By John Richardson
HAVE the post-Global Financial Crisis (GFC) economic stimulus policies of the Western central banks worked? If your answer is yes, you might be heavily influenced by your economic circumstances.
Those who are convinced that everything is working out just fine could include the small percentage of people at the summit of the global economic pile who own lots of shares. Stock markets remain on a tear.
And anyone who had the means and the courage to pick up several London properties back in early 2009, at the height of the GFC, may also concur with the view that central bank stimulus policies have been extremely effective.
But the above chart, from a July 2016 McKinsey Global Institute study, should give all of us pause for thought.
It shows that between 2005 and 2012-2014, which was the latest data available, the real incomes of about two-thirds of households in 25 advanced economies were flat or had declined. Since 2014, there is little evidence that the situation has changed for the vast majority of average earners in the developed world.
Advances in automation help explain why average earners in developed economies continue to struggle. Well-paid working class or blue-collar jobs are disappearing and are being replaced by zero-hour contracts and the “gig economy”.
And as I have long argued, demographics are another reason for income stagnation. Ageing populations in the West mean that no matter how much money central banks print, they will never be able to compensate for a rapidly growing demand deficit. You cannot print babies.The end-result of less demand is of course weaker wage growth.
You might have your own alternative explanations for weak wage and overall incomes growth. But whatever the reasons, it is hard to dispute the argument that stimulus policies in the West have to date delivered uneven and disappointing benefits.
Record levels of debt will have to be reckoned with
Policy failures also explain persistently weak inflation – for example, US inflation was just 1.6% in June compared with the Fed’s annual target of 2%. Western central banks would be hitting their inflation targets if there was a broad-based economic recovery.
There is also the issue of the record levels debt left behind by central bank stimulus policies. Fellow blogger Paul Hodges writes:
- UK debt as a percentage of GDP has more than doubled from 51% in 2007 to 123% last year.
- US debt has risen from an already high 77% in 2007 to 128% last year.
- Japanese debt has risen from 175% in 2007 to 240% in 2016.
This debt wouldn’t matter if inflation had picked up. Higher wages and prices would encourage even more consumer spending. The real cost of loans would also be falling on the declining value of money. Now, though, deflation rather than inflation seems more likely.
China will not inevitably ride to the rescue
The failure of Western central bank policies to achieve a broad-based boost in income levels has led to a rise in political volatility.
I believe that last year’s Brexit vote was largely a protest vote in some of the poorer regions of Britain that have trailed behind the rich Southeast East region for many years. Now the risk is that Brexit will make everyone in Britain, rich and poor alike, a great deal worse-off.
You can equally argue that Donald Trump’s electoral success was down to a protest vote by America’s squeezed middle classes. No matter what your politics, I think we can all agree that the jury is still out on whether President Trump’s very different approach to government will benefit the US and global economies. The downside risks of today’s US policy agenda seem substantial.
What happens next? At some point, there will have to be a reckoning with all of this debt. We have borrowed too much based on realistic estimates of future demand. This could lead to a great deal of lending being written off, which would of course make tomorrow’s demand even worse.
When this happens, everyone is at risk of being adversely affected – whether they are on a zero-hours contract in a fast-food restaurant or rich enough to be invited to the annual Davos World Economic Forum.
And please note that I think it unwise to assume that China will ride to rescue of the global economy. China, too, continues to wrestle with its own set of problems created by excessive economic stimulus – and the underlying data continues to point to a major change in economic direction. This will be the subject of my post on Wednesday.
You might think this is too pessimistic. But take another look at the above chart, study the other data out there and have a word with the barista in your local espresso bar. Something clearly isn’t working.