Margaret Thatcher used to say that There is no alternative to whatever policy she believed in. But there is always an alternative to banging your head against a brick wallyou can stop banging your head against a brick wall. The G20 Finance Ministers meeting in Moscow last weekend may have marked such a moment of revelation, when governments around the world gave up on fiscal and financial austerity, and recognised that growth based on consumption, borrowing and rising house prices is better than no growth at all.
It is now nearly five years since the Lehman crisis and throughout this period politicians and economists have been obsessed with avoiding the mistakes that supposedly produced the crisis. They have been trying to reduce debts, both in the public and the private sectors; to make their banks behave more cautiously; and to rebalance their economies away from their over-dependence on consumption, services and finance in favour of supposedly more sustainable economic activities such as saving, exporting and manufacturing. The virtues of saving, exporting and manufacturing are so much taken for granted these days that it is easy to forget the novelty and implausibility of the rebalancing concept.
Until 2007 conventional wisdom among economists was that manufacturing nations like Germany and Japan should restructure their economies to resemble the US and Britain. It was only after the Lehman debacle that economic fashion shifted decisively against Anglo-Saxon bubble economies, based on debt-fuelled consumption, property speculation, financial engineering and other frivolous service activities like coffee shops and computer games. Instead every nation has tried to emulate the solid virtues of the Germanic economic model, powered by exports, investment and manufacturing. Angela Merkels slogan that you cannot cure debt with debt has become an international motto, despite the fact that central banks were printing money like there was no tomorrow, and governments have committed themselves to deleveraging by homeowners, banks and the public sector, all at the same time.
In the past few months, the pendulum of economic fashion has started swinging back from austerity and towards credit-fuelled consumption growth. The G20 communique made this plain, stating that growth is now a higher priority than debt reduction in every major nation.
More important than mere words and phrases have been the actions of governments around the world. One country after another has accepted the US injunction to stop relying on exports for recovery and instead to promote domestic consumption growth, if necessary financed by debt. In Japan, we have seen the launch of Abenomics, with its enormous spending programs and monetary expansion. In Britain, the government started deliberately inflating a housing bubble in its last budget by creating a subprime mortgage market backed by unprecedented government guaranteesand the results have already become apparent in an upsurge of house prices and consumer confidence.
China is now irrevocably committed to economic restructuring away from investment and exports, in favour of faster consumption growth. Although China is trying to squeeze credit and property speculation at the same time as stimulating a consumption boom, these policies are clearly in contradiction and the minimum growth target of 7% announced this week by the prime minister suggests that consumption is likely to take priority. To accelerate consumption growth will require credit expansion of some kind, whether by reforming the banking system or by using the governments own fiscal capacity to increase borrowing and hand the proceeds to consumers through tax cuts or expanded social programs. Even in Europe there are now clear signs that the age of austerity is over, with Italy refusing to implement the tax hikes it agreed to with the Troika, while France returns to its habit of ignoring European directives by simply denying that it has to tighten fiscal policy at all. Germany, too, has agreed after some resistance to endorse the G20s priority for growth over austerityand more importantly, the German government is widely expected to shift from fiscal tightening to cutting taxes or increasing social spending after the election on September 22.
It seems, then, that policymakers have finally accepted the long-standing US view that it is impossible for all of the worlds major nations to rebalance their economies simultaneously by exporting and investing more while they consume and borrow less. The reason is obvious in the case of exports, since one nations exports are by definition anothers domestic consumption. But investment, too, depends ultimately on consumption and credit growth, since businesses will only increase investment in response to growing demand.
In short, politicians and business leaders around the world are giving up hope of export-led growth, powered by manufacturing. Instead they are gradually reverting to pre-crisis economic models, where growth and job creation are powered by consumer spending. From this, several conclusions follow that will seem shocking after the austerity economics of the past five years.
Stronger consumption will need to be financed by credit creation, at least until the point is reached when employment and incomes grow rapidly enough to create self-sustaining economic recoveries around the world. This means that household or government debts will have to stop falling and preferably that leverage will start to rise again. Debt levels that were considered unsustainable until recently, both for governments and households, will have to be accepted as the new normal. And finally, to create this new credit and support consumption growth, some of the regulatory restrictions on banks will have to be loosened rather than tightened further in the years ahead.
None of these new policies will be publicly announced, since politicians and economists do not like to admit U-turns, but economic reality is moving well ahead of official rhetoric. All over the world, plans for deleveraging and economic rebalancing are being abandoned, while housing and consumption are making comebacks. In sum, the Age of Austerity is well and truly over.