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’ 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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