Believing in Secular Stagnation

Across the fault lines of Adam Smith and Keynes, those who take an interest in the global economy fall into two camps - those who are general optimistic about humankind’s instinctive ability to create wealth an prosperity and those who believe we are pre-disposed to muck (no typo) things up.  You would think that those on the left are most agitated about market failures and the inefficiencies of capitalism - and many are, but social media exposes the truth that at least as many on the right are doomsayers.   Every article in the press welcoming the signs and firm evidence of recovery in the UK is met with a barrage of comments from conservatives foretelling the end of the world – house bust, savings dearth, public debt ruin, balance of payments crisis and so it goes on!

Let Them Eat Cake

The key to good economics is timing, Adam Smith was banging on about pins when pins where the last word in precision technology, Keynes was lucky to be at the height of his powers when the world needed him most and Milton Friedman took his bow when everyone had gotten bored of trying to make Keynes ‘General Theory' work.  Enter stage right Thomas Piketty, who is also lucky to be making his pronouncements on inequality as a new gilded age dawns bright.  Incidentally, one of the last gilded ages led to Equality, Fraternity and Liberty by way of the Guillotine so M. Piketty, a Frenchman, should be careful what he wishes for.

Exécution de Marie Antoinette 16 octobre 1793

Selling England by the Pound

The English are having a bad year, we are on the brink of losing our last meaningful colony and these storm blasted islands have endured the worst weather on record and we are only in April! Despite all this we are still standing and there remain three things that the English can be proud of:

• Getting drunk and then fighting for their lives 
• Being polite and stand-offish
• Having a weak currency

A Spaniard - what you find when you Google an image of a drunk English Gentleman!

The starkly contrasting social habits of the English are well documented but the relatively value of our currency has been brushed under the (garishly patterned) carpet  by the long line of Keynesian and neo-Keynesian economist who believe that  we will eventually take our place on the global top table of exporters if we continuously devalue our currency.

Float my boat?

The image of a rising tide lifting all the boats is a picture politicians like to paint – a fair recession and recovery, the reality maybe that the posh yachts and the scruff dinghies may be okay but the smartly kept but modest day boats may be stuck in the mud for a while yet!

Who will float my boat?

Five years after the Great Recession there is a sense that the world’s economy no longer adheres to normal rules, the tide is moving in a mysterious way.  In a recession wages are meant to be sticky and as a result of this unemployment rises sharply as workesr price themselves out of the market.  Following a recession, typically, productivity and wages pick-up quickly and eventually unemployment should fall.  This time around rates of employment have remained quite high through the recession, wages and earnings have fallen sharply and productivity has not bounced back; so why?

A sticky mess for economists

I have spent a fair amount of my leisure time racing on sailing boats, where one becomes paranoid about wasting the wind, the tide or ones position on the water.  This is in stark contrast to the rest of my life where waste is everywhere; I waste time in mindless meetings and commuting, I waste money on an over indulged family and some would argue that I am wasting my life away writing this blog!  But all that is going to change; waste is out and utilisation is in – or so says the Governor of The Bank of England (BoE).

Having spent the last five years providing as much slack as possible to keep the banking system on its feet and the economy off its deathbed, there is now a new mood and doctrine.  When Mark Carney arrived in the UK in July last year he promised us Forward Guidance on interest rates – he would hold rates at 0.5% until we achieved full employment.  So like a seasoned skipper he turned the yacht downwind and let all her sails out.  The economy (helped by a friendly gust of overseas investment) has picked up speed, employment rates have shot up and people are wondering when we will need to tighten things up.  If we don’t tighten things up and the economic tail-winds pick-up we could get into a real mess.

He should have tightened up a bit earlier

European Hunger Games

For anyone who was growing up in the 1970s there is a short list of things that one has to be concerned about:  The music of The Bay City Rollers, the instant pudding - “angel delight”, playing rugby against the Welsh and inflation.

The Great Barry John laying waste to England

Although the oil price shocks affected all industrialised economies inflation had a particularly severe impact on the UK, we quickly became known as the sick man of Europe.  Our smoke stack industries were failing against new competitors and trades unions made it impossible for us to improve productivity; this labour intransigence forced unemployment to horrific levels.  But worst of all, Inflation was in double digits eating up savings, wealth and security and against all the laws of Keynesian economics we had high inflation, high unemployment and high interest rates – stagflation!  Like a creeping terminal disease it infected all parts of our economy and did untold social damage; many of today’s most potent social problems steam directly from this time – rising divorce rates, poor parenting, plunging standards in education, rising crime rates and so it goes on.

Emerging market emergency?

The mere thought of the US Federal Reserve tapering their asset purchase programme (QE) in May last year put the world into a spin.  As sellers sold out their positions, currencies were devalued and Central Banks had to step in with higher interest rates.  Nine months on and the Fed has begun to taper by $10 billion a month and the impact on emerging markets is ratcheting-up.  This time last year the Fed started buying $85bn of asset purchases a month they and least we forget they are still pouring $65 billion a month into the world economy?  On the face of it this is a small reduction, $20bn a month after $2tn or more of asset purchases in four years, but it is having a material effect in emerging markets and may well come home to haunt us in the West .

The QE 1 - just a good excuse to remember this grand ship

Judgement Day for Economists

The economic discussion on how to solve the evolving recession and global stagnation has become increasingly political with Krugman and Summers on the left and Rogoff and Co on the right.  Too much energy is now being spent on self-defence,  protecting one's reputation takes precedence over new thinking.

The depression in the 1930s gave us Keynes and stagflation in the 70's gave us Friedman and I am pretty sure there will be a new luminary to rise from the ashes of the current mess we are in. Frankly, neither of the "old schools" looks likely to predict the "first best solution" correctly.

Keynesians really struggle to find an elegant solution to the ending current cash hoarding and low private sector investment when their demand side policies would further raise public debt.  Why would a company or an individual risk investing in new ventures in a country where sovereign debt is increasingly out of control and where there is a risk of default or very high interest rates in the future(particularly when most investors are not followers of Keynes)?  The risk of slowly reducing asset value is always preferable the risk of a total loss investment.   Followers of Keynes offer no insights into how this conundrum is resolved.

In the same way monetarist struggle to solve the problem of very low private sector investment when real interest rates have been and are likely to be negative for years to come.  They argue for more public sector austerity, that would reduce demand and further endanger recovery.  They also can’t resolve the problem that supply side solutions would further erode labour share (the % of national income earned by employees), which is one of the main reason for falling demand and productivity.

Rogoff on the left and Krugman on the right - just for a change

The morning after the night before

Like a terrible hangover that takes an age to clear the developed world has been limping along, since the aftermath of the financial crisis.  There is lack of vigour, a kind of listlessness that Larry Summers has characterised as “secular stagnation”.   Economies, unable to return to the optimistic per-party state they enjoyed from 1995 to 2007, are now settling for survival rather than growth – the pounding headache makes future endeavours unthinkable – we are definitely in the bunker. There are four connected things going on here: dehydration, nausea, a sense of injustice and finally despair – sounds familiar? Secular stagnation is not inevitable we can find a cure. But as Larry tells us “ without a clear diagnosis of our problem and a commitment to structural increases in demand, we will be condemned to oscillating between inadequate growth and unsustainable finance”. And he goes on to say that " A strategy that relies on interest rates significantly below growth rates for long periods of time virtually guarantees the emergence of substantial bubbles and dangerous build-ups in leverage"  - which is exactly where we are low growth, poor levels of employment, low levels of investment - but the very high risk of bubbles and other financial risks.

The Morning after the night before

Debts Still Matter

The mind of George Osborne works in a strange and Machiavellian way.  His announcement today that austerity will continue unabated into 2016 - 17 was greeted with howls of protest from all sides, could it be that the British Chancellor knows something that we don't?  

which one is George?

Five years after the default of Lehman Brothers and three year since taking office the world is still a dangerous place even after years of pain.  What is now clear is the history of this crisis; and most developed countries have faced a number of distinct phases in this recession.

1. The credit crunch caused by a lack of liquidity in the banks 2008

2. Falling growth and a deep recession, caused by the banking failure and the subsequent free fall in asset prices in 2009

3. A false recovery 2009 – 2010 temporarily fuelled by growth in the Commodities, BRIC economies and emerging markets

4. The sovereign debt crisis triggered the very high public spending required to off-set recession (centred on the EuroZone) that rumbled on over 2011 -12

5. (Secular) Stagnation – weak growth in demand and GDP and deflationary pressure on prices in 2012-14?

As I have discussed in a recent blog there have been a number of strategies that have been deployed since 2008 with varying degrees of success.  These strategies (Abenomics, austerity, QE, etc.) have been blurred and muddled by the realpolitik of the day and no country has been able to pursue a fundamentalist approach, not even the UK under Osborne's guidance.  The main policy argument has been around the need for and the pace of debt reduction.  In a nutshell, can advance economies grow whilst carrying substantial levels of public (or private) debt?  There are good reasons for thinking that high levels of debt will be a drag on growth and these are pretty obvious: