https://socialistaction.org/2019/08/24/the-next-recession-its-all-going-pear-shaped/
The next recession: It???s all going pear-shaped
/ 1 day ago
Sept. 2019 Depression sculpture (Kevin Burkett:flickr)
A sculpture in Washington, D.C., of unemployed men during the Great
Depression. (Photo: Kevin Burkett / Flickr)
By MICHAEL ROBERTS
??Is the world economy soon headed for recession? For information of our
readers, we are reprinting this commentary from the blog of Marxist
economist Michael Roberts, posted on Aug. 24. See:
https://thenextrecession.wordpress.com/2019/08/24/its-all-going-pear-shaped/
With perfect timing, just as the summit meeting of the leaders of the
top capitalist economies (G7) met in Biarritz, France, China announced a
new round of tariffs on $75bn of US imported goods. This was in
retaliation to a new planned round of tariffs on Chinese goods that the
US planned for December. US President Trump reacted angrily and
immediately announced that he was going to hike the tariff rates on his
existing tariffs on $250bn of Chinese goods and impose more tariffs on
another $350bn of imports.
The US president also said he was ordering US companies to look for ways
to scrap their operations in China. ???We don???t need China and, frankly,
would be far better off without them,??? Mr Trump wrote. ???Our great
American companies are hereby ordered to immediately start looking for
an alternative to China, including bringing your companies HOME and
making your products in the USA.???
This intensification of the trade war naturally hit financial markets;
the US stock market fell sharply, bond prices went up as investors
looked for ???safe-havens??? in government bonds and the crude oil price
fell as China was going to impose a reduction on US oil imports.
These developments came only a day after the latest data on the state of
the major capitalist economies revealed a significant slowdown.?? The US
manufacturing activity index (PMI) for August came in below 50 for the
first time since the end of the Great Recession in 2009.
Indeed, the US, Eurozone and Japanese indexes are below 50, indicating a
full-out manufacturing recession is here now.?? And the ???new orders???
components for each region was even worse ??? so the manufacturing index
is set to fall further. Up to now, the service sectors of the major
economies have been holding up, thus avoiding an indication of a
full-blown economic slump. ???This decline raises the risk that weakness
in manufacturing may have begun to spill over to services, a risk that
could generate a sharper-than-expected weakening in US and global labor
markets.??? (JPM). Overall, JP Morgan reckons the world economy is growing
at just a 2.4% annual pace ??? close to levels considered a ???stall speed???
before outright recession.
Despite all his bluster about how well the US economy is doing, Trump is
worried.?? In addition to attacking China, he also launched again into
criticising US Fed chair Jay Powell for not cutting interest rates
further to boost the economy, calling Powell as big an ???enemy??? of the US
economy as China!
Powell had just been speaking at the annual summer gathering of the
world???s central bankers in Jackson Hole, Wyoming.?? In his address, he
basically said that there was only so much monetary policy could do.??
Trade wars and other global ???shocks??? could not be overcome by monetary
policy alone.?? Powell???s monetary policy committee is split on what to
do.?? Some want to hold interest rates where they are because they fear
that too low interest rates (and everywhere they are going negative)
will fuel an unsustainable credit boom and bust.?? Others want to cut
rates as Trump demands to resist the recessionary forces descending on
the economy.?? Powell bleated that ???We are examining the monetary policy
tools we have used both in calm times and in crisis, and we are asking
whether we should expand our toolkit.???
The trouble is that the central bankers at Jackson Hole are realising,
as had already become obvious, that monetary policy, whether
conventional (cutting interest rates) or unconventional (printing money
or ???quantitative easing???) was not working to get economies out of low
growth and productivity or avoid a new recession.
Many of the academic papers presented to the central bankers at Jackson
Hole were laced with pessimism.?? One argued that bankers needed to
coordinate monetary policy around a global ???natural rate of interest???
for all.?? The problem was that ???there is considerable uncertainty about
where the neutral rate really lies??? in each country, let alone
globally.?? As one speaker put it: ???I am cautious about using this
impossible-to-measure concept to estimate the degree of policy
divergence around the world (or even just the G4)???.?? So much for the
basis of most central bank monetary policy for the last ten years.
Another paper pointed out that ???monetary policy divergence vis-a-vis the
U.S. has larger spillover effects in emerging markets than advanced
economies.????? So ???domestic monetary policy transmission is imperfect, and
consequently, emerging markets??? monetary policy actions designed to
limit exchange rate volatility can be counterproductive.????? In other
words, the impact of the Fed???s policy rate and the dollar on weaker
economies is so great that smaller central banks can do nothing with
monetary policy, except make things worse!
No wonder, Bank of England governor Mark Carney in his speech took the
opportunity before he leaves his post to suggest that the answer was to
end the rule of dollar in trading and financial markets.?? The US
accounts for only 10 per cent of global trade and 15 per cent of global
GDP but half of trade invoices and two-thirds of global securities
issuance, the BoE governor said. As a result, ???while the world economy
is being reordered, the US dollar remains as important as when Bretton
Woods collapsed??? in 1971. It caused too much imbalances in the world
economy and threatened to bring down weaker emerging economies which
could not get enough dollars.?? It was time for a global fund to protect
against capital flight and later a world monetary system with a world
money!?? Some hope!?? But he showed the desperation of central bankers.
The impending global recession has also concentrated the minds of
mainstream economics.?? A division of opinion among mainstream economists
has broken out over what economic policy to adopt to avoid a new global
recession. Orthodox Keynesian, Larry Summers, former US treasury
secretary under Clinton and Harvard professor, has argued the major
capitalist economies are in ???secular stagnation???. So he reckons monetary
easing, whether conventional or unconventional, won???t work. Fiscal
stimulus is needed.
On the other hand, Stanley Fischer, formerly deputy at the US Fed and
now an executive of the mega investment fund, Blackrock, reckons that
fiscal stimulus won???t work because it is not ???nimble enough??? ie takes
too long to have an effect. Also, it risks driving up public debt and
interest rates to unsustainable levels. So monetary measures are still
better.
The post-Keynesians and Modern Monetary Theory economists got very
excited because Summers seemed to agree with them, finally, ??? namely
that fiscal stimulus through budget deficits and government spending can
stop ???aggregate demand??? collapsing. It seems that the consensus among
economists is moving to the view that central bankers can do little or
nothing to sustain capitalist economies in 2019.
But in my view, neither the ???monetarists??? nor the Keynesians/MMT are
right. Whether more monetary easing and fiscal stimulus, nothing will
stop the oncoming slump. That???s because it is not to do with weak
???aggregate demand???.?? Household consumption in most economies is
relatively strong as people continue to spend more, partly through extra
borrowing at very low rates of interest.?? The other part of ???aggregate
demand???, business investment is weak and getting weaker.?? But that is
because of low profitability and now, in the last year or so, falling
profits in the US and elsewhere. Indeed, US corporate profit margins
(profits as a share of GDP) have been falling (from record highs) for
over four years, the longest post-war contraction.
The Keynesians, post-Keynesians (and MMT supporters) see fiscal stimulus
through more government spending and increased government budget
deficits as the way to end the Long Depression and avoid a new slump.??
But there has never been any firm evidence that such fiscal spending
works, except in the 1940s war economy when the bulk of investment was
made by government or directed by government, with business investment
decisions taken away from capitalist companies.
The irony is that the biggest fiscal spenders globally have been Japan,
which has run budget deficits for 20 years with little success in
getting economic growth much above 1% a year since the end of the Great
Recession; and Trump???s America with his tax cuts and corporate tax
exemptions in 2017.?? The US economy is slowing down fast, and Trump is
hinting at more tax cuts and shouting at Powell to cut rates.?? In
Europe, the European Central Bank is preparing a new round of monetary
easing measures.?? And even the German government is hinting at fiscal
deficit spending.
So we shall probably get a new round of monetary easing and fiscal
stimulus measures, to satisfy all parts of mainstream and heterodox
economics.?? But they won???t work.?? The trade and technology war is the
trigger for a new global slump.
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August 24, 2019 in Economy.
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