What would you have done 5 years ago, in 2009, if you had been given $16tn to restore global economic growth?
Would you have boosted spending in areas such as education, health and infrastructure in the belief this would create a sustained boost to economic capability? Would you have cut taxes in order to encourage entrepreneurs to develop new businesses and promote innovation? Would you have changed social policies to enable people to retire later due to increased life expectancy?
Or would you have handed it out to the major players in the financial, property and other markets, whilst encouraging everyone else to spend and borrow as much as possible?
Well, bad luck all those readers who might have wanted to do any of the first suggestions. Or anyone who had different ideas about what might have made a difference. In fact, the $16tn has been spent by the central banks on the second option, as the chart demonstrates:
- China has spent the most, with $6.5tn since 2008 gone on official lending (red shading). It has also allowed an unregulated shadow banking system to develop – just as happened with sub-prime in the USA before 2008
- Nobody quite knows the real size of this shadow banking sector. The chart uses the $3.2tn estimate of a recent report by the Academy of Social Sciences (dark blue). Western analysts such as JP Morgan suggest it could be $5.7tn (69% of GDP). Fitch suggest China’s total official/shadow debt could be $16.3tn (double GDP)
- In the West, the US Fed has spent $2tn on Treasury bonds (brown) and $1.5tn on mortgage bonds (light blue)
- In Europe, the European Central Bank has spent $0.8tn on its LongTerm Repo Obligation (orange); the Bank of England’s Quantitative Easing is worth $0.6tn (yellow)
- Japan has moved into overdrive more recently with $1.9tn of spend (green)
In addition, of course, governments have added direct stimulus such as ‘cash for clunker’ support for car sales, and major support for housing markets. Their spending effectively doubled the total to $33tn by mid-year 2013 (almost half of global GDP), according to Bank of America Merrill Lynch.
And here’s another question. Do we now have a booming global economy as a result? Clearly the answer is ‘no’. Many hope that a return to SuperCycle growth might now be underway in some major economies. But every New Year has started with similar hopes recently, and so far they have all been disappointed.
Instead, we have this great burden of debt which can never be repaid, as the world’s ageing population takes the economy ever closer to the tipping point where deflation replaces inflation.
The problem with the current policy is obvious, of course. This is that you can’t print babies. And only people can generate sustained demand. With global fertility rates having halved to just 2.5 babies per woman since 1950, it is clearly impossible to generate the same level of demand as when the BabyBoomer generation was in its prime consumption mode, as the blog’s December series described.
This creates a third question. What happens next in China, and how will that impact the rest of the world?
- It has one of the worst demographic positions, as well as one of the worst debt problems
- Environmental pollution is out of control, and responsible for millions of premature deaths
- The new leadership has stated publicly and very often that it is going to tackle the problems
- And it seems, after November’s 3rd plenum, that they have begun on their task
This question seems super-critical at the moment, and so the blog will focus on it over the rest of the week. There are clear parallels between today and China’s two earlier economic/political crises of the post-Mao era. These provide us with excellent insight on how president Xi and premier Li will move forward:
- Wednesday will look at Deng’s economic recovery programme in the post-Mao period from 1976
- Thursday will focus on (a) how Jiang tackled the crisis that had developed between 1985-1992, and (b) how today’s crisis developed in 2003-12’s ‘lost decade’ under Hu/Wen
- Friday will then summarise the common themes from Deng and Jiang’s recovery programmes, as guidance for what we should expect under Xi and Li
The basis for this analysis will be its own personal experience of China since 1987, plus the insights of co-New Normal book author John Richardson, plus many friends and colleagues.
It is no exaggeration to say that what China does next is THE most critical question on the global agenda this year. The blog therefore hopes readers will find its analysis helpful as they finalise their business Scenarios for 2014.