26 Feb 2016

Mark Carney’s last chance saloon warning on the global economy

Last night Mark Carney, governor of the Bank of England, issued a stark warning about the future of capitalism. Here is what he said:  “The global economy risks becoming trapped in a low growth, low inflation, low interest rate equilibrium.”


I would concur with that except for the word “equilibrium”. If growth collapses; if you can’t earn interest on capital invested; and if inflation cannot be relied on to erode the world’s 270 trillion dollar debts, the last thing you’re going to get is anything like equilibrium.

In fact you’re going to get a second financial collapse, starting in China and the emerging markets where debt has rocketed, and this time the monetary policy tools central bankers have used to revived the economy after 2008 will be – as Carney admits – of very limited use.

Sometimes, in journalism, just spelling out more clearly what policymakers – who always have to use opaque and restrained language – mean is a public service in itself. The whole speech and the assorted graphs are here.  So here goes.

The 12 trillion (my figure) dollars worth of money printed by central banks in the form of quantitative easing and soft loans has simply bought time.   That time has been used to mend the banking system, defusing the debt timebombs that would have closed all the ATMs in the world, Greek-style, if the bailouts had not happened.

But constantly printing money, and slashing interest rates close to zero, can’t revive sustained economic growth unless the structure of the global economy, and individual countries, changes.

But it hasn’t changed enough. Instead money surged into the emerging markets, creating a financial bubble that has burst. If, as many expect, those countries respond by slashing at each other with currency devaluations – aka curency war – Carney fears the global financial architecture will begin to fall apart.  The words he uses are “it will be more challenging to build a truly open, global system”.

So central bankers are facing an existential question: was eight years of QE just a bridge between two manageable crises, or a “pier” leading nowhere?  Carney thinks the crisis is manageable: that is, he thinks there are things central bankers can do to buy more time – but they cannot revive growth themselves.

And the problems are long term. Carney lists them: ageing populations, destruction of capacity by two boom-bust cycles, higher borrowing costs for ordinary people compared to banks, less investment, more inequality, people paying down debt and the austerity measures required by high public debt.

“With more savings chasing fewer investment opportunities, equilibrium safe returns have fallen sharply towards zero.”  Again, in plain English: there’s too much capital for capitalism to function and its depressing the baseline return on money to zero.

With interest rates slashed close to zero, all central banks can do is continue with unconventional policies: namely printing money to buy the debts of governments and “communicating” – ie promising not to raise interest rates.

Problem is, some of the effects of QE are only temporary. Boosting asset prices runs out of steam. The impact on growth is temporary. And inflation is falling close to zero.  So the central banks have to push real interest rates negative. About a quarter of the world economy now enjoys what you might call Central Bank anti-capitalism: policy set so that one pound automatically becomes 90p over time.

But something’s blocking the effectiveness of these negative interest rates: because they destroy the traditional business models of banks, banks don’t pass them on. So savers are insulated from them, while businesses are not.


This, Carney points out, leads to devaluation of the currencies of countries doing the negative interest rates. And that leads to the currency war that’s simmering away, and that everybody wants to avoid, because after currency war comes controls on capital and then – goodbye globalisation.

The Bank of England’s governor points out that, in this situation, all you can do is for individual countries to try and restart their economies through structural measures, not monetary ones. Since they can’t borrow and spend their way out of the crisis, they have to “reform” their way out of it.

But how? Carney does not spell out the details but in the G20 parlance, the main tools in the toolkit of “structural reform” are ripping up labour protections, privatising public assets, cutting business taxes, boosting state investment – and direction of investment – into the major industries and projects, and privatising education.

Naturally, in all countries where this is tried it provokes resistance, and is therefore done gradually. But Carney points out doing things slowly does not work, because austerity, low growth, high debts and falling wages feed off each other.

The world then needs to “use the time purchased by monetary policy to develop a coherent and urgent approach to supply-side policies”.

But nobody in the room believes that will happen. G20 countries are already seriously engaged in competitive exit routes from the crisis: Saudi Arabia slashing the oil price to hurt America, Japan and China hurting each other with currency measures, the Eurozone destroying social cohesion among its weaker members through austerity.

Both Britain and America, which effectively “won” the recovery  by taking QE measures early and (in America’s case) avoiding austerity, are currently engaged in luxury political debates. In America the actual macroeconomic policies being debated at the G20 rarely figure in debates between the Republican candidates, and Hillary Clinton’s strongesst card against Sanders is that “there’s more to this than economics”. Here we’re engaged in a “nice-to-have” fistfight over EU membership.

So Carney’s speech has to be read like a “last chance saloon” warning – decoded it says: we can do more through QE, we can slash interest rates to negative, we might have to reach inside the banking system and force banks to pass negative interest rates on to savers, and we can keep the banking system from exploding again, but only a co-ordinated turn to policies that revive growth by governments will prevent a 1930s style exit into deglobalisation.

But calm and prescient as he may be, the governor – indeed the assembled elites in the G20 – can do nothing about the rising tide of what they call “populist” political responses that want, either from the left or right, an end to central bank-led capitalism, the write-off of debts and a return to national-centred economic policies.

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