Another autumn beckons another IMF Summit. The problems are still the same, only getting worse. Across the developed countries, income growth is sluggish and inflation rate is low. Central banks have run out of ways of using QE. Even negative interest rates have failed to revive inflation or increase growth.
There is now little disagreement about the idea that QE has now reached its limits everywhere it has been tried. While central banks are reluctant to raise interest rates (as the Fed did last Wednesday), there are limits to cutting rates further below the Zero Lower Bound. Governments everywhere are shy of using fiscal policy to expand the economy. This is perhaps because there are legal constraints, as in the Maastricht Treaty. But even in the US and the UK, the idea of incurring larger debt is frightening the champions of fiscal policy.
In the UK, the deficit has been halved by the previous Chancellor during his six years. The new Chancellor, Philip Hammond, has promised a looser fiscal policy, but we shall wait to see. Bond yields are at their historic low and thus new borrowing may not cost so much. Even so, it is unlikely that taps will be loosened enough to flood the economy with spending power.
The idea that governments should not monetise deficits but borrow on the open market at a decent rate has been the orthodoxy only since the late 1970s. The fear was that monetising deficits will cause inflation. Now that inflation in the developed countries is barely positive, why can’t we think outside the box ?Within the Eurozone, the orthodox are hoping for a rapid political integration of the Eurozone countries, and then, with a single state, they could have more scope for fiscal policy. But it is hardly a quick recipe. It may take another 20 years, and, if anything, Brexit has made it more, rather than less, difficult for EU to integrate. It would be better for the Eurozone to break into two zones—North (hard Euro) and South (soft Euro) or even to revert to the Exchange Rate Mechanism which allowed some deviation around a central value for the exchange rate. This may let the deutschmark appreciate and the drachma depreciate. This would be a market-led path out of stagnation.
This is unlikely to happen of course. The mood following Brexit is very hostile towards further integration of EU but even more against any relaxation of the noose which the EU27 have slung across their necks. The EU will drift along with low-growth and stagnation. It is hard to think that it could lead the world out of stagnation.
The long odds on a breakout of this impasse is with the likely election of Donald Trump. There are all sorts of ideological problems with Trump. But what is new about him is his unorthodoxy about economics and public finance. Here is a candidate for the highest office in the US who has publicly committed himself to a huge infrastructure spending project—the Wall across the Mexican border. It may be politically unwise, but it will generate jobs.
Trump has also said he does not mind debt. As a businessman, and the only one in post-war years to be nominated by either Party without having ever held a political office, he is a true amateur politician. He can be flexible in his budgetary ideas, and will be. America has a huge infrastructure deficit in terms of roads, bridges, ports and railroads and airports which requires serious public expenditure. It is this unfashionable attitude which will take the American economy out of its tepid recovery. If there is inflation and the RER of the dollar suffers, all the better for the rest of the world.
The other escape is through the emerging markets. This was much hyped up in the early years of this century by Jim (now Lord) O’Neill’s catchphrase, BRICS. Of the five, only India and China are growing at a decent rate any longer.
China has deep structural problems with overcapacity in the old export/ infrastructure economy and a fast-growing domestic-market-led economy. It has also (somewhat like India) high non-performing loans on the books of the state-owned banks. Even so, it is growing at around 6.5% which is, despite dubious statistics, still one of the higher growth rates.
Add India to this, and you have the motor for future growth. But even more South East Asia—Indonesia, Vietnam, Malaysia, Thailand—is also a boom region.
Once there was a North versus South and West versus East paradigm. The Cold War ended and the West-East issue takes a backseat ( Ukraine notwithstanding). The North-South relationship is now inverted. Forget the East India Company, Tata Steel matters more for the UK.
The author is a prominent economist and Labour peer