If we’ve learned anything from the post-crisis experience (and there’s a veritable mountain of evidence to suggest we haven’t), it’s that money printing and accommodation in general in the form of ZIRP and NIRP are not a magic bullet when it comes to catalyzing a sustainable and/or robust rebound in global growth and inflation.
It’s true that without central bank accommodation, the system would have likely collapsed entirely an outcome that, unless you are a true believer in the idea that the world could survive a true reset without devolving into chaos, simply wasn’t a viable proposition.
But increasingly, it’s looking like the intersection of structural headwinds (e.g. demographics, technology, etc.) has antiquated the old models, thus necessitating a serious rethink of the extent to which we can rely on traditional thinking to restore prosperity.
Additionally, it seems likely that the still-sluggish pace of a “recovery” that is now nearly a decade in the making is at least partially attributable to the fact that although fiat regimes provide policymakers with the flexibility to cushion the blow from crises, the tools that come along with an unanchored system (i.e. the ability to print money and create credit) make it inevitable that the next crisis will be even larger than the last. Eventually, the busts will become so spectacular that they will overwhelm the system’s ability to respond. The slow pace of the recovery thus appears to be a harbinger of a time when no recovery is possible and the fact that crisis-era policies are still in place suggests that policymakers will be low on ammunition the next time around (there’s a full discussion of this dynamic in “I’m Out Of Bullets, How About You?“)
Meanwhile, there’s a compelling argument to be made that some of the policies enacted by central banks are self-defeating. For instance, when you keep markets open to otherwise insolvent (i.e. uneconomic) production, you undercut your own efforts to lift inflation. See the U.S. shale space for instance.
So that’s the context for the following piece from Bloomberg’s Cameron Crise who suggests it’s going to start taking longer and longer to recover from the busts that invariably follow from the booms…
What will it take to raise the trend of economic growth and inflation? That is THE key question for both markets and policymakers these days. Donald Trump’s economic advisers think it requires a large tax cut. Policy doves like Lael Brainard believe we need accommodative monetary settings as far as the eye can see. Some academic economists think that raising central bank inflation targets could do the trick, even though the vast majority of citizens, at least in the United States, almost certainly don’t know what the current target is. The reality is that to properly reflate the U.S. and global economies, it will require the one thing that’s always in short supply for both traders and politicians: time.
- The architects of the Trump tax plan think that they can goose U.S. growth back toward 3%, but the numbers don’t really stand up to scrutiny. Trend growth in any economy is a function of labor force growth and productivity. In the world’s largest economies demographics provide a headwind to the former, and past experience suggests that tax reform will do little to permanently boost the latter. NBER economists analyzed the last tax holiday on foreign profits and found that 92% of the cash went to buybacks and dividends. That’s fantastic news if you are an investor but offers little hope of a rise in trend growth
- Accelerated writedowns of capital expenditure may provide a modest boost to business investment, but to really goose economic growth the world’s consumers have to start spending. In the U.S. it’s hard to see that happening with any vigor until either wages rise substantially or consumers feel comfortable taking on more debt. Fifty years ago, U.S. households could fund almost all of their spending out of wage and proprietors’ income. Today, there is a 27% shortfall. From the mid ’70s until the financial crisis, households made up the growing cash flow gap with rising debt. Since the crisis, however, households have delevered — and thus are buying less than they used to
- Are low rates the answer? Well, maybe, but if households refuse to take on more debt then they won’t pull consumption forward — and the level of rates becomes less relevant. Meanwhile there’s an argument to be made that easy policy increases aggregate supply, which puts a lid on inflation. The oil patch has been a microcosm of this phenomenon over the past several years
- In “This Time It’s Different,” Ken Rogoff and Carmen Reinhart noted that it takes a long, long time to rebuild from financial crises. So it has turned out to be this time around. Current indications are that it will take longer still
- In the meantime, easy monetary and/or fiscal policies will be great for owners of capital and recipients of financial engineering. Other than painting over a few cracks, however, it’s hard to see how how these programs will achieve their stated goals in the real economy