(photo credit: REUTERS)
‘Watch out.” That was the headline of The Economist magazine’s cover for its June 13-19 issue. The subhead was more specific and hence more dire: “The world is not ready for the next recession.” Accompanying these words was artwork in the brilliant Economist tradition, showing a knight in armor looking back on the dragon he has just slain, labeled “the financial crisis.” But that struggle has resulted in the knight using all his weapons, so that he is now virtually unarmed.
So far so good. But the point of the cartoon, and the substance of the “watch out” warning, is that while the knight is looking back at his recently vanquished lethal opponent, straight ahead of him sits another monster, its huge jaws wide open, ready to devour him. The implicit message of the cover is that the knight has used up all his strength and weapons on fighting the first dragon and now has no tools available to fight the new danger dead ahead.
Powerful stuff. But the good news is that the message from the magazine’s analysis and the thrust of its editorial is that although there is danger ahead, if the right measures are taken – and the wrong ones avoided – the world economy (represented by the valiant knight) will be fine in the future, too.
In fact, that issue of The Economist marked the influential magazine’s firm alignment with one side in the debate under way about the global economy: the mainstream side. The multipage analysis of the state of the US economy in that issue concluded that: a) the American economy has finally emerged from the shadow of the Great Recession of 2008-09 and is now set to grow at a reasonable clip; b) that this, namely the well-being of the US, is the critical issue in the outlook for the global economy; and c) that the looming dangers – that other monster on the cover – are real but can be successfully avoided if the Federal Reserve refrains from raising interest rates – at near-zero since late 2008 – in 2015 and probably beyond.
All of these positions individually, and their presentation as a logical and interlinking whole, represent the mainstream view of where the global and US economies are and what the outlook is for them. The mainstream camp is led by the IMF and includes, inevitably, the Fed and the other main central banks as well as the great majority of analysts in American and European (and other developed countries’) financial institutions. The greatest attraction of this thesis is not that it forecasts that things will be OK, but that it does not predicate a major crash and a global depression.
The other camp, which is populated primarily by independent institutions and analysts, but also includes the BIS (Bank for International Settlements, “the central banks’ central bank”) and a few voices from the major financial institutions, sees the world in an entirely different light. It is increasingly skeptical about the centrality of the US economy in the 21st-century global economy; it believes that China was the key player in pulling the world out of the Great Recession, but Chinese growth is trending rapidly and irreversibly lower from the era of 10-percent-plus per annum.
It is also overtly negative about the recovery in the US economy, believing it to have been artificially created by monetary stimulus delivered in unprecedented quantity for an unprecedented period of time. The result is that the US economy and most other developed economies (especially Europe and most especially Japan) are now hooked on monetary stimulus and cannot be weaned off it without plunging them back into recession – and without their financial markets imploding. This implosion will, the non-mainstream camp believes, be on a scale that will, nay must, match the level of distortion created by the last seven years of ZIRP (zero interest rate policy) and the last 40 years of financialization of the Western world’s economy – in other words, the greatest financial crash ever.
The oft-repeated and just as often deferred projections of a return to a rate of growth in the US of 3% per annum, like the parallel oft-repeated promises to begin raising interest rates back to “normal” levels, are viewed by non-mainstream analysts as delusional or deliberate efforts to persuade the general public that such a return to normality is possible and imminent. Or both.
The non-mainstream camp does not consider itself to be evil, or even obsessed with disaster. Rather, it considers itself realistic and sensible compared to the wrongheaded and doomed efforts of the mainstream to restore the world to the supposedly happy state existing in 2007 – in other words, to put Humpty Dumpty back together again.
The realists recognize that there is no going back and that, worse, the only beneficiaries of the prolonged effort to recreate the lost world are the top 1%, 0.1% and 0.01% of the population, who are able to leverage their wealth so as to massively increase it, while the great majority fall further behind, in relative and often in absolute terms.
The reason why the realists are convinced they are right can actually be summed up in two sentences: They believe the crash of 2007 was the result of excess debt, and you cannot solve a problem created by excess debt by piling in far more debt. However, additional debt will “kick the can down the road” while making the problem steadily worse.
It really is that simple.