the reality is that progress has been hampered by the coalition’s bargaining (with the illiberal Lib Dems), which ring fenced welfare, the NHS and pensions from the ravages of austerity.  Nearly all the cuts imposed in this Parliament have been born by spending departments that receive less 40% of the entire public sector budget.  There have been some interesting results – less spending on police has reduce crime, less spending on “enterprise” has helped growth take off, lower spending on Europe has made Europe even less popular and a huge increase in international aid has seen our stock in the world fall dramatically!

Where no hawks dare to fly

The doves at the Fed led by the chief "cooer" Janet Yellen have found a new reason to keep interest rates at an historical low.

Not a hawk in sight

The latest buzz words are “Pent up wage deflation” and they provide an elaborate excuse for ultra loose monetary policy. The essence of the idea is that in the Great Recession of 2009-2011 the market rate for jobs fell appreciably but that because wages are "sticky" and actual wages remained flat. This stickiness of wages is a function organised labour (Trade unions), employee nervous to move jobs and employers who are reluctant to loose key staff.

Life "Sans Gaz"

The great and the good of the economics world have been debating the possibility of growth without bubbles.  Larry Summers and other commentators have proposed that the dynamic growth enjoyed by the West between 1994 and 2008 was due to a stream of bubbles (dotcom, the euro, the credit boom and commodities) that kept growth rates artificially high.  Without a stream of future bubbles the developed world may not be able to grow at a rate that improves living standards.  Fortunately human being are well adapted to bubble recognition  (it occurs when the capital gain an investor expects over time is much greater than the potential change in interest rates in that same time period) and once one person has spotted a bubble we all dive in!
Stripping out these instances of temporary and unsustainable exuberance we are left will a pretty anemic performance in global GDP growth.  The inability to grow without market bubbles providing the fuel to the global engine has been coined secular stagnation – low growth, high debts, falling prices and high unemployment.

Here's to the next bubble

Before we all throw in the towel,  it's possible that the champagne that has been on ice for five years is about to pop its cork in a shower of new bubbles – the housing market is building up a head of steam in a number of key markets – parts of the US, the UK, Germany and parts of Scandinavia. In other markets there is still a considerable over hang in supply (Spain, Ireland, Greece and parts of the US) and the pain that investors and lenders have been through ought be burned into their collective consciousness.

All work and no pay

The next generation are taking over, after 25 years of being the sole bread winner in the family two of my three daughters are about to step into the world of work – well let’s hope so!  Being equipped with a degree is no longer a passport to wealth and prosperity it may not even be enough to secure a job.  One of these daughters has taken the option to take a year out from University to gain experience working for a number of business as an intern during a "year in industry", which is sandwiched between her 2nd and 3rd years.  She secured three internships, where she is working for no money to gain experience; some might say this has been a pretty poor introduction to the world of work.  The reality is that she has the opportunity to work for three outstanding companies and has already been offered a permanent position!  This “year in industry” seems an eminently sensible idea, she gets to see different businesses and roles close up and they get the chance to check her out.

Get on yer bike!

My daughter’s situation is a microcosm of the whole job market, which has been a buyer’s market since 2007.  Those of us who work in the private sector have had to survive wholesale downsizing, salary freezes, smaller or no bonuses and a broader squeeze on company benefits (pensions, etc).  This reduction in take home pay has reduced demand and slowed growth; but this flexibility has allowed the UK economy to maintain relatively high levels of employment.  Now the economy is growing again the somewhat vexed question is - how long will it take for this increased economic activity to feed through into higher take home pay and rising living standards?  I say vexed because living standards have fallen by as much at 5% over the last 5 years and in real terms by much more.

Where have all the bubbles gone

The UK economy may be in the midst of a stellar year in which growth has returned, most unexpectedly, but there are special circumstances that have benefited us.  Elsewhere in the developed world, we face a persistent economic stagnation. Across the developed world employment rates are low, wages and disposable income are depressed; real interest are still negative; government debt is staggeringly high and rising; companies and individuals prefer to hoard cash than invest and to cap it all it looks like deflation is now stalking the planet. 

Despite extraordinary efforts by the world’s central bankers in the aftermath of the Lehman’s default, which has included the massive increase of liquidity (QE) and negative real interest rates, five years on the outlook is pretty poor.  Larry Summers re-coined the term secular stagnation to characterise the economic landscape and went on to float the idea that the west has grown on the back of asset bubbles for the last 20 years (Property, DotCom, Emerging markets, Sub-prime, etc) and that any return to pre-2008 levels of growth will demand some new bubble to help us along.  Larry Summers suggests the level of real interest rates required to generate full employment might be, say, -2 or -3 per cent.  More practically bankers in both the Fed and the ECB are now contemplating negative interest rates on short term money they hold over-night as a way of stimulating demand.  

Where have all the bubbles gone

The world's economy is off-balance

Economists around the world are dusting themselves off after a bruising few years of terrible forecasts, messed up assumptions and missed diagnosis.Whether you have been on the Rogoff / Reinhart or Krugman side of the argument there are red faces all around. The simple problem is that economies are not meant to behave in the way they are.  We have got to a point where old models (classical, Keynesian or monetarist) don’t work and excuses just don’t wash.  The problem is that after five years of negative realinterest rates the world’s economy has been unable to return to “historic trend” levels of growth – we are still bumping along the bottom.  Most economists believe that interest rates can be set to create a sustainable equilibrium in the economy where growth, employment and inflation can be held in a positive balance.  The absence of the interest rate equilibrium after years of interest rates set near or at the lower bound of zero raises the question as to what the alternatives are to negative real interest rates might be?  Larry Summers the former Secretary of the Treasury of the United States made  an important speech on this subject a couple of weeks ago.



Larry Summers - tired of waiting for the recovery

Who's Been Eating My Porridge

Even the Bank of England has now confirmed that the green shoots of recovery are growing strongly and that we have reached escape velocity.  Even inflation is falling towards the Government’s target range of 2%.   Some might describe this as the perfect Goldilocks scenario for our economy– not too hot not to cold! However there is one angry bear that might ruin the breakfast – poor productivity and falling living standards.

Unglobalization - the decline in world trade

The declining growth in world trade has got economists baffled.  Some economists think this is important whilst others are not so fazed.  On the face of it we should care because the volume of trade has broadly mirrored the growth in GDP (wealth) across world so any decline may signal a slowdown in GDP growth.   The chart below shows the long run growth in world trade and the impact of the 2008 recession.  The steep decline and bounce back between 2008 and 2010 is not surprising but the lack of sustained recovery since 2010 is a worry, particularly in the developed world.

The Right Type of Recovery

The doomsayers in the British media, having been unable to call the timing of the recovery in the UK, are venting their frustration on the type of recovery we are ‘enjoying’.  A short while ago these same experts were screaming that we were on the edge of a triple dip recession and they blamed risk adverse banks and frightened consumers, who were both rebuilding their reserves and savings.  In six short months we have metamorphosed from ‘triple dippers’ to the ‘northern tiger’– growing at a rate not seen since the 1990s.  In a typically display of British pessimism we have been unable to take this good news at face value and the icons of our ‘thoughtful media’ the BBC, the FT and The Telegraph all tell us that we are in having the ‘wrong type of recovery'!  These doomsters say that at some point, the bond markets will bite us in the backside and that, house prices will fall, the cost of borrowing will rise and we will be back in recession. The overall indebtedness of our economy is the thing that worries these media luminaries and the numbers are quite frightening - currently we owe 300% of our GDP.