Russia is in crisis. There are concerns about the eurozone. Japan is struggling to emerge from stagnation. Booming stock markets seem divorced from economic reality. The Anglo-Saxon economies are outpacing the other developed economies of the west.
This is the world as it exits 2014. But it was also the world as it was 15 years ago during a month in which the first major anti-globalisation protests took place on the streets of Seattle and preparations were made for the nonexistent millennium bug. Oil prices were low. Banks could lend money cheaply. There was talk of how technology would power a new industrial revolution.
It would be a mistake, though, to think that nothing has really changed. The story of the past decade and a half is of the increasingly desperate attempts to prevent the Great Stalling of the global economy. Rock-bottom interest rates have failed to prevent growth rates from slipping. Living standards in many countries are back to the levels of the early 2000s. Securing international cooperation to tackle climate change, to open markets to trade, to manage currencies or to create jobs has become increasingly difficult. The problems of 1999 are still the problems of 2014, but more serious and seemingly more intractable.
There is no shortage of explanations for what has gone wrong and what needs to be done to put things right. One view, popular with central bankers and technologists alike, is that all that is needed is a bit of time. Seen from this perspective, the world is on the cusp of the sort of technological shift that happens only once in every 50 or 60 years. The transition, however, has been delayed by the structural changes in the global economy caused by the collapse of communism a quarter of a century ago. Adjustment to these geopolitical shifts, such as the rise of China, is taking longer than expected but will eventually happen.
Another view is that the zombie-like state of the global economy is owing to a lack of structural reform. Here there is common cause between the German government, which blames the eurozone crisis not on a lack of demand but on supply-side impediments to growth, and the free market economists who say the financial crisis of 2007-08 was caused by over regulation.
The solution, therefore, is to make markets work better, through reforms that sharpen incentives to work, dilute labour rights, cut taxes, reduce government spending, balance budgets and push back against growing protectionist tendencies.
Then there is the Keynesian view of the world. Here, the idea is return, as far as possible, to the world as it existed in the golden years of the 1950s and 1960s. That means governments rethinking their austerity programmes; keeping interest rates low; using redistribution to spread the fruits of growth more evenly; and returning to the sort of managed currency regime that existed until the early 1970s.
What is common to all the explanations is that they believe there is a short-term (sometimes a medium-term) fix that will put matters right. Growth and a steady increase in living standards has been a feature of the modern industrial world, stretching back to the 18th century: it is quite a stretch to believe that 250 years of progress have come to a halt.
As a result, the assumption is that eventually the global economy will achieve escape velocity following several years in the post-global recession doldrums. It is simply a question of pulling the right levers: the European Central Bank getting on with quantitative easing, if you are a US policymaker in Washington; the rest of the eurozone making itself more German, if you are looking at the world from Berlin.
It is also thought that the near-halving of oil prices since the summer will speed up the return to the world as it was before the queues formed outside Northern Rock and before Lehman Brothers went bust. The grounds for this belief are that since rising energy costs have historically been bad news for global growth, it follows that lower energy costs must be helpful. This is fine as far as it goes; all other things being equal, lower crude prices will boost consumer spending and business investment in oil-importing countries.
But what if not all other things are equal? What happens, for instance, if Vladimir Putin cuts up rough as a result of the impact of falling oil prices on the Russian economy? What happens if losses on derivatives linked to the oil price cascade their way through the global financial system? What if the falling oil price is merely a symptom of a global economy where demand is weak despite the unstinting efforts of central banks. Stephen King, chief economist at HSBC, thinks deflationary pressures were well-established long before oil and other commodity prices fell, suggesting the global economy is in relatively poor shape.
“Faced with continuously high debt levels, monetary policy appears to have limited traction,” King said. “With interest rates at zero and after years in which central banks have pursued various forms of unconventional easing, there are very few signs of renewed credit growth: it’s increasingly difficult to ignore the echoes from Japan.”
Now, turning Japanese is not necessarily a problem. Japan remains a rich country even after relatively sluggish growth and periodic bouts of deflation during the past 25 years. Living standards will still rise in developed countries; they will simply rise less rapidly than they did in the second half of the 20th century until the arrival of a new technological paradigm leads to a surge in growth. The secular stagnation described by the former US Treasury secretary Larry Summers need not be that bad.
But there are two obvious flaws in the “life will go on” thesis. The first is that it is not difficult to envisage the global economy tipping back into recession. Debt, deflation, and massive speculative flows from a largely unreformed banking system are a heady and potentially toxic brew.
The second is even gloomier. This is that the economic system that has generated unprecedented prosperity is now irreparably broken. The only way that growth can be generated is through ultra-low interest rates that generate destabilising asset-price bubbles. Even then, growth is weaker than it was and is disproportionately captured by elites who seek to convince the rest of us that things are getting better when they are not. Worse still, the obsession with raising growth rates at all costs means that frightening risks are being taken with the future of the planet.
The economist Harry Shutt sketched out this dystopian vision in a recent blog. His view is that we are at one of those points in history, such as the end of feudalism, where the world is changing but we haven’t realised it yet. Get it wrong, he says, and a new dark age looms.
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