This article was written by Richard Horswill. All views and opinions expressed are strictly his own.
The eternal question that economists and politicians alike bat backwards and forwards is the one of economic growth and how to harness it at the local and global level. Many point to subjects surrounding productivity, labour force, education, tax, technology, and Brexit being specific to the UK. All have their place in the debate: however what is seemingly omitted from many conversations relates to the actual building blocks of all of the above which is the finance that provides the underlying opportunity for all to take place. This article attempts to outline the backdrop to the current global growth dilemma.
Depression is an unloved word because of its connotations, and when one considers its meaning - “A dramatic and sustained downturn in economic activity lasting more than three years” - one understands why it is shied away from. However, maybe we should be more open to use it when we consider the backdrop to the 2008 Global Financial Crisis. The global economy has been on a sustained sub-par growth trajectory since the crisis with only pockets of improvement, soon followed again by the lower path. Periods of fiscal support create transitory momentum but the short lived sugar rushes only provide a one off hit. The inevitable slump and low growth picture once again emerges. It would appear that a silent depression has been prevalent since 2008 but no one really wants to suggest such a thing. But if one did suggest the "D" word, one might ask what actually transpired in the wake of the 2008 crisis that has led us into suppressed global growth.
An interest rate fallacy that has conspired to provide a false narrative is one that suggests that a low interest rate environment is stimulative. However, when one considers why interest rates in developed economies since 2008, until recently, were at record lows, it was claimed to be down to the suppression of rates by Central banks through the initiation of Quantitative Easing thus providing an unlimited bond buyer in the Government debt markets. This is nonsense, as can be seen from the similar low interest rate environment during the Great Depression. US 3 month T-bill rates stayed well below 1% between 1932 and 1947. The underlying rational for this occurrence is that there was demand for safety and investors saw government debt as the best place to shelter in investment terms as confidence had been lost in the economy. Also, the banking system had been damaged by the crisis events leading to economic stagnation as a consequence of limited lending. The same safety trade would have occurred in gold had it not been for Executive Order 6102 which prohibited the holding of gold by US citizens in the 1933 confiscation. In comparison, from October 2008 to May 2022 - with only a brief period from July 2017 to February 2020 - 3month T-bill rates were also significantly below 1%. The backdrop to the financial crisis once again providing investors with a requirement and thus demand for safety, not down to the QE narrative. Subsequently since June 2022, rates having been forced up by Central bankers in the mistaken belief that they are fighting a 70's style inflation. They have inverted yield curves which are in essence the underlying reason for the current tightening of global financial conditions. Banks borrow short and lend long and thus the resulting conditions provide the rational for the global banking participants to curtail their previous lending practices. The long and variable lags are now seemingly catching up as global dis-inflation is now looking likely to turn into deflation East to West.
So the obvious question of where global growth has gone seems to have been answered in what global interest rates have been doing, and how the money curves have been instrumental in providing for where all the money has gone. 2008 was the moment that banks realised that lending to infinity was not possible and the risk models that they ran were inadequate. The subsequent changes made by the global banking industry meant that their lending practices had to be tightened which has ultimately led to the low growth environment we have had since 2008. This economic malaise led to tick over in the global economy but nothing more, and as such bumping along the bottom seemed to be the new normal. That was until a global pandemic hit, along with a global energy crisis in the form of initially a war in Ukraine and now one brought about by supply cuts by OPEC 2 and now a further Middle Eastern geopolitical crisis. Now, the possibility of any prolonged global growth event seems even further away as the global banking fraternity are likely to be besieged by a wall of delinquent and very likely un-payable debt at the prevailing rates unless a sea change in monetary policy is forthcoming. The higher for longer rhetoric would indicate that this is not likely unless given little choice events unfold in a way that occurred in 2008. Certainly, areas to follow that could indicate there are concerns are higher gold prices even though a positive real yield rate environment currently exists, and continued high oil prices that could create severe stresses on global demand over and above the obvious human necessities for food and energy.
Politicians who are promising growth and thus better times ahead need to be looking in the right direction. For sure, growth will not likely be coming from the usual commercial banking protagonists any time soon as their business model changed for good in 2008, therefore MMT (modern monetary theory) may well be the saviour they will be selling. In a world awash in debt that will likely never be fully repaid on the current trajectory, and the current debt servicing conundrum instigated by central bank nonsense, politicians may well ultimately find the elusive unlimited credit card they always desired as debt and deficits just do not matter when interest rates are stuck at zero. Politicians spending like drunken sailors - who would have thought it!!