The global return to pre-crisis growth strategies

July 25, 2013

Margaret Thatcher used to say that “There is no alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall — you can stop banging your head against a brick wall. The G20 Finance Ministers’ meeting in Moscow last weekend may have marked such a moment of revelation, when governments around the world gave up on fiscal and financial austerity, and recognized that growth based on consumption, borrowing and rising house prices is better than no growth at all.

It is now nearly five years since the Lehman crisis and throughout this period politicians and economists have been obsessed with avoiding the mistakes that supposedly produced the crisis. They have been trying to reduce debts, both in the public and the private sectors; to make their banks behave more cautiously; and to “rebalance their economies” away from their over-dependence on consumption, services and finance in favor of supposedly more sustainable economic activities such as saving, exporting and manufacturing. The virtues of saving, exporting and manufacturing are so much taken for granted these days that it is easy to forget the novelty and implausibility of the rebalancing concept.

Until 2007 conventional wisdom among economists was that manufacturing nations like Germany and Japan should restructure their economies to resemble the U.S. and Britain. It was only after the Lehman debacle that economic fashion shifted decisively against Anglo-Saxon “bubble” economies, based on debt-fueled consumption, property speculation, financial engineering and other frivolous service activities like coffee shops and computer games. Instead every nation has tried to emulate the solid virtues of the Germanic economic model, powered by exports, investment and manufacturing. Angela Merkel’s slogan that “you cannot cure debt with debt” has become an international motto, despite the fact that central banks were printing money like there was no tomorrow, and governments have committed themselves to deleveraging by homeowners, banks and the public sector, all at the same time.

In the past few months, the pendulum of economic fashion has started swinging back from austerity and towards credit-fueled consumption growth. The G20 communique made this plain, stating that growth is now a higher priority than debt reduction in every major nation.

More important than mere words and phrases have been the actions of governments around the world. One country after another has accepted the U.S. injunction to stop relying on exports for recovery and instead to promote domestic consumption growth, if necessary financed by debt. In Japan, we have seen the launch of Abenomics, with its enormous spending programs and monetary expansion. In Britain, the government started deliberately inflating a housing bubble in its last budget by creating a subprime mortgage market backed by unprecedented government guarantees — and the results have already become apparent in an upsurge of house prices and consumer confidence.

China is now irrevocably committed to economic restructuring away from investment and exports, in favor of faster consumption growth. Although China is trying to squeeze credit and property speculation at the same time as stimulating a consumption boom, these policies are clearly in contradiction and the minimum growth target of 7 percent announced this week by the prime minister suggests that consumption is likely to take priority. To accelerate consumption growth will require credit expansion of some kind, whether by reforming the banking system or by using the government’s own fiscal capacity to increase borrowing and hand the proceeds to consumers through tax cuts or expanded social programs. Even in Europe there are now clear signs that the age of austerity is over, with Italy refusing to implement the tax hikes it agreed to with the Troika, while France returns to its habit of ignoring European directives by simply denying that it has to tighten fiscal policy at all. Germany, too, has agreed after some resistance to endorse the G20’s priority for growth over austerity — and more importantly, the German government is widely expected to shift from fiscal tightening to cutting taxes or increasing social spending after the election on September 22.

It seems, then, that policymakers have finally accepted the long-standing U.S. view that it is impossible for all of the world’s major nations to rebalance their economies simultaneously by exporting and investing more while they consume and borrow less. The reason is obvious in the case of exports, since one nation’s exports are by definition another’s domestic consumption. But investment, too, depends ultimately on consumption and credit growth, since businesses will only increase investment in response to growing demand.

In short, politicians and business leaders around the world are giving up hope of export-led growth, powered by manufacturing. Instead they are gradually reverting to pre-crisis economic models, where growth and job creation are powered by consumer spending. From this, several conclusions follow that will seem shocking after the austerity economics of the past five years.

Stronger consumption will need to be financed by credit creation, at least until the point is reached when employment and incomes grow rapidly enough to create self-sustaining economic recoveries around the world. This means that household or government debts will have to stop falling and preferably that leverage will start to rise again. Debt levels that were considered unsustainable until recently, both for governments and households, will have to be accepted as the new normal. And finally, to create this new credit and support consumption growth, some of the regulatory restrictions on banks will have to be loosened rather than tightened further in the years ahead.

None of these new policies will be publicly announced, since politicians and economists do not like to admit U-turns, but economic reality is moving well ahead of official rhetoric. All over the world, plans for deleveraging and economic rebalancing are being abandoned, while housing and consumption are making comebacks. In sum, the Age of Austerity is well and truly over.

PHOTO (From R-L) Germany’s Finance Minister Wolfgang Schaeuble, Britain’s Chancellor of the Exchequer George Osborne, Russia’s Finance Minister Anton Siluanov, Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development (OECD), and France’s Finance Minister Pierre Moscovici attend a news conference, part of the G20 finance ministers and central bank governors’ meeting, in Moscow, July 19, 2013. REUTERS/Grigory Dukor


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So, is anyone suggesting that we (US or other) return to the “irrational exuberance” days of 2003-2006? A time when there was cheap credit whether or not the borrower could afford and/or repay the loan. A time when homeowners were encouraged to use home equity as a piggy bank for financing second homes, RVs, and exotic vacations. A time when financial institutions were allowed to be “creative” and in the process create a a spider web of financial entanglements that, to this day, have not been rectified. A time when an administration, a Congress, and regulatory agencies turned a blind eye to what was happening.

I don’t buy it and hope to God that we are not headed in that direction. In 2004, it was plain to see that we were headed toward an economic train wreck. The same type, only far worse, that we witnessed in 1987 and 1999/2000.

Posted by bald1 | Report as abusive

I don’t think additional de-regulation of financial institutions follows from needing to expand credit. I think that is a good way to make the financial system crash again. Growth policies, yes. Corporate giveaways, no. How about giving money to consumers for once, rather than directly to the banks?

Posted by Benny27 | Report as abusive

The growth model has returned, but here I the UK our government is still using the crisis as an excuse to cut back on welfare.

Thus punishing the poorest for the crisis caused by the excesses of the rich.

Same is true across Europe. The European social model is being sacrificed on the altar of austerity, even though it is dead as an economic policy.

Posted by Urban_Guerilla | Report as abusive

So the “new economic policy” is to spend, spend, spend, and cross your fingers that there are enough “bigger fools” to sustain this “perpetual motion economic model” long enough that everyone responsible is safely retired and out of the public eye before it comes crashing down?

What is the foundation upon which this illusion is to be built? Please explain in simple, clear terms how “winners” and “losers” emerge from a process in which the whole world is passing around the same pocket change?

At least the Germans understand that you can count and measure the production and sale of their widgets. I fear no good can come of all nations placing their hopes and dreams for the future in the same basket of smoke and mirrors.

Posted by OneOfTheSheep | Report as abusive

I am sorry. But what difference does it make with traditional Keynesian and (neo)liberal economic tools? Which were available to governments for decades?
“Business as usual” in macro-economics is a combination of “heating” spending (demand end) and tax reducations/austerity (supply end.)
I don’t see any new ideas from either side of the political spectrum.
We have a new reality without new economic concepts.
We observe global corporations in great shape; stable high profits; sweet executives’ salaries and stakeholders’ dividends. We even see huge investments into rationalization.
There is a problem: the economy lies flat. It is still depressed.
I am not sure that spending will help. This time. Austerity did not.

Posted by OUTPOST2012.NET | Report as abusive

So we should all max out our credit cards, buy homes we can’t afford, buy big TVs, the latest cars and trucks – in order to get the economy back on track? Most do not have the good credit to purchase big-ticket items and are barely making it in the first place. Cities are going bankrupt – pensions unfunded – most jobs now are part-time with minimum wages – but we are supposed to spend money we don’t have?

Please, Sir – send me a pair of your rose-colored glasses or some of that wacky-tobacky the “economists” are smoking.

Posted by AZreb | Report as abusive

More Keynesian hope based on maxing out the credit card. I hope Anatole is right about the virtues of funding the economy based on increased credit, but I doubt it.

On the other hand there is a fix that doesn’t require just a hope that more demand will fix the developed world’s economies. Unfortunately, this solution is on the banned list at the moment. There is a topic that is totally off the agenda, and anyone who suggests action on this line is dismissed as a reactionary. Dare I mention it?

All the western countries have been living beyond their means, as most commentators on this blog seem to recognize. This overspending by governments has been done over the last 20 years to ensure the standard of living has been maintained even though all of these countries have been shipping jobs overseas at an ever-increasing rate.

I am all for trade, especially the trade that helps impoverished people lift themselves out of poverty, but it probably time for a rethink.

Let us face the facts: there is a problem of a global imbalance in wage rates. Now that imbalance has been exacerbated for western countries by demographic changes that mean we no longer have a massive education advantage over developing countries. It is virtually a level playing field now.

The fix is easy, but who will recommend it? A small tariff, across the board in every trading block, at the Doha allowed rate of 15%, would allow local industry in each nation to flourish.

Too simple? Too easy? Too dangerous? I don’t think so.

Posted by GrahamLovell | Report as abusive

Anatole got it all wrong on the 2008 crash, a bit like the 1987 weather man who said there wasn’t going to be a hurricane when it had already started.

Posted by MoneyObserver | Report as abusive

There is no going back to that exuberant model, not because it failed miserably, but because the failure is still fresh in the minds of too many people.
People do learn, they’re just a bit slow at it, and it usually takes some pain to engrave the memory in their minds.

Posted by reality-again | Report as abusive

Good point @Urban_Guerilla, considering that the government promised a “fairer system”, and that they would get rid of the “benefits cliff” when elected, they have actually done nothing but cut welfare – largely with the support of the press.
Meanwhile they have done nothing whatsoever to slash agricultural payments which in many cases go to wealthy land-owners (including some prominent Conservatives), yet the press have largely remained silent.
And the minimum wage remains well below a “living wage”.

It seems that the massive wealth transfer from the poor to the rich continues unabated, and may get even worse with the return of pre-crisis inflationary policies.

Posted by TocoToucan | Report as abusive

Personally I also liked the pre-2007 situation more. That feeling of “we’re all getting richer” while we were all sinking deeper into debt was great.

Posted by pepijndekorte | Report as abusive