SIGN OF TIME: A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London. Ending the Great Stagnation that is taxing Western policy makers may depend as much on the Chinese Communist Party as it does on the world’s leading central banks. — Reuters photo
LONDON: Ending the ‘Great Stagnation’ that is taxing Western policy makers may depend as much on the Chinese Communist Party as it does on the world’s leading central banks.
Six years after the global financial crisis erupted, there is any number of explanations why Europe cannot shake off a Japan-style balance-sheet recession and why the United States is experiencing sub-par growth and high unemployment.
Governments and households racked up too much debt to sustain living standards.
Demographic tailwinds have turned into headwinds as baby boomers retire and the surge of women entering the workforce has run its course.
Many banks are still ailing and are building up capital instead of lending freely. But two other factors cannot be overlooked.
Firstly, there is an excess of global savings, which has lowered the natural real rate of interest that equalises savings and investment.
The result is a liquidity trap. Even with interest rates near zero, monetary policy is like pushing on a piece of string.
Secondly, the share of income accruing to labour has shrivelled in most countries. With real incomes stagnant or falling, consumer demand is too weak for Western firms to justify investing their record cash piles, at least at home.
What links these two phenomena is the meteoric rise of China as the workshop of the world after Beijing joined the World Trade Organisation in late 2001.
“That changed the world. That for me was basically the start of this globalisation process,” hedge-fund manager Stephen Jen told a recent Reuters BreakingViews conference.
At a stroke, he said, the effective size of the world’s labour force doubled.
With Beijing repressing domestic consumption and holding down the yuan’s exchange rate to give it a competitive edge in world markets, foreign direct investment poured into China to take advantage of cheap labour, land and other inputs.
Exports duly exploded. China’s resulting current account surplus, though now declining, contributed to a glut of global savings that depressed US interest rates and helped fuel the fateful boom in sub-prime mortgages.
China’s foreign exchange reserves today stand at an unfathomable US$3.66 trillion.
Tens of millions of people have been lifted out of poverty by the rise of China and other poor countries plugged into global supply chains.
But outsourcing of production has hollowed out skilled jobs in advanced economies in what British financial analyst Tim Morgan, in his book ‘Life After Growth’ calls “a self-inflicted disaster with few parallels in economic history”.
Jen added: “If you are a labourer in the West, you have been hurt. It’s very clear. If you are a capitalist in the West, you have benefited immensely.”
Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide Investment, noted that labour’s share of US non-financial output held steady at between 61 per cent and 65 per cent for half a century.
“Then, something happened. From 2000, it plummeted and currently rests at an all-time low of 57 per cent,” Rossi wrote in the Financial Times.
Over the same period, median US household incomes have fallen in real terms.
“Overall, labour is not participating in economic growth as it has done in the past,” he said.
The flip side is that US corporate profit margins stand at 12 per cent of gross domestic product, a record high, yet net corporate investment is only 4 per cent of GDP, Rossi noted. — Reuters