One of the most serious economic problems, which will be discussed at the forthcoming International Financial Congress in St. Petersburg – is a surprising inability of Western countries to restore economic growth and inflation to the level at which they were before the World Financial crisis in 2008.
In recent years, the growth rate of well-being significantly slowed down, both in Europe and in the United States. Inflation also remained extremely low. The global economy is constantly being inflated through a variety of incentives, but it is like a punctured tire, deflates over and over again.
This won’t be surprising for those who are familiar with the changes in the Japanese economy over the past 25 years. What is now celebrated in the West, once was considered unique to Japan: not only slow growth and very low inflation, but a chronically low level of interest rates as well. Even before the global financial crisis, before a period of monetary experiments, interest rates in the Western world gradually declined for structural reasons. In some cases, long-term interest rates reached the bottom, which is associated with the policy of quantitative easing and the impact of negative nominal short-term interest rates. Meanwhile, in most cases, there is reverse causation: as in the case of the Bank of Japan in the past, the central banks of different countries simply follow the market dynamics.
Low growth, low inflation and low interest rates reflect a number of structural changes occurring in the global economy which the central bank is not able to tackle yet. Some of these changes preceded the financial crisis. In recent years, many of the factors that ensured economic growth in the post-war years have dried up: trading opportunities have been increased, women in Western countries began to pay less attention to the household, but more to work (thanks to technological progress, which reduced the amount of housework, and thanks to significant success in changing legislation to eliminate discrimination against women in the labour market), higher and secondary education brings little marginal income, the financial crisis has, at least, temporarily slowed down the growth of household debt, and it is clear that more and more baby boomers are moving from productive work to the idle life.
Now, when the financial crisis has occurred, the western economy is faced with other problems: extremely high level of government debt, increasingly difficult to sustain the pension funds, the cost of medical services is increasing, and enthusiasm for globalization is rapidly reduced. Even regional trade agreements - including the Trans-Pacific Partnership - can fill a dump of failed initiatives, if the US presidential election in November will be held with a certain outcome.
All these factors led to the creation of economic conditions, similar to Japanese. Low growth leads to a decrease in ability to pay debt. The desire to pay off debt – is understandable given the lack of revenue growth - leads to a decrease in investment. A low level of investment, in turn, leads to lower economic growth. This process is repeated again and again.
Is there a way to get out of this vicious circle? In recent months - almost by default because of the lack of alternatives – many people talked about so-called distribution of money from a helicopter. The idea is simple: the Ministry of Finance does not increase the borrowing through the sale of bonds in the market but through the sale of bonds to the central bank. The latter, in turn, prints (or, to be more precise, creates electronically) an additional amount of money. This money, in turn, "are dropped from a helicopter
," ie. are entered into the economy in the form of significant tax cuts or increase in government spending.
This approach is associated with a particular problem. If debt is too high the creation of new money will be pointless until the debt burden is reduced. The most obvious way to achieve this, if we print more money – is to significantly accelerate inflation. However, in this case, those who have money savings will lose part of their savings. Therefore, the "helicopter money
" - is nothing more than a well disguised tax on wealth: by using this method borrowers benefit and investors lose. Many former Soviet republics faced this phenomenon in the early 90's, when significant funds were lost.
Another option - is to rely on a better political coordination at the international level. With mass deleveraging it is important to find a government, which will take the role of "consumer of last resort
" and will be able to spend the excess world savings. Three options come to mind. United States could weaken the tax policy taking into account the status of the dollar as a reserve currency, which will increase domestic consumption, including consumption of imported goods from the rest of the world. China, with its extremely high volume of savings, could reform the system of consumer loans, which will allow more people to spend money today in the hope of increasing revenues tomorrow. The Germans, taking into account their positive balance of trade, could afford to significantly increase wages, rather than investing their income from exports in the shaky economies of Southern Europe through the international financial system: again, the domestic consumption will increase. Taken together, these actions will lead to an acceleration of growth in world trade and promote the development of the global economy. They will also be an effective antidote against the weakening economy process called "currency wars
", which is evident nowadays.
However, even if it was possible to enter into an agreement similar to "Plaza" in 1985 - but the internal political realities in all three countries suggest the opposite - it will not be able to solve all the current problems of the world economy. Economic incentives, of course, limited the fall in the labour market associated with the global financial crisis, but only insignificantly increased performance. Perhaps, stimulation has partly led to inefficient companies to continue to operate. Consideration of the possible solutions of this issue is beyond the scope of this article. But if the political leadership does not pay significant attention to this important issue relating to the supply side, we will continue to observe low growth, low inflation and low interest rates. Perhaps the situation with the Japanese economy is not so unique.