Regular readers will know that I have spent quite a lot of time reading the…
W comes before V
The talk at present is that while we are hoping for a V we might have to accept a W. Its all about shape. The shape of the future. The shape of the recovery! In Post-Lehman World Will Mean W-Shaped Recoveries we read that Japan’s former economic and fiscal policy minister, Hiroko Ota said that “The worst is over but I can’t say the economy is heading for a recovery at all”, Japan’s recovery may be W-shaped instead of V-shaped. There are some very real reasons why W might rule over V. They all relate to the lack of understanding of the characteristics of a fiat monetary system and the opportunities that such a system presents the sovereign government. Unfortunately, the ignorance (or wilful neglect) among policy makers may force millions of people to endure unnecessary hardship.
There is some fear that Japan’s so-called lost decade – where it struggled to grow again after the 1991 recession – will become the model for all of us. But other economists recognise that the current stimulus packages that are being unleashed in most countries will probably get activity rolling again but will soon push the world towards higher inflation, higher interest rates and higher taxes – all bad. The argument is that will force policy responses which will create what is seen as “the W-ization of the business cycle” (Source of quoted expression).
I have some sympathy with the W-shaped view. But note my use of the words force policy responses. The policy responses might be real enough but they won’t be forced by any essential or underlying economic imperative. They will be driven by irrational, ignorant and/or wilful governments who choose to bow to the pressures of the neo-liberals instead of fulfill the only legitimate charter that government has – to advance public purpose.
Here is the way I see the W-dynamic working. We get some “green shoots” – retail sales are up; consumer confidence rises etc. The share market lifts – but most do not realise the share market has very little to do with the real economy.
The “green shoots” engender the impression that the real economy (that is, production and employment side of the world) is showing some tentative signs of bouncing along the bottom rather than remaining in free fall. The recovery has so far been stimulated by fiscal expansion. Stupid governments believing (or wanting us to believe) they are revenue-constrained have issued public debt to “fund” the spending even though this is a totally voluntary decision by them and in reality – spending funds spending for a sovereign government. The debt issuance funds nothing! The spending even provides the funds that are used by the non-government sector to buy the debt! Not many people realise that, do they!
Anyway, the environment is then ripe for the hysteria to begin. It is the warm up stage at present but will reach monumental proportions before too long. So the debt and inflation hysteria sets in, driven by the sheer ignorance (or venal wilfulness) of the neo-liberal (mainstream economists) commentators and whipped up by the frenzied conservative press, who are not committed to advancing public purpose at all but just want a buck and will do whatever it takes!
Higher taxes! Higher interest rates! Inflation! Drowning our kids in debt! We will be told that the sky is about to fall in unless we have a plan to get back into budget surplus and pay down the debt as quickly as possible. Readers of billy blog will not be moved by the hysteria though!
The problem is that governments around the world will get spooked and start to cut back on net spending to restore what they claim is financially responsible fiscal positioning. That would be the rhetoric. Of-course, readers of billy blog know that if there is unemployment and capacity slack, the only show in town is to increase net government spending. That is the only responsible thing to do.
But the irresponsibilty will probably rule and before we are recovering strongly enough to get close to full employment the fiscal drag will set in and we will be back down that W.
In this regard, the Bloomberg article, noted above, says:
From Washington to Beijing, officials are still treating the symptoms of the crisis, not the cause. Throwing money at the problem was fine for a while. It is now time to revamp regulations, retool economies and restore trust in markets …
Well, you see the point – this guy doesn’t understand the situation at all. The problem is a lack of demand! There might be structural issues in the banking sector and a lack of regulation elsewhere and crooks in the corporate sector that still need to be locked up, but the real economic problem is a lack of demand. That is equivalent to a lack of spending. If the private sector doesn’t want to spend enough then the government has to keep spending until the demand problem goes away. It is not a matter of a quick fling and then you abandon the fiscal stimulus path.
The Bloomberg journalist then goes from bad to worse.
Even China, the nation many view as best positioned to avoid the worst of the global recession, may be heading this way as the effects of stimulus efforts wear off. At that point, the fourth-biggest economy will face a dismal export environment.
What? An on-going fiscal stimulus cannot wear out if there is continuous daily net spending from the government going into the economy to fill the spending gap left by the pessimism of the private sector (firms and households). Even if China faces a dismal export environment it will be able to keep its growth going by providing public infrastructure and public employment for its 1.x billion citizens who eat a lot! I use .x because the population is growing so fast.
The ultimate and most simple example of how a fiscal package cannot wear out is if it the government introduces a Job Guarantee, which would provide a job to anyone who wanted it – forever! It would underwrite income security and put a floor under the real activity levels of the economy. All the dynamics that were then drivem by variations in private spending would be on top of that floor. A much better place to be in than a situation where unemployment is rising.
The recovery theme is also taken up in the World awaits recovery as G8 finance chiefs meet report from the AFP. The news is that the finance ministers from the G8 are meeting in Italy today as the IMF are now ramping up world growth forecasts.
As an aside I have had a very interesting encounter with the IMF in the last few weeks which I will report on soon – when I am allowed to! I am calling it the “Case of the Missing Report” although Sherlock Holmes is not required. The case is solved and the criminals known. It will make your hair stand on end!
Anyway, back to the theme. The writers of the AFP article however have to put their foot in it and say that:
But there are also worries about the huge debt incurred by governments to fight the crisis and their commitment to cut spending once growth restarts.
I am not the slightest bit worried about the (unnecessary) debt build-up, and I, actually understand how the system works. But I am worried that national governments will get bullied by conservative organisations such as the IMF, most of the world press, and other like minds (many of who do not understand how the fiat monetary system works) into cutting back before they should.
The only time that a national (sovereign) government should cut back is if their economy is overheating. That would be evidenced by full capacity utilisation and full employment (meaning – as a constant reminder – 2 per cent or less unemployment and zero underemployment and capacity participation ratios). The evidence of the past 30 years or so is that governments start trying to run surpluses well before this capacity peak is reached and sooner or later plunge their economies back into economic malaise.
However, before we get to the W we have to get to the V bit and latest forecasts are not looking good.
Yesterday, the World Bank said that
The world economy is set to contract this year by more than previously estimated, and poor countries will continue to be hit hard by multiple waves of economic stress … the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent. Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.
That’s \ not V nor W.
But I suspect the policy debate will start being dominated by W-type forces. It is clear to me following yesterday’s Labour Force data that our fiscal stimulus is way short of the mark. So far from holding back, another stimulus package is needed.
The Federal Employment Minister claims the Government wants “to stand shoulder to shoulder with” the unemployed as their own policy design is forcing more workers onto short and zero hours. So that would only be true if they used the capacity the government has as a direct employer to make sure there is a job offer for anyone of the workers she is standing shoulder to shoulder with. Otherwise it is hollow rhetoric.
Meanwhile, the finance ministers will eat a lot in Lecce (Southern Italy) and apparently, in between, they will be considering “whether Europe should go for US-style ‘stress tests’ to check the stability of its banks and on how far new rules on global finance should go.”
I would prefer them to think fiscal and get some real job-creating expansion into the system to avoid the sort of future that the World Bank is predicting.
My understanding is that the US “stress tests” have been a farce. Perhaps my mate Scott Fullwiler who knows all about these things can comment.
Anyway, that’s my time for today.
Digression: other things
I contributed to the ABC current affairs PM show last night. You can read a story that ABC Economics reporter Stephen Long wrote arising from the show – Men hit hardest by unemployment crisis. You can also hear the segment and read the Transcript
On another front, ABC news reports that our true-blue Prime Minister Rudd savages Commonwealth over rate rise. Simple solution cobber – take away the Government guarantee that you are giving them and encourage people to take their business elsewhere!
International readers note: the PM is under attack at present because he has gone overboard with the vernacular – trying to use expressions that were common among a small number of Australians about 50 years ago but which apparently define our nationhood. He is allegedly trying to appear down-to-earth and Australian. It is largely just cringe territory.
Digression: Saturday Quiz
Another tough quiz focusing on debt and currencies will be available tomorrow.
Digression: Continuity of billy blog over next two weeks!
billy blog will probably be a little patchy over the next two weeks. I am travelling to Europe tomorrow to give a research presentation and then to the US for 10 days where I will be giving a keynote talk to a United Nations Development Program workshop in New York on employment guarantees in developing countries and attending to other research issues.
So while I should be okay most days – and a foreign flavour might enter the blog – some days I will find it impossible to make copy (as they say!). So please forgive me in advance!
This Post Has 3 Comments
Excellent summary of the situation. Hyperinflation is another buzzword now from the actual printing press (media). There was a report by one of the Federal Reserve banks in the US (St Louis, I think) which pointed out a negative growth of bank credit in the US amidst complications due to JPM taking over WaMu. Worst thing is that Ben Bernanke thinks that the market thinks that there is going to be inflation due to the yields rising – as if the market gets things right so easily.
Hi Bill, you said
“The problem is that governments around the world will get spooked and start to cut back on net spending to restore what they claim is financially responsible fiscal positioning. That would be the rhetoric. Of-course, readers of billy blog know that if there is unemployment and capacity slack, the only show in town is to increase net government spending. That is the only responsible thing to do.”
I think the greater danger is that govts. use the argument that they shouldn’t relax/take a foot off the pedal of fiscal and monetary easing, as an excuse to blow another asset bubble.
We all know how we got out of the 2001 recession that was threatining, we blew a housing bubble. which followed a nasdaq bubble. Even at that point the dangers of a pre-war style near depression were being highlighted in some quarters.
I actually think attempts to blow another bubble is a far greater danger than seeing a double dip. I see 2001 repeating itself, rather than any danger of a global depression. Except it’s difficult to see where the next bubble is coming from, other than a reflating of the private debt bubble.
At some point it becomes a case of the boy who cried wolf, early in the decade the 30’s are evoked to blow a bubble as a policy response, financial sector sourced global downturn see’s the 30’s evoked again to get govts. to spend to build bridges to nowhere and indulge in a ZIRP-Queasing policy, why shouldn’t we expect another bubble to be blown ? And if they do succeed in blowing another bubble nobody will be listening to the calls for such action next time….i know i won’t.
I don’t disagree with you. The comments you make are interesting. My guess is that so much financial wealth has been wiped out in this crisis and production capacity utilisation is so low now that it will take some time before we get another credit binge. It will also take a long time before the real economies recover and approach anything like reasonable levels of utilisation. Until then I think firms will react to the nominal demand stimulus by increasing production and repairing their battered balance sheets. Later in the cycle you will get later-boom Minsky type issues arising again which will need to be contained with fiscal policy contraction.