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- Sep 30, 2014
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PAUL KELLY
Staying smart in dangerous post-GFC world
Illustration: Eric Lobbecke
In the democratic world dominated by America and Europe there is a growing and lethal nexus — economic tribulation and weak growth is linked to political dysfunction, rising populism and distrust in the political system.
The world suffers from what former US Treasury secretary Larry Summers brands “The Age of Secular Stagnation”, the failure of economies to recover from the 2008-09 global financial crisis, the upshot being weak growth, low or negative interest rates, rising asset prices, more inequality and poor investment.
The former governor of the Bank of England during the crisis, Mervyn King, in his recent book The End of Alchemy, argues that while the 1930s Depression produced a robust policy response this has not been replicated in the years since the GFC.
“Without reform of the financial system, another crisis is certain and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,” King says. “Since the end of the immediate banking crisis in 2009 recovery has been anaemic at best. There was a continuing shortfall of demand and output from the pre-crisis trend path of close to 15 per cent.”
Translated into household reality, King says, the fall from the pre-GFC trajectory equates to about $US8500 per person in America and about£4000 per person in Britain. Summers says that US real GDP is about 13 per cent lower than 2007 forecasts and this amounts to a shortfall of $US15 trillion.
There is, moreover, no sign of any substantial recovery, with King warning that “markets do not expect interest rates to return to normal for many years”.
This is the core issue for the future and stability of democratic politics. What will be the consequences of an extended period of lower interest rates, where people and corporates cannot generate the returns to finance their spending, investment or retirement and governments cannot reduce their huge public debt burdens?
The world’s best economic brains now ponder the question of the age: what is the source of the growth crisis? Many theories abound. Meanwhile political systems gradually succumb to public distrust, anger, hostility towards elites, populism on Left and Right and an intellectually feeble policy debate that offers little cause for optimism.
Donald Trump in America and Jeremy Corbyn in Britain did not fall from a clear blue sky. They are manifestations of how the financial system crisis has created a contagion of weak economies leading to a poisoning of politics and the inability of political systems to deliver policy solutions. Sustained low growth provokes alarm the market economies cannot deliver prosperity as they did before; this, in turn, sanctions many wild ideas amid a recognition that changes to the world order are required.
Is the worst over or is this the beginning of a long degeneration?
Summers, in his article published in the March-April issue of Foreign Affairs, says that at least two dozen countries sit around zero interest rates, which means central banks are fast running out of monetary ammunition to fight another downturn. He warns that “if historic patterns hold true a recession (lasting at least six months to a year) will probably hit the US before 2020 — and given the central role the country plays in the world economy, the slowdown will likely become global”.
Summers fears a recession, after a weak post-GFC recovery, “would strongly suggest that the current stagnation is secular — that is, indefinite — rather than merely cyclical or temporary”. That is, instead of moving ahead to a period of normalisation the world might be only part way through a slow growth era “shaped by previously unthinkable and far-fetched policies” like negative real interest rates.
King argues the longer real interest rates stay close to zero the more painful will be the ultimate adjustment. The loss of output, jobs and income has shaken confidence in how economies are supposed to behave. King is a pessimist on both the eurozone and the effectiveness of the global financial institutions.
Indeed, he ruminates on parallels between the current period and the earlier 20th-century inter-war era. “Whether the next crisis will be another collapse of our economic and financial system or whether it will take the form of political or even military conflict is impossible to say,” King says.
The cultural consequence is upon us. Inequality is reviving the politics of class warfare and huge debts are generating the politics of generational warfare.
These forces drive the tidal wave of agitation surging through democratic electorates.
The social story of the GFC (in the US and Europe) is that finance bosses exploited the system for personal gain and the system failed its obligations to customers. Ordinary wage earners became victims, having done nothing wrong. This story is now part of the culture. It deepens with ongoing low wage growth, poor investment returns and asset price escalation, the aim of central bank policies.
Meanwhile some governments lack the will or public support to tackle debt-GDP ratios. Australia, with a relatively modest debt burden, is a classic example: it struggles with a sentiment by the current generation to finance its living standards on borrowings to be paid by the next generation, an immoral act justified by the fairness ethic.
For the past dozen years the Australian economic experience has been sharply different to the US and Europe. Our economic transition proceeds better than many predicted and the economy has absorbed a series of shocks. Yet Australia, relentlessly, is being pulled into the vortex of similar problems that confront the West.
The trajectory and cultural trend cannot be missed. Consider the events of the past fortnight. Australia has problems that must be addressed with tax dodging, banks and the steel industry. That needs to be done with balance, judgment and sound policy, not populist hype inflated for an election.
It should be coupled with an awareness of our vulnerability against a precarious global outlook. That means serious restraint on our nearly endless demands for more government benefits and programs.
The common narrative is distrust of banks, corporates, power elites and politicians who protect them. The feeling is that “people are being ripped off” and, of course, some rip-offs have taken place. For Australia, however, the core need is for policies that recognise the real problems and priorities, making the 2016 election a plus, not a minus, for the nation and keeping the destructive populists at bay.
Nocookies
Staying smart in dangerous post-GFC world
- THE AUSTRALIAN
- APRIL 13, 2016 12:00AM
- Paul Kelly
Illustration: Eric Lobbecke
In the democratic world dominated by America and Europe there is a growing and lethal nexus — economic tribulation and weak growth is linked to political dysfunction, rising populism and distrust in the political system.
The world suffers from what former US Treasury secretary Larry Summers brands “The Age of Secular Stagnation”, the failure of economies to recover from the 2008-09 global financial crisis, the upshot being weak growth, low or negative interest rates, rising asset prices, more inequality and poor investment.
The former governor of the Bank of England during the crisis, Mervyn King, in his recent book The End of Alchemy, argues that while the 1930s Depression produced a robust policy response this has not been replicated in the years since the GFC.
“Without reform of the financial system, another crisis is certain and the failure to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later,” King says. “Since the end of the immediate banking crisis in 2009 recovery has been anaemic at best. There was a continuing shortfall of demand and output from the pre-crisis trend path of close to 15 per cent.”
Translated into household reality, King says, the fall from the pre-GFC trajectory equates to about $US8500 per person in America and about£4000 per person in Britain. Summers says that US real GDP is about 13 per cent lower than 2007 forecasts and this amounts to a shortfall of $US15 trillion.
There is, moreover, no sign of any substantial recovery, with King warning that “markets do not expect interest rates to return to normal for many years”.
This is the core issue for the future and stability of democratic politics. What will be the consequences of an extended period of lower interest rates, where people and corporates cannot generate the returns to finance their spending, investment or retirement and governments cannot reduce their huge public debt burdens?
The world’s best economic brains now ponder the question of the age: what is the source of the growth crisis? Many theories abound. Meanwhile political systems gradually succumb to public distrust, anger, hostility towards elites, populism on Left and Right and an intellectually feeble policy debate that offers little cause for optimism.
Donald Trump in America and Jeremy Corbyn in Britain did not fall from a clear blue sky. They are manifestations of how the financial system crisis has created a contagion of weak economies leading to a poisoning of politics and the inability of political systems to deliver policy solutions. Sustained low growth provokes alarm the market economies cannot deliver prosperity as they did before; this, in turn, sanctions many wild ideas amid a recognition that changes to the world order are required.
Is the worst over or is this the beginning of a long degeneration?
Summers, in his article published in the March-April issue of Foreign Affairs, says that at least two dozen countries sit around zero interest rates, which means central banks are fast running out of monetary ammunition to fight another downturn. He warns that “if historic patterns hold true a recession (lasting at least six months to a year) will probably hit the US before 2020 — and given the central role the country plays in the world economy, the slowdown will likely become global”.
Summers fears a recession, after a weak post-GFC recovery, “would strongly suggest that the current stagnation is secular — that is, indefinite — rather than merely cyclical or temporary”. That is, instead of moving ahead to a period of normalisation the world might be only part way through a slow growth era “shaped by previously unthinkable and far-fetched policies” like negative real interest rates.
King argues the longer real interest rates stay close to zero the more painful will be the ultimate adjustment. The loss of output, jobs and income has shaken confidence in how economies are supposed to behave. King is a pessimist on both the eurozone and the effectiveness of the global financial institutions.
Indeed, he ruminates on parallels between the current period and the earlier 20th-century inter-war era. “Whether the next crisis will be another collapse of our economic and financial system or whether it will take the form of political or even military conflict is impossible to say,” King says.
The cultural consequence is upon us. Inequality is reviving the politics of class warfare and huge debts are generating the politics of generational warfare.
These forces drive the tidal wave of agitation surging through democratic electorates.
The social story of the GFC (in the US and Europe) is that finance bosses exploited the system for personal gain and the system failed its obligations to customers. Ordinary wage earners became victims, having done nothing wrong. This story is now part of the culture. It deepens with ongoing low wage growth, poor investment returns and asset price escalation, the aim of central bank policies.
Meanwhile some governments lack the will or public support to tackle debt-GDP ratios. Australia, with a relatively modest debt burden, is a classic example: it struggles with a sentiment by the current generation to finance its living standards on borrowings to be paid by the next generation, an immoral act justified by the fairness ethic.
For the past dozen years the Australian economic experience has been sharply different to the US and Europe. Our economic transition proceeds better than many predicted and the economy has absorbed a series of shocks. Yet Australia, relentlessly, is being pulled into the vortex of similar problems that confront the West.
The trajectory and cultural trend cannot be missed. Consider the events of the past fortnight. Australia has problems that must be addressed with tax dodging, banks and the steel industry. That needs to be done with balance, judgment and sound policy, not populist hype inflated for an election.
It should be coupled with an awareness of our vulnerability against a precarious global outlook. That means serious restraint on our nearly endless demands for more government benefits and programs.
The common narrative is distrust of banks, corporates, power elites and politicians who protect them. The feeling is that “people are being ripped off” and, of course, some rip-offs have taken place. For Australia, however, the core need is for policies that recognise the real problems and priorities, making the 2016 election a plus, not a minus, for the nation and keeping the destructive populists at bay.
Nocookies
