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Restoring Economic Growth Is Not Possible, Invisible Mending ?

Economics / Global Economy Dec 22, 2011 - 12:11 PM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleThere are no shortage of search engine hits with "Restore economic growth". In Europe, the eye of the storm for ever more complex and unsure, but supposedly market friendly debt control plays that finally depend on even more government borrowing, restoring economic growth always figures somewhere on the teleprompter for leading edge interviews by political deciders. The quest to retore economic growth is always cited as a goal by deciders, but they know, and we know that it isnt possible.

At the same time as harsh austerity programs are applied, the official hope is that growth will somehow be stimulated. Do not ask how.

UNCTAD's Director on Globalization and Development Strategies, Heiner Flassbeck, is one quotable expert who explains that all governments in the world have effectively decided to prevent any chance of growth being restored. What they have done is to create a situation where all countries are menaced by a nearly simultaneous tilt into recession. Our political masters can pretend they do not know this, but the facts run right against their simulated optimism.

 What Flassbeck underlines, and the facts also show, is that everywhere there is slowdown. Mainstream media bleats that things are better than in 2008-09, but the exact opposite is the reality. In 2008 there was more faith and optimism upon which to draw. But both of these have been squandered to ever rising degrees by the refusal to regulate pinwheel casino-type financial activity, called "investing", and by authorities who failed to address any of the root causes of the first crisis, even as they plaster layer after layer of thin-air money over the main symptoms.

With no surprise we find that Europe shows the most unambiguous signals of economic slowdown, yet stock exchange operators in the continent can ritually have "good days" during which the right mix of well massaged data can support a 2 or 3 percent rise. Outright falls of industrial production, capital investment, car sales, and house sales (except in 'special circumstances' like the USA today, in a context where average house prices in Detroit have fallen below $100k) are daily feeds. Mass layoffs and company shutdowns are also regular feeds. Outplacement and delocalisation continue - they are simply "not talked about" in government friendly media. More sinister for official optimists, economic slowdown in China and India is easier and easier to prove. The very ironic "good signal" of high commodity prices and oil at over $100 a barrel, supposedly showing that "all is well" is now faced by a repeat of the 2008-09 sequence during which oil prices fell about 75 percent and other commodities followed. Only very hefty commodity market manipulation keeps prices up.

For Flassbeck and any rational global macro economist there is simply no escape. If the three big developed regions (US, Europe, East and South Asia) are not able to stimulate their economies, then the game is over and the only logical result is deep recession. The "soft landing" option would need permanent stagnation on the Japanese model, and plenty of doubt exists on whether that is possible in the current global context. Exporting the Japananese No Growth model is closer to impossible, than simply difficult.

What we get is a very simple read-out: There is no such thing as the Global Growth Path in a recession-prone context. The shining path of muddle through economics is getting dimmer each day.

The Japanese "soft option", a probably permanent deflationary recession that has already existed for 20 years, is as we said a special situation. The pat slogan for editorialists talking up the prospects of growth in Japan is " two lost decades". Lost from what ? Japan racked its national debt into the stratosphere, methodically and constantly, from the start of the 1990s. At current debt/GDP levels for Japan (about 200% of GDP), the US national debt would be about $ 30 000 billion ($30 trillion), and therefore even more luridly out of control than it is. How did this happen to Japan ? There are plenty of reasons, but the results are clear and simple: permanent economic stagnation, near zero growth, is the only possible economic result. The economy is hollowed out every day. Japan's ability to compete with its Asian rivals declines every day. Japan's population shrinkage helps to mask the decline a little, but it is another symptom of the decline

We can conclude that allowing national debt to rack up without limit is one sure and certain cause of permanent low growth. Afterwards, there is no point whining about hoping to restore growth.

At least until now, the trick of printing money and using most of it to service ever ballooning debt (with shrinking leftovers cast into the "real economy") has not produced an inflation fireball, but the risk of this coming is permanent. Until then, the near-zero growth and permanent stagnation economic model can limp forward one more day. Any analyst can supply the basic reason why the debt-choked economy stumbles into slow growth, gets trapped in the quicksand and stays there: private consumption is the most important overall component of growth in Japan, the Eurozone and the United States, and increasingly in developing and emerging Asia.

Only increasing personal consumption can "save the economy" if it slumps into low growth. The problem is that one supposed quick fix for levering up personal consumption is flooding the economy with cheap credit - but servicing national debt takes the No 1 slot. In theory we have cheap credit for increasing personal consumption and have had it for years, but a host of factors make it difficult, or even impossible to force or persuade consumers to buy more in a sombre and threatening context of rising unemployment. Other factors blunting the drive to personal consumption include ageing populations, saturated consumer goods markets, and the loss of faith in consumerism.

The psychological no-win of governments forcing the sale of government debt, while steering a "growth path" by restoring and raising personal consumption, has this readout: government fiscal policy must stay on an austerity path.

But growth must be stimulated. These two perfectly exclusive goals underline where we are at today. Politicians believe that the only way to regain market confidence is by cutting deficits. Growth will be slayed but the official claim is that growth can be restored. This comedy circus can only go on for a certain while, despite appearances. At some stage or another "something happens", and the result will be inflation-deflation.

This doesnt happen in an OECD-only global macro environment but due to the very short timeframe and lowered horizon for results, the basic fact of life is OECD governments will not cut public deficits. All they will do is to make media-applauded attempts to cut deficits, with ever larger collateral damage of the global economy for as long as they keep up the comedy show. Government debt is too massssive and governments are too big to simply cut their spending and then expect revenues will remain as they were before. This is not possible, as all previous examples show - and they will fail. After that, these governments will fall but as they fall they will tear down the Card Castle of global economic growth.

The spinoff to lower income countries will be certain, rapid and negative. UNCTAD economist Flassbeck says it will take a bit longer for the recession to hit developing countries. But this will happen, and when it does he said there will be severe consequences right across the developing world, from the middle income to the least developed countries.

 His conclusion is simple: nations apparently have not learned the lessons of the 1930s. Long and deep recession was at the time driven by tiny debts relative to those of today, individual countries had much more autonomy - but the process of global economic collapse was unstoppable. Flassebeck added that it was frightening to see that just like the 1930s, nations cannot agree upon a coordinated plan of action for stimulating world growth.

As we also know, the most recent period of high and relatively stable commodity prices through 2004-07 was marked by fast economic growth in the low income countries as well as Emerging Asia. Since the crisis years 2008-09, commodity prices have erratically shifted between extreme highs and lows almost totally unrelated to supply/demand fundamentals - and are heavily driven by speculation in what is now a "seamless asset space" also including equities and government debt,  The risk today is very clear: commodity prices can slump overnight, especially non-oil commodity prices, instantly depriving the low income countries of the potential for economic growth. Civil strife, even civil war is likely.

The experience of the 1980s and 1990s shows how deep and dangerous recession became endemic in the low income developing countries - driven by debt and deprived of revenues due to Sunset Commodity bargain basement raw materials prices. At the times, they were trailing indicators of the OECD struggling back towards weak and uncertain economic growth. The global context featured interest rates racked up due to inflationary recession following the 1970s period of inflationary growth.

Today, the low income countries are set to be leading indicators of the global economic meltdown shifting to its last and most dangerous phase.

The possibility of "the Japanese model" of deflationary recession being exported to the developing world, today, is almost zero but a repeat of pure and simple mass impoverishment along the 1980s and 1990s model is a strong possibility. This would be driven by the global economic context in 2012 quickly shifting for a short but very damaging interval into inflation, even hyperinflation due to reckless money printing by the European Central Bank and US Fed, and by the Chinese and Indian central banks and monetary authorities. Commodities would briefly soar, and then crash making the commodity price signal the clearest indicator of the process.

End of year 2011 is a transition period from a complex and even unreal financial, fiscal, economic and monetary crisis environment, or system, to something bigger and different. The economic crisis component of the present meltdown system will grow sharper and easier to see, harder to deny with a sure and certain international spreading of the OECD-centred current crisis.

Commodity prices are set to be markers of this process: they can grow to extreme highs despite supply/demand fundamentals that run right against any increase, and this commodity price surge underlines the monetary meltdown component of the crisis system. Government debt growth, financed through money printing, has racked up so high in many countries, whether Greece or the USA, Spain or Italy that it now vastly exceeds the costs of their oil imports. Oil crises are finished ! Or so it seemed.

For a short while the low income developing countries whose total population is close to the OECD total of almost exactly 1 billion, can profit from this unreal commodity price surge but the Black Swan is waiting. Following a rapis crash of global economic growth, a simultaneous economic meltdown in both the Old Rich countries and the New Poor countries will set impossible challenges for developing and emerging Asian economies. There is no way the so-called Asian Locomotive can handle this challenge. China and India will also be swamped by the runaway train process of collapse.

The switch from commodity price expansion, to sharp and steep decline can happen at anytime, even in the 3 months from Jan 1, 2012 and without warning. Delivering a total surprise impact, this commodity price crash will be accompanied by massive inflation, not deflation, at first. The inflation surge will ruin any hope of Muddle Through Economics saving the day - this surge will only tell us more about the debt monster lurking in the closet and getting uglier every day.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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