Global econ­omy needs a ‘Great Meta­mor­pho­sis’

The Pak Banker - - OPINION - Justin Fox

SOME­THING weird is go­ing on with the global econ­omy. It's been go­ing on since at least 2007. Eco­nomic growth has been slow, fi­nan­cial mar­kets have been volatile and eco­nomic pol­i­cy­mak­ers have of­ten been at a loss. We tend to fo­cus on the prob­lem of the mo­ment - the sub-prime cri­sis, the euro cri­sis, the China slow­down, the oil bust. But surely th­ese events are con­nected. What threads link them? I've been col­lect­ing pos­si­ble sto­ry­lines for a while now. I make no claim that the eight here are an ex­haus­tive list. To­gether, though, they paint an in­ter­est­ing pic­ture, if not a clear one.

* Global Fi­nan­cial Cri­sis and Af­ter­math: There was an in­ter­na­tional bad-debt cri­sis that started in 2007 and re­ally got in­ter­est­ing in 2008, and the global econ­omy is still deal­ing with its af­ter­math. Car­men Rein­hart and Ken­neth Ro­goff tell the ba­sic story in "This Time Is Dif­fer­ent: Eight Cen­turies of Fi­nan­cial Folly": Th­ese debt crises hap­pen from time to time, and they al­ways leave an eco­nomic hang­over.

This cri­sis was es­pe­cially large, so the hang­over has been es­pe­cially long and painful. * Great De­vi­a­tion: Econ­o­mist John Tay­lor de­fined this in a 2011 pa­per as "the re­cent pe­riod dur­ing which macroe­co­nomic pol­icy be­came more in­ter­ven­tion­ist, less rules based, and less pre­dictable". The de­vi­a­tions from good pol­icy started in 2003 with the Fed­eral Re­serve's de­ci­sion to keep in­ter­est rates lower than dic­tated by the mon­e­tary guide­line known as the Tay­lor rule (yes, same Tay­lor), and have con­tin­ued through var­i­ous bailouts and mon­e­tary eas­ings and fis­cal stim­uli in the US and Europe.

Tay­lor's spe­cific di­ag­no­sis of pol­icy fail­ure has been much dis­puted, but the sen­ti­ment that govern­ment and cen­tral bank er­rors have let us down is widely shared.

* End of the Amer­i­can Cen­tury: Since the 1940s the US has been the dom­i­nant force in the global econ­omy and the dol­lar the de facto global cur­rency. In re­cent years this dom­i­nance has waned, but no other coun­try or global in­sti­tu­tion is ready to take over. The re­sult is con­tin­u­ing un­cer­tainty and un­rest in geopol­i­tics, eco­nom­ics and fi­nan­cial mar­kets. And there's no sign of that end­ing any­time soon.

* End of In­fla­tion: Since the 1200s, his­to­rian David Hack­ett Fis­cher wrote in "The Great Wave: Price Rev­o­lu­tions and the Rhythm of His­tory", the world has seen four long pe­ri­ods of ris­ing prices. The first three were fol­lowed by eco­nomic and political tur­moil and then a long pe­riod of price sta­bil­ity.

The fourth, which in Fis­cher's telling be­gan in the late 1890s and was still go­ing when he pub­lished his book in 1996, may now be in its death throes. If his­tory is any guide, those could go on for a while, and spark mul­ti­ple fi­nan­cial crises.

Even if you don't be­lieve that his­tory moves in long waves, it's clear that af­ter the Great In­fla­tion of the 1960s and 1970s and the Great Dis­in­fla­tion (an­other Tay­lor phrase, mean­ing a long pe­riod of de­clin­ing but still above-zero in­fla­tion) that fol­lowed, cen­tral bankers are at some­thing of a loss as de­fla­tion spreads. * Great Stag­na­tion: Econ­o­mist Tyler Cowen was re­fer­ring specif­i­cally to the US when he pop­u­larised this term, but it's a good name for the more global phe­nom­e­non of a slow­down in tech­nol­ogy-driven pro­duc­tiv­ity growth and a wan­ing of the con­di­tions (big un­tapped ex­port mar­kets abroad, big un­tapped labour sup­ply at home) that al­lowed de­vel­op­ing coun­tries to make great eco­nomic leaps for­ward in re­cent decades.

* Tech­no­log­i­cal Rev­o­lu­tion: On the other hand, maybe the pro­duc­tiv­ity slow­down is just the pre­lude to a boom. Ma­jor new tech­nolo­gies take time to make their im­pact felt, tech­nol­ogy scholar Car­lota Perez ar­gued in her book "Tech­no­log­i­cal Rev­o­lu­tions and Fi­nan­cial Cap­i­tal: The Dy­nam­ics of Bub­bles and Golden Ages".

With each past tech­no­log­i­cal rev­o­lu­tion there have been mis­steps, un­cer­tainty and se­ri­ous fi­nan­cial tur­moil be­fore a "golden age" in which busi­nesses, con­sumers and gov­ern­ments fig­ure out how to take full ad­van­tage of the new pos­si­bil­i­ties. Perez dates what she calls the in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy rev­o­lu­tion to 1971, and has spec­u­lated that the 2007-08 fi­nan­cial cri­sis might mark the be­gin­ning of a tran­si­tion to a new golden age. She doesn't say how long that tran­si­tion will take, though.

* Pop­u­la­tion Plateau: In the lat­est is­sue of For­eign Affairs, Mor­gan Stan­ley's Ruchir Sharma ar­gues that de­clin­ing fer­til­ity rates around the world have put a ma­jor damper on eco­nomic growth. There was a time when many peo­ple wor­ried that unchecked pop­u­la­tion growth would de­stroy the planet, so in most ways the pop­u­la­tion slow­down is a re­ally good thing.

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