by Michael Roberts
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’ i.e.,
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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