By Brian Davey
Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis. It is obvious that Chinese growth is falling. The prices for energy and the raw materials that feed the growth economy keep falling. The demand for Chinese exports is down too. Stock Markets in Asia are falling, despite attempts to prop them up. Countries are being tempted to export their problems abroad – for example by competitive devaluation. In Europe its obvious that a “solution” is being cobbled together for the Euro and Greek crisis even though no one at all believes that it will work. At the same time the policy response of “quantitative easing” which has kept interest rates down very low has reached the end of the road. With interest rates at or near to zero the scope for addressing the crisis through monetary policy (low interest rates) is exhausted. Many pundits believe that low interest rates have not encouraged productive investment but speculative bubbles – the creation of capacity in fields that in the long run will not pay, or fuelled a casino style speculation, a giant bubble of bets that could soon collapse, bringing the global economy down with it.
So what is going on? How do we explain the situation? In this paper I am going to argue that there are a number of ways of understanding and addressing what is developing into a global crisis. The desire to make the crisis understandable can convert into a temptation to make it seem simpler than it is. At its most banal we have the explanations that neo liberal German politicians are prone to – like the idea that the crisis is because of a lack of confidence and trust and that this can be resolved (in Europe) purely and simply by countries following the Eurozone rules. If the confidence and trust are restored then all will be well and the market will restore prosperity.
A more adequate story is needed than this – and it is one that needs to focus on global trends not just in Europe but in the USA, the so-called developing world and above all in China. This story has a number of different plots and sub plots, not one. We need to understand how the sub plots interweave. The story is one of debt, competitive imbalances and an energy crisis and all need to be told. To make the story even more complicated we need to keep in mind too that an even more important story, that of climate change, has to be held in our minds too. If and when humanity has any chance of resolving these crises it will have to resolve that one at the same time. Will this be possible? I don’t know – what I do know is that there is a theory, by archeologist Joseph Tainter, that humanities’ problem solving capacities are limited by complexity. A friend is currently trying to get me to use twitter. However I am daunted by reducing complex situations to short simple messages. Understanding the global economy is like entering a labyrinth. As I get older I notice that some people become famous because of the clarity in the way that they write. What may not be noticed is that the apparent clarity in a political economic message is often the result of simplification. The popularity of neo-liberal economcs is like that.
So lets look at the ways of describing the crisis. In summary this can be described as the interrelationship between 4 processes.
(1) Structural policy stupidity – policy governance cannot cope with the complexity of the crisis. Politicians cannot cope with communicating complex messages to their peoples nor find the mechanisms to cope with the complexity of the issues.
(2) Problems are also caused by uneven development between countries and sectors which cannot be sustained without methods for recycling purchasing power from the more competitive countries to the less competitive ones. These imbalances become most problematic when capital export from surplus to deficit countries slows which happens when growth slows in the deficit countries.
(3) The crisis is both cause and effect of a rising amount of debt – personal, corporate, state and financial sector – which has acted as a drag on growth. As growth falls all kinds of debt become more difficult to service so the monetary authorities have tried to push interest rates down. Nevertheless the finance sector has tended to become both more speculative and more predatory as there is a “hunt for yield”. Interest rates rise when risk premiums are imposed on distressed borrowers (including states), money making occurs through financing arrangements based on “passing the risk parcel” exploiting the naivety of lenders about complex financial arrangements and by the promotion of asset price bubbles. The bigger players are rescued during crises but the smaller players (including tax payers and those who lose their state benefits) are made to pay.
(4) The crisis is the result of reaching “the limits of economic growth” and, in particular, because of resource depletion in the energy sector. This is less obvious because of currently low and falling energy and commodity prices but we need to study the experience of the energy sector over last few years, not just the immediate situation. The immediate fall in commodity and energy prices is a result of the onset of the crisis – a crisis which very high and rising energy prices up until recently helped bring on. The high energy prices have been compatible with a high level of debt only because interest rates have been so low and because there has been a “hunt for yield”, something that would pay more than leaving money on deposit paying very little.
Depletion of resources in the energy and mining sector means that it is taking more energy than before to extract energy (and other mined resources) and this has pushed up the costs of extraction of energy and other minerals. High energy costs act as a drag on the growth of the economy as a whole – because energy costs, like interest rates, enter into the production of virtually everything else. This is particularly acute problem in the energy sector itself as the energy sector is such a huge user of energy. The energy companies need a high price for energy otherwise they cannot actually make a profit. However, if energy prices are high for too long the economy wilts.
The development of unconventional oil and gas has been possible because quantitative easing has made a large amount of money to Wall Street at a low interest rate and they have been “searching for yield” – looking for somewhere to put this money to earn a high rate of interest. This funded the voracious capital expenditure needs of the industry with its high drilling intensity. However it pre-supposed that prices would remain high enough for long enough to cover costs and this has not happened. The problem is set to get a lot worse as depletion speeds up.
So, to repeat, the best way to tell the story of this crisis needs to relate ALL of these elements together – policy failure, debt, imbalances, energy. Each element is causatively connected to the others but sometimes in a time lagged way which obscures the relationships. Together these elements are bringing about what some observers are calling “secular stagnation”.
“Stanley Fischer, vice-chairman of the US Federal Reserve, has laid out the predicament that forecasters face. Half way through each year, economists have had to explain why their global growth forecasts were too optimistic, he said, and this has happened “year after year”. While growth rates have been falling across the world, it’s not yet clear whether this is all a hangover from the 2008 crash or something more fundamental.”
In my view it is “something more fundamental”. It is related to reaching the limits to growth – and this has to do with fossil fuel and materials depletion and the end of cheap energy. However, this does not exclude a partial truth in the other narratives that economists are using to explain low growth.
In the reminder of this article I run through each of these themes in more depth.