Global economic recovery – what does it even mean?
There is a lot of noise when it comes to economic data. Retail sales, inflation, unemployment, PMIs, capital expenditure, durable good sales, consumer confidence, credit aggregates… you name it, we measure it. And that’s before we even look at corporate earnings releases.
In fact, a quick look at my economic calendar shows well above 500 economic data releases place each month in developed world markets, all of which are analysed, interpreted and commented on by economists, asset managers, brokers, investors, politicians and the like.
The financial media loves the volume of noise too – every time retail sales beat analysts’ guesses (sorry, “expectations”) there’s a headline about “consumer confidence returning”.
Conversely, every time durable goods orders misses expectations, a “Fed to keep rates lower for longer” title can’t be far away.
Underpinning all of this ‘analysis’ is one key question though – is the global economy really recovering some five years on from the “end” of the global financial crisis.
While some argue that it is, others – myself included – are not entirely convinced.
But what do analysts even mean when we talk about global economic recovery? Do we just mean higher levels of growth? Do we mean normalised interest rates, structural social welfare reforms, higher real wage growth for the majority of people who aren’t participating in the global equity market rally?
For this analyst, at least, we’d need all four of the following criteria below to be satisfied to believe we’re really seeing anything approaching a genuinely sustainable economic recovery.
Permanent end to central bank debt monetisation the world over
Call me simple-minded but I don’t think countries or their respective central banks can permanently print money, at least not without devastating financial, economic, social and political consequences.
Normalise interest rates and end intervention in bond markets
Interest rates are meant to reflect the market price of money itself. Suppressing them punishes savers, gives a free ride to debtors (including governments) and sends misleading signals to all. It is not a sign of a healthy and functioning economy when both the short and long end of the interest rate curve are so heavily influenced by central banks.
Balance budgets at the sovereign level
Developed market governments have been running deficits of on average about five percent of GDP every year since the financial crisis hit despite the fact that, in many cases, their balance sheets were hardly pristine before it started. Unless you think governments can go further and further into debt forever (in absolute terms and relative to the size of the economies over which they preside), this needs to stop. Put simply, spending must come down, taxes must rise or there must be some combination of both.
Structurally reform the at-present unaffordable social welfare state
The demographic timebomb has been heading our way for some time now and is only just starting to wreak havoc with the already stretched public finances of the West (and Japan). There is simply no way we can honour the promises we’ve made to ourselves, at least not with dollars, euros, yen or pounds that have anything like the value they do today. We need some very brave politicians to have a stern talk to us about what we can and can’t do.
If we can pull these off and still get decent levels of economic growth, higher real wage growth and declining unemployment, then I’ll think we’ll be on the up and up. There may be something else that needs to be added to the above list but, at the very least, these would be the prerequisites. To argue otherwise, one would effectively need to make the case that:
- We can print money forever.
- We can suppress interest rates, effectively the price of money, forever without causing bubbles and huge capital misallocations.
- That governments can spend more money than they take in in tax revenue indefinitely.
While there is no shortage of PhDs and high priests of international finance who might argue that all of these things can be done, surely common sense, logic and basic mathematics would counter their claims.
And once one ventures outside the laboratories of financial alchemy in a search of answers, one can’t help losing confidence in the status quo.
The historical track record of success when implementing the policies favoured by the financial and political elite of today is precisely zero. Next week I’ll look at how this will affect asset markets, including physical gold and silver.
You can read more from Jordan at www.abcbullion.com.au