Such events often remind investors that politics can trump economics. Whereas Pax Americana may be diminishing, there is no doubt about the Federal Reserve’s global influence.
In February, Janet Yellen formally started her reign as chair. Now that Stanley Fisher has been confirmed as the new vice-chairman, the US again has a dream team, this time a monetary one.
Together with recent appointees at other central banks, including the Bank of England, they will all need their experience and skills to deal with the challenges their respective countries face in an increasingly integrated but imbalanced global society.
Central bank co-operation
There are a few dimensions to this. First, it involves the global impact of their own local monetary policies. Compared to previous occasions, there seems less appetite now for co-operation between central banks. In fact, the policies of the Fed have met a growing wave of criticism. For now, Yellen seems inclined to be inward-looking, specifically regarding the recent turmoil in emerging markets.
She stated that these “do not pose a substantial risk to the US economic outlook.” In other words, John Connally’s famous statement that the dollar was “our currency but your problem” is being paraphrased by Yellen as “our monetary policy is your problem”.
Second, various hot topics over recent months, like imbalances, independence and inequality, have their ‘roots’ in economics but their ‘fruits’ exposed socially.
It is for this reason that central banks are being scrutinised by the public. In the West, we have only recently become (re-)accustomed to the outsized impact of central bank policies. Worryingly, a large proportion of the public sees monetary policy as an extension, rather than independent, of government policies.
Third, among the structural macro challenges are the growing share of government consumption and government debt to GDP in many countries, particularly in developed markets. On first sight, both seem to reflect the Keynesian ‘compensation’ by the public sector for the downturn in the private sector.
However, there are a growing number of voices expressing that a more worrying current underlies these waves. Larry Summers, in a speech for the IMF, pointed to the risk of “secular stagnation”.
It means intrinsically the economy is incapable of creating enough demand, i.e. it needed bubbles and
extraordinary stimulus to show the trend growth we were accustomed to.
Secular stagnation
I would argue that secular stagnation is the long-running vicious circle caused by growing government interference in the economy and markets. Speculative risk is promoted while entrepreneurial risk is stymied. The resulting distortions lead to an inappropriate risk/return profile for the global economy as a whole. It is more than ironic to recall the words of Vladimir Putin that the central role of the state: “lead to the total non-competitiveness of the economy. That lesson cost us very dearly . . . expansion of the budget deficit, accumulation of the national debt – are as destructive as an adventurous stock market game.”
The amount of debt globally has soared more than 40% to $100trn. Governments and central banks have shied away from allowing defaults and similar ‘creative destruction’ measures. Their main motivations are political rather than economic.
However, time is running out. Demographic trends are narrowing the window of opportunity to deal with this economic problem. We need private consumption and investment to make a larger contribution to growth. Governments and banks need to refocus on facilitating entrepreneurship and allowing markets to correctly price associated risks. They need to step back and make room for a new Pax Economica.
