The new, volatile normal

The new, volatile normal

The “new normal" was supposed to be a quieter time. After the roller coaster the global economy witnessed in the last decade—a massive boom at a time of low inflation, followed by a fantastic bust—perhaps a staid age of low growth was what the doctor ordered. Yet, that’s not what the new normal is turning out to be.

Instead, it’s a volatile age where “turbulence in financial markets…casts a cloud over (the economic) outlook", as the International Monetary Fund (IMF), in an update to its World Economic Outlook, put it last week. IMF projects that, in 2010, the world economy will grow by 4.6%, with advanced economies chugging along at 2.6%. The year 2011 is worse. The problem isn’t simply low growth: It’s the financial stress coming with it.

So the last one week has seen global investors pouring $33.5 billion into ultra-safe money market funds, research group EPFR Global noted on Friday.

Investors are clearly fleeing to safety, spooked on multiple fronts, from China to Europe to the US. A cloud of uncertainty may be persuading companies to keep hoarding cash, while anaemic US indicators are leading many to believe a double dip imminent. We don’t know the chances of such a recession, but we do know that the longer the US recovery remains jobless, the greater the chance that US politicians, bitten by the Keynesian bug, will invest in another near-trillion-dollar fiscal stimulus.

More US government debt could mean that the US Federal Reserve will extend its “extended period" for keeping interest rates low, to accommodate that debt. What’s worse, as one bank has been predicting, the Fed could start a second “monster" programme of quantitative easing, purchasing assets such as government bonds.

That spells high inflation, if not now, then soon. It’s not too surprising then that hedge funds are buying gold, the classic inflation hedge, as the Financial Times reported on Friday.

These stresses may affect cross-border trade and capital in the short term. The Baltic Dry Index, a proxy for global trade, has already fallen for 30 consecutive days, slipping some 50%. And emerging markets will be flooded with more capital, IMF economists say.

But there’s more at stake in the longer term. The old normal was, at least, a time of high growth with low inflation. Has the new normal just switched that around to give the world low growth with high inflation?

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