by Satyajit Das for The Sydney Morning Herald
Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation.
Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe.
Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.
Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions.
The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17 per cent of the world’s gross domestic product. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings.
Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies.
The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road. The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles.
Economic problems are now compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and man-made climate change and extreme weather conditions. Slower growth in international trade and capital flows is another retardant. Emerging markets, such as China, that have benefited from and recently supported growth are slowing. Rising inequality affects economic activity.
For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few, reflecting increasing difficulty in building sufficient savings. In effect, living standards will decline. Future generations will bear the bulk of the cost as they are left to tackle the unresolved problems of their forebears.
Governments are unwilling to tell the truth about the magnitude of the economic problems, the lack of solutions and cost of possible corrective actions to the electorate. Politicians have taken regard of historian Simon Schama’s comment that no one ever won an election by telling voters it had come to the end of its “providential allotment of inexhaustible plenty”. The official policy articulated, in a moment of unusual candour, by Jean-Claude Juncker, the current head of the European Commission, was that when the situation becomes serious it is simply necessary to lie.
Ordinary people are complicit; refusing to acknowledge that maybe you cannot have it all. They sense that the ultimate cost of the inevitable adjustments will be large. It is not simply the threat of economic hardship; it is fear of a loss of dignity and pride. It is a pervasive sense of powerlessness.
The political and social response is likely to be volatile. It was the fear and disaffection of the middle class who had lost their savings in the events of Great Depression that gave rise to totalitarianism.
For the moment, to paraphrase Alexander Solzhenitsyn, the “permanent lie [has become] the only safe form of existence”. But the world cannot postpone, indefinitely, dealing decisively with the economic, resource management, social and political challenges we face.
Satyajit Das is a former banker and author. His latest book A Banquet of Consequences was published on August 26.