What if?

Vi pratar gärna om hur låga räntorna är och riskerna för att de ska gå upp så fort inflationen knackar på dörren som ett resultat av högre tillväxt och stimulativ penningpolitik…. Men tänk om vi är helt fel på bollen, tänk om det är recession som lurar runt hörnet? Vilka verktyg har vi då?

Nedan text av HSBC chefsekonom är läsvärd

Are we closer to the next recession than to the last one? In the US, recessions tend to come along every eight or nine years. The last recession ended six years ago. If history is any guide, the next one may not be very far away. That’s a frightening prospect: policymakers simply don’t have the ammunition to fight another major economic downswing.

Admittedly, history is an unreliable guide. And many would say that the latest recovery has been so weak that there is no way that the usual imbalances that precede recessions could possibly have accumulated. This, however, misses the point. There are no ‘usual imbalances’. If there were, economists and policymakers would have no difficulty forecasting downswings.

There are plenty of potential triggers for another recession: a collapse in overvalued equity markets fuelled by quantitative easing leading to an implosion in demand; systemic failures across the pension fund and life-insurance industries thanks to underfunded future liabilities; a sizeable slowdown in China that threatened an emerging market collapse and, with it, a major downswing in world trade; and even the US itself prematurely tightening monetary policy.

Whatever the likely cause of the next recession, the recovery seen so far has not enabled policymakers to replenish their ammunition; growth has returned but policy has not ‘normalised’. Interest rates are still at rock bottom, central bank balance sheets are awash with the spoils of quantitative easing, budget deficits are still big by past standards and government debt levels are, for the most part, still heading upwards. The US economy is like a ship sailing across the ocean without lifeboats. Other nations are following in convoy behind. For all their sakes, we must hope to avoid recessionary icebergs.

Policymakers coped with previous economic downswings because they had plenty of conventional monetary firepower. Across all US recessions since the late-1970s, the key Fed funds policy rate fell by a minimum of 5 per cent. That is no longer possible. In the US alone, government debt is the highest it’s been relative to gross domestic product in more than 200 years of both war and peace, with the sole exception of the Second World War. According to the Congressional Budget Office, debt is set to rise still further even in the absence of another recession. In the UK, the newly elected Conservative government has committed to more austerity, suggesting that George Osborne, chancellor of the Exchequer, sees little room for fiscal flexibility against a background of weak productivity growth and a yawning balance of payments deficit.

In the event of another recession, what could US policymakers do? The most obvious tactical option would be a return to – or continuation of – QE. That, however, might lead to yet another unsustainable asset price bubble and, thereafter, to an even bigger bust. Another option would be to bite the bullet and accept even bigger budget deficits, justified through a series of Roosevelt-esque stimulus measures. FDR, however, didn’t have to worry quite so much about pre-existing spending commitments: life expectancy in the 1930s was short enough to limit the chances of a pension and healthcare-fuelled debt spiral.

Those of a more adventurous disposition might argue in favour of so-called helicopter money, using the printing press to fund ever-higher levels of government borrowing with the sole purpose of raising inflation sufficiently to reduce the real value of nominal debts. Yet, with ageing populations increasingly reliant on pension income, it’s difficult to see why western societies would favour such ‘hidden’ defaults.

An alternative would simply be for the Fed and other central banks to raise interest rates now in a bid to replenish their stocks of ammunition. Sadly, those who have so far tried – the Bank of Japan in 2000, the European Central bank and Riksbank in 2011 – have failed. Sustainably higher interest rates are only possible if the underlying economic forces – beyond the control of central banks – will let them go higher.

One of those underlying forces is population ageing, which has triggered both excessive levels of savings – to furnish lengthy retirements – and ludicrously low interest rates. The more boomers save to meet their pension objectives, the more interest rates fall; the more interest rates fall, the lower the returns on boomers’ wealth; and the lower the returns on their wealth, the more they save to meet their pension objectives.

The ‘simple’ answer, then, is to raise the retirement age, probably by a sizeable amount. This would, at a stroke, reduce the need for high retirement savings because people would expect to work longer and, thus, live off wage income for longer. Lower savings would mean higher levels of consumption, stronger demand and, hence, higher levels of investment. Importantly, faster economic growth would also boost tax revenues and push up interest rates. The ammunition needed to cope with the next recession would be replenished.

In the real world, unfortunately, the chances of such radical reform are low. Political expediency – older people tend to be more willing to vote than the young – will doubtless trump economic necessity. We will, therefore, carry on sailing across the ocean in a ship with a serious shortage of lifeboats. Many – including the owner – thought the Titanic would never sink. Its designer, however, knew better: ‘She is made of iron, sir, I assure you she can’

Om GaStan

Ga Stan bloggar här under rubriken "Kortsikt's blogg". GaStan är en medelålders gift man bosatt i Stockholm och verksam i finansbranschen.
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