Wednesday, August 10, 2011

Stagnation, debt and inequality

The following is from the Unconventional Economist (Leith van Onselen), who I encourage students to read via the Macrobusiness Superblog. Your parents (or you) might benefit from a reading of his (and Delusional Economics') views on housing. 

Leith highlights a report from Societe Generale’s Albert Edwards.  This is a negative view of the global economy, but one I have long worried about since preparing the manuscript for The Vulnerable Country from 2006.

As we see a short-lived economic recovery failing only two years into the cycle and a plunge back into recession, we remind investors that this was exactly the Ice Age template that Japan showed us. A fragile recovery undermined by private sector deleveraging collapses as a semi-bankrupt government tries to rein in runaway deficits…
I and many others have been pointing out for a long time now the simple fact that the global economy has been living way beyond its means for years. A massive transfer of income to the very rich has occurred while middle class real incomes stagnated. The middle classes only tolerated this because Central Bankers created housing booms to keep the impoverished middle classes borrowing and spending to give them the illusion of prosperity and stop them from revolting. I believe the Fed and Bank of England, in particular, were wholly complicit in this ‘daylight robbery’.
These unsustainable private sector, debt mountains were transferred to the public sector in 2008 to prevent the adjustment to the depression-era reality that the debt unwind would undoubtedly have brought about. Yet, those debts are as unsustainable in the hands of the public sector as they were in the private sector. Central bank polices haven’t changed though. Print and print and print. And if that doesn’t work, print some more. And as London burns, the point I have always made is that the US and UK are not like Japan in one very special way. Although Japan suffered a decade of pain it is a very homogenous, equal society (see below). The UK and US are not…
In the Eurozone, the markets are now realising what should have been obvious from the start. The authorities are in very little position to halt the rot. During the bubble (aka The Great Moderation) the Eurozone had the same mechanics of mutually assured economic destruction that was seen on a grander scale between China and the US, viz the excessively loose US monetary policy causing a housing and spending boom that resulted in a huge trade deficit, financed in the main by a willingly mercantilist China printing money ad infinitum to keep their fixed exchange rate link (incidentally it’s a bit rich for the Chinese to complain about the US profligacy when they are just as bad when it comes to cranking the printing press).
The Eurozone has been no different to this unstable US/China nexus, with some member countries enjoying (suffering?) super loose monetary policies through no fault of their own (unlike the US), leading to housing and spending booms causing huge trade deficits funded in the main by Germany with a Chinese-style trade surplus, with their banks lending money to the deficit nations in the periphery to keep the party going.
So, during the Great Moderation, although the overall trade situation of the Eurozone seemed to be in external balance with the rest of the world, under the surface the situation was always every bit as unstable and poisonous as the US/China situation…

Edwards makes several important points about the problems at the heart of current global problems and much of it can be slated back to rising inequality, the third of the key vulnerabilities facing Australia, but obviously much more acute in the US and UK.

If globalisation (meaning here the proclivity towards freer trade and finance) is to remain sustainable then it has to be accompanied by redistribution of opportunity and of wealth, otherwise populists of the right (and left) will gain increasing leverage over political processes and lead to a return to insularity.

The massive transfer of wealth to the rich in the US is not seen, unfortunately, as a cause of US problems by supporters of the extreme right. Instead mild efforts to maintain growth in the US are seen as signs of rising socialism.

The US economy is in deep trouble not because its debt is unsustainable - its not - but because the political process is broken. Some basic measures to raise taxes on the very rich and make corporations pay tax, at the same time as increasing spending on worthwhile labour market programs and infrastructure development would make a big difference.

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