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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13 reader comments

  1. Ursula Taylor says:

    Isn,t this where Capitalism looks at having a war (or threats of war) as a means of stimulating economies? There does seem to be an increase in Cold War rhetoric of late on the part of the West and the Western media. Could end badly though!

  2. Alan says:

    Mr Carney represents private banking interests, as such national interests are not his concern, unless profitable to the private banks shareholders. Capitalism as defined died many years ago, Mr Carney knows this. Whilst we allow a private bank (the so called Bank of England) to issue usury based paper no solution is possible.

  3. Roger says:

    Remarkable that the option of public investment spending is nowhere mentioned.

    As if we can’t go back to the post-war happy years of low inflation and large growth (until the collapse of Bretton Woods)

    Carney repeats the same old neo-liberal dogma that we’re all stuck in a rut until the private sector takes off. Which it won’t do unless governments start to focus on Full Employment, like they did after the war.

  4. Kungfu Armadillo says:

    A great article explaining all the lingo and laying things bare. I feel a bit disconcerted though. Was eight years of QE just a bridge between two manageable crises, or a “pier” leading nowhere? We are going to find out sooner or later and I don’t feel too optimistic.

  5. Philip says:

    The problem with Carney’s approach – e.g. ripping up labour protection, cutting business taxes – is that where it’s been pursued most enthusiastically – the USA and the UK – it has led to greater inequality, with millions in fragile employment and low pay, unable to pay down debts or provide the consumer demand to fuel the business cycle and growth. Growth in the USA & UK has barely been felt by millions, whose real wages have been static for the best part of a decade. State investment will help – not least in the UK through building houses (and using that investment to create more skilled, better paid jobs through investing in British workers). But that will only go so far. I wonder whether the time isn’t now ripe to provide a citizens’ income which could largely remove the need for the massively complex and often destructive benefit system? Phased in over a number of years, it could avoid being inflationary and would be a better use of the billions used in QE than a further round of QE, which essentially just restored the banks to some degree of health, without resolving the basic weaknesses in the banking system. It would enable people to invest as well as spend, largely on necessities, as well as boost demand, thus creating a cycle of growth. I’ve no doubt there are lots of reasons why this would be seen as a bad idea, but it seems to me to be worth further thought.

  6. Dave Quinn says:

    Doesn’t this sound remarkably like what that guy Karl said?

  7. Plato's cave says:

    When the govenor of the BOE starts to articulate the underlying truths post 2008, financial hawks talk of banning cash or patronising “helicopter drops” (which the banks have enjoyed for years but with rather different terminolgy used), you know they only do so because their backs are to the wall and there is no other option open to them except to try to salvage as much as they can for themselves by engaging with emerging new realities and make people think this was not bleedin obvious all along.

    Mission accomplished, we are back to almost feudal levels of inequality with the successful tranfer of physicalnassets to the elites to the point where they feel comfortable enough to allow conversation to turn to reality….. one they feel they can still now ultimately control.

    Make no doubt about it, the sea change in the estabkishment rhetoric is brutally calculated.

  8. Andrew Dundas says:

    Alas Paul, you’ve swallowed the Tory & Republican propaganda.
    QE doesn’t cost much because ‘the debts’ created are not assets owned by any central bank, but by its sole shareholder: the sovereign government that has borrowed the fictional money in the first place. It’s entirely within the power of governments to simply write-off such false ‘debts’ without charge.
    Confused? You ought to be.
    Governments aren’t like householders and businesses that are obliged to re-pay their borrowings. By authorising their wholly-owned bank to acquire their government bonds they are simply borrowing from themselves.
    It’s as if I lent my wife some cash to buy some shoes and then treated that ‘loan’ as a gift. Therefore, loan doesn’t exist any more, cause I’ve written it off.
    It follows that QE is a very inexpensive way of financing a government deficit: borrow the money from your own bank and then later on, write off the debt for no payment.
    You can check what I’m writing by looking at the UK money supply data. For all the extra debt our BoE has bought in since 2009, the overall amount of money in commercial banks and other financial companies has remained closely related to changes in national income. Moreover, inflation remains close to zero which would not be the case if the BoE had truly been ‘printing money’.
    If the previous and current governments had not authorised the BoE to buy-in government debts, the volume of money being spent would have fallen, dragging down prices and provoking a further collapse in spending and a true economic depression.
    Because the UK is a large economy (ie, not like Greece, Portugal etc) we can run a large annual government deficit financed by a growing BoE owned debt without causing the runaway inflation our Chancellor claims would overwhelm us. His argument, and yours Paul, is rather undermined by the obvious fact that the UK has been running a very large deficit for seven years without the crises you and he are predicting.
    Our government’s huge and burgeoning debt has enabled the UK to grow economically whilst our debt-bothered neighbours remain in a dire trouble of mass unemployment and stagnation.
    The irony is that Osborne is an astute politician who knows that he must say one thing whilst doing the opposite. So he insists that he’s trying to ‘get the deficit down’, whilst all-the-while doing the opposite by handing out tax breaks to middle and higher income households and big business.
    So there you have it! British economic policy, introduced by the Brown government and continued by the Cameron government, has demonstrated that QE doesn’t cost us much because those debts are owned by their very own BoE.
    What we chiefly need now are lots of sensible people to go and spend the cash we’ve stashed away. And to take on more debts to finance that spending. If the people don’t do it, then the government should spend on useful things, like better education and health-care. Every little helps.

  9. Andrew Waite says:

    G20 ‘structural reform’ parlance of ripping up labour protections, privatising public assets and cutting business taxes are exactly what got the developed world into its deflationary spiral in the first place, as the value of labour has been undercut by deregulation and trade liberalization.The middle classes no longer have the spending power to lift the economy out of the doldrums

    Lack of consumption is the first world’s main economic ill, as evidenced by Mark Carney’s inability to prevent the British economy from continuously undershooting the Governments 2% target for inflation.

    If the Bank of England and Treasury are not now drawing up a list of shovel ready projects to be funded by helicopter money come the next downturn then the BoE should be looking for a new governor.

  10. CharlesJ says:

    His disregard for the power of fiscal policy is wrong. The UK govt can borrow more (from the BoE if necessary) as Japan has shown. We can roll our public sector debts over until the end of time if necessary.

  11. Lurkinggherkin says:

    The following elements of a successful long-term solution to the problems identified above, suggest themselves as minimum requirements:

    Single Currency
    World Government

    1. Andrew Dundas says:

      Hello Gerkin,
      What would happen to us all if Germans (Finanzminister Schäuble) or US Republicans (led by Ted Cruz or Donald Trump) were dominant in the ‘World Currency’, and China & India led a majority in the World Government?
      Are you ready for that?

  12. Mikel says:

    I think that many are overlooking the fact that Carney’s comments come as the EU Referendum looms. All sorts of uncertainty about the future will be generated and I firmly expect more dire “news” to herd all the “simpler” folk into the “Stay” lobby. Having said that, I do wonder how much longer the world can be run on an economic system that relies on never ending growth, against a background of finite resources and a rapidly expanding global population. One also wonders how long the Western populations will put up with ever reducing value of their wealth/infrastructure creating efforts, while a relative minority help themselves to Increasingly obscene shares.

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