They need to accept that debt accumulation has brought growth forward and has to be paid for, with lower growth
My column for Mint last Tuesday attracted some responses from friends. One of them simply called it NUTS. I have two responses to that. One is that the verdict of history is unencumbered by the preferences of either the elites or the electorate. As things stand, history’s verdict on Hillary Clinton, if she went on to win the elections, would be very different from that of the elites who are rooting for her.
The second response is that such criticism misses the point of the piece and ends up vindicating it actually. Last week’s column should be seen as a warning to elites that if they do not wish to see things getting worse before they get better, they should commit to the following and soon:
(1) Acknowledge the ills of financialization and financial integration pursued relentlessly since the 1980s.
(2) Accept that portfolio flows in search of higher returns, performance and bonuses have real economic consequences for people who are far removed from the world of financial asset allocators.
(3) Concede that current monetary policies exacerbate both (1) and (2) above. Admit also that current monetary policies result in economies being driven more by asset prices and less by fundamentals such as savings, investment, employment and consumption.
Illusory balance sheet strength (rising asset prices) is no substitute for poor or lack of income statement gains. Even with the apparent balance sheet strength, it must be noted that asset price gains are illusory while debt is legal and permanent obligation.
Despite the findings of a survey of more than 27,000 Americans by the FINRA Investor Education Foundation showing that the ratio of respondents who have set aside three months of emergency funds rose to 46% last year, compared with 40% for its previous survey in 2012 and 35% in 2009, majority of Americans are still spending more than their income.
The percentage of respondents who spent less than their income—meaning they had money left over to save—actually declined to 40% in 2015 from 41% in 2012 and 42% in 2009. About 58% have retirement accounts, up from 54% in 2012 but nearly flat from 57% in 2009.
Retirement incomes, however, are declining. A chart from OECD’s press handout (page 13) for its Economic Outlook No. 99 of June 2016 showed that money set aside for retirement earns 40% less income than it did at the turn of the millennium in OECD countries, on average.
(4) Acknowledge that debt accumulation played a big role in the economic prosperity that the world has experienced since the 1980s and that ‘great moderation’ of the quarter century up to 2007 was due to a happy confluence of circumstances rather than (merely) a reflection of monetary policy success.
(5) Stop advocating monetary placebo and panacea for all world problems. A recent edit in Financial Times recommending a rate cut, return to quantitative easing and even helicopter money in Britain is precisely the sort of advice that both Britain and the world can do without.
(6) Accept that debt accumulation has brought growth forward and has to be paid for, with lower growth and that means reversion to lower growth is not only inevitable but desirable. Trying to deny it would only delay it and with more unpleasant consequences.
(7) Such lower growth, resulting from the mean reversion as explained in (6) above will have consequences. Governments have to be explicit about who will bear the cost of it. It cannot be the poor and low-income folks.
Prakash Loungani of the International Monetary Fund (IMF) had an interesting profile article in Finance and Development of Dani Rodrik who teaches at Harvard. Rodrik’s 1997 monograph, Has globalisation gone too far?, has presciently anticipated the consequences of the pursuit of globalization unmindful of its distributional consequences. Economists overstated the benefits of free trade without emphasizing the need for redistribution to accompany it so that all won from free trade. The latter was ignored. The accumulated consequence is the worst income inequality in decades in the developed world and a backlash against globalisation and similar elitist agenda.
(8) Find the intellectual honesty and courage to accept such arguments and act on them.
Since there is a fat chance that elites would do any of the above, whatGeorge Friedman, a geopolitcal forecaster,wrote in the aftermath of Brexit would prove to be the final denouement of the elite agenda and of elites themselves: “A democratic society cannot survive this divide. It occurred in the US in the Great Depression, but was smashed by World War II when the young soldiers of all classes discovered that their lives depended on each other and social class meant nothing when the artillery opened up. The moderation of the post-war period had much to do with this experience.
“Of course, World War II was unique and hardly the solution to a social problem. Nevertheless, something dramatic needs to happen. It will, as the situation becomes increasingly untenable. In the end, the palace doors may be kicked in. Hopefully, it will be done more politely and without the viciousness of the falls of the Bourbons and Romanovs."
V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.