[SCMP Column]Signs of Life

March 05, 2016


From last week’s G20 in Shanghai, to our APEC Business Advisory Council meetings in San Francisco, the messages from economists and the world’s economic policymakers alike seem unanimous: that the world’s economy has taken a dangerous turn for the worse.
I would not dare to disagree – but I am still perplexed at the disingenuity and denial at the heart of efforts to explain why we are in our current pickle – in particular in the US where the terrible post-2008 recessionary journey began.

As if we need to be reminded, we are now close to eight years into the “Great Recession” that has followed the Lehman crash in 2008, and are soon formally likely to acknowledge a “lost decade”. And unless policymakers in places like the US begin properly to admit true causes, I fear we may be into a second decade before we can see confident evidence of recovery.

For me, the analytical problem starts right back in 2008, when Lehman’s collapse threw the global economy into cardiac arrest. After recognizing that the immediate crisis had been caused by the crazy collateralization of huge volumes of sub-prime mortgage loans, Ben Bernake laid the foundations for unprecedented Quantitive Easing in order to bail out the banking institutions that had created the crisis.
The assumption seemed to be that the crisis that engulfed us was a product of panic, and that if enough money was flushed into the economy, and interest rates lowered far enough, then what was essentially a psychological crisis could be resolved, allowing the pre-2008 party to resume.

From my contrarian perspective, this was profoundly wrong: the message from 2008 was that a significant proportion of the “growth” recorded in our GDP numbers since the mid-1990s had not been growth at all. Rather, it had been an orgy of interbank collateralization activity which had given the appearance of growth, had massively enriched those in the financial sector that were driving the orgy, and which had little to do with any traditional banking role of funding real growth in real companies in the real economy. It had been a bankers’ ponzi scheme of gigantic proportions. In short, much of the giddy growth and apparent wealth we had recorded since the early 1990s had never occurred in the first place, and at some point would need to be written down. Many in the US even today seem reluctant to acknowledge this.

With the global economy in cardiac arrest, quantitative easing was used as life support. The assumption then appeared to be that if they dealt with the panic, and recovery would occur naturally. They seemed not to recognize that life support systems can only buy you time, but they do nothing to deal with the root cause of the cardiac arrest.

From this point of view, the first quarter point upward tweak in interest rates in December was a first tentative effort to turn off life-support, and to discover whether the patient was able to survive unsupported. The message so far is resoundingly no – and this is the alarming insight that in my view has spooked the markets since December.

Blaming volatility on fragile emerging markets, and in particular on China, is ridiculous. The reality is that all economies have been struggling since 2008 to cope with the huge and volatile forces unleashed by the US crash, and that countries like China that have on the one hand shouldered responsibility to provide locomotive support to the global economy, and on the other struggled to manage difficult structural changes at home, have had a terrible time trying to juggle domestic reforms in such a volatile and adverse external economic environment.

Our economist in San Francisco claimed he was perplexed that the patient on the table showed so few signs of life. According to their models, with interest rates at unprecedentedly low levels for the past seven years, and oil and commodity prices at their lowest levels for more than a decade, there should have been signs by now of strong economic recovery: companies and consumers can borrow more cheaply than at any point in the past five decades: raw material costs for industry are at such low levels that profitability ought to be easy.
But surely the reasons there are few signs of life should be clear. Companies and consumers, traumatized by the depth and duration of the crash, still lack confidence that it is yet safe to begin spending or investing. Consumers, in particular in the US, are paying down debts to record low levels and still are unwilling to take on new liabilities. Improving jobs data disguise a more complex and sobering reality – that some of the “improvement” is due to people no longer bothering to look for jobs, and that many of the new jobs are insecure and low-paying.

Many also see property and other asset markets unsustainably inflated by record low interest rates, and set to fall sharply as soon as interest rates begin to rise. The likelihood of a perhaps significant property crash is enough to keep many people and companies very cautious.

Similarly sobering is the rising realization that the monetary stimulus at the heart of QE programmes has now run out of road: that stimulus going forward will need to come from fiscal measures – with governments raising spending, and encouraging investment, in particular in infrastructure. But with governments across the world carrying unprecedented debts, and with many resource exporters seeing revenues slashed, their capacity to provide the necessary fiscal stimulus is in doubt. With governments having cut funding for services ranging from education to health and pension provision, consumers have every reason to squirrel away savings wherever they can.

In short, the reasons why companies and consumers are still unwilling to begin relaxing and spending seem very clear. Quite why so many economic policymakers don’t recognize or acknowledge these forces perplexes me. Whatever the reason, it seems much more adversity lies ahead before the patient on the emergency room table begins to show signs of sustainable life. [ Back ]