René Magritte, “Song of the Storm” (1937)
Are we seeing the signs of a global economic meltdown?
Marxist and other radical economists often remind people of the inherent instability of capitalism—unlike their mainstream counterparts, who tend to focus on equilibrium and the invisible hand of free markets.
But, right now, the warnings about new sources of instability are coming from quarters that are anything but radical. And they’re all saying pretty much the same thing: National monetary policy is increasingly ineffective. Central banks are largely impotent. The IMF points to increased global economic risk because of impossible amounts of debt that will never be repaid. Creditors are way too overextended. Finance capital is out of control. Growth everywhere is threatened. China and emerging-market nations are mostly to “blame.” And so on and so forth.
Here’s a recent sample of three recent articles [ht: ja]: from the BBC, Reuters, and the Guardian.
Andrew Walker (for the BBC) cites the latest IMF World Economic Outlook, according to which emerging and developing economies will register slowing growth in 2015 for the fifth consecutive year, to argue that (a) economic growth in China is slowing down (and helping to pull down the rest of the world, both directly and indirectly) and (b) lackluster growth in rich countries is failing to pull the rest of the world along. In addition, according to the latest IMF’s Global Financial Stability Report, the explosion of dollar-denominated credit in recent years, along with the rise in the value of the dollar, is going to make it difficult to repay those debts, a growing problem which is in turn exacerbated by the reverse “flight to safety” of financial capital. And then, of course, there are the negative effects—in Russia, Brazil, Venezuela, and elsewhere—of falling oil prices.
David Chance (for Reuters) cites the recent report by the Group of Thirty according to which low interest-rate rates and money creation not only were not sufficient to revive economic growth, but risked becoming problems in their own right.
The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies.
At the same time, we’re listening to a growing chorus, at least in the United States (first from Federal Reserve Governor Lael Brainard and then Fed governor Daniel Tarullo) against the prospect of changing central bank policy and raising interest-rates anytime soon.
Finally, Will Hutton (for the Guardian) warns that capital flight and bank fragility threaten to create new asset bubbles and the eventual bursting of such bubbles—and there’s no prospect of global coordination to prevent the resulting economic dislocations.*
The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees.
The upshot? My view is these three commentators are on to something, backed up by the research taking place within the IMF and other international entities. Clearly, they are concerned that the anarchy of production—the anarchy of both “real” production and of finance, within and across countries—and the absence of any new ways for central bankers to regulate that anarchy are creating new fissures and cracks within the global economy.
The problem of course is, the same search for profits mainstream economists and policymakers hoped would lead the recovery from the crash of 2007-08, along with the initially hesitant and then increasingly desperate measures central bankers have adopted to enhance the prospect of that search, now seems to be undermining that fragile recovery.
That’s the gathering storm they—and we—should be worried about.
*I do have one bone to pick with Hutton, who argues that excessive credit is created by banks lending out money based on existing deposits, which in turn is based on “the truth that not all depositors will want their money back simultaneously.” The latter may be the case but Hutton gets the order wrong: it’s bank credit that creates deposits (like fairy dust), not the collection of deposits that serves as the basis for the expansion of credit.