By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.
Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former U.S. treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.
Summers’ complaints about monetary and fiscal policy seem excessive. Before the crisis, central banks were widely praised for generating steady, non-inflationary growth around the world. That does not make them sound too tough. And the fiscal deficits since the crisis in many developed countries have been the largest ever in peacetime as a share of GDP. That hardly sounds inadequate.
A more plausible financial explanation for the disappointing global recovery starts with balance sheets that have been distorted by more than two decades of increasing borrowing. Many households, companies and governments have been left under financial pressure. Their spending is likely to be restrained without a massive reduction in debt – whether through write-offs, repayments using newly created money, or inflationary erosion.