While I write futuristic novels, none of them involve trying to predict the future; rather I use the future as an excuse to formulate a situation that has little merit other than to be the background to a story that is really looking at something else. However, like most people, I am curious about what could be coming. That includes wondering where the economy is going.
Some time ago I saw an interview with Mervyn King, an ex-Governor of the Bank of England. According to him, in a market economy banking crises are endemic because a market economy cannot provide all the required price and investment signals. This is effectively a statement that there is an inherent failure in the market economy, and it arises because nobody can predict the future, and there are the problems of positive feedback (where the effects of the problem make it worse) and hunting (where the correction dramatically overshoots and causes the opposite problem). Thus suppose commodity A suddenly has a shortage. Prices rise, the masses start acquiring A and the price rises further, but there is no fundamental reason for the rise. When reality strikes, prices drop, and keep dropping.
I recall in my youth the price of potatoes tanked, and farmers found themselves dumping them. My father immediately began renting land, and with a trailer, went around the potato dumps and picked up free seed. Next season, because everyone had got out of potatoes, and also partly because of adverse weather in places, prices leaped five times above average. At that point, my father made a lot of money, but immediately got out of potatoes, on the grounds that next year everyone would be back into them. Now, King’s point is, bankers lend to farmers, but they cannot know what next season’s prices will be, and hence cannot know whether the farmer will prosper or go bust. In New Zealand there are a number of dairy farmers who got into it with expensive farm conversions when prices were very high a couple of years ago. When the world became swimming in milk, the debts still had to be serviced.
The question then is, can anything be done about this? My guess is, so far there are no signs that anything better would work. A long time ago I was in the old USSR, a command economy, and basically it was not working at all well. Prices were stable, by command. I went into a restaurant and picked up a menu that was printed twenty years before and the prices held! The problem was, I also went into a major store to see an array of empty shelves. The prices might have been stable, but if the goods were not available, their price was irrelevant. In one of my trilogies, I proposed an economy that was stable, BUT there is no evidence it would actually work. The proposal was simply background to make the rest of the story easier to follow, and in any case, there were price rises due to resource shortages. However, there was no possibility of major recessions, or major booms. Perhaps I was dreaming?
Another one of King’s points was that while central banks avoided a catastrophe in 2007 – 2008, since then, the basic fundamentals have not been corrected. In particular, there is a serious disequilibrium between saving and debt, largely due to very low interest rates. The problem is, the longer this goes on, the harder it will be to return to some desirable “normal”.
King was also somewhat skeptical about the European Union, and noted that a single interest rate imposed on countries with varying rates of wage and cost inflation leads inexorably to divergence in competitiveness. Well, yes, it would. German banks would seem to have to take some major losses, but they seem reluctant to do so. (Note that Germany itself has defaulted on debt before.)
King’s way out is to boost productivity and growth, and he was enthusiastic about the TPP trade agreement. My guess is that Trump will kill that option.
The problem I see with that analysis is that King thinks society in the future will be more or less the same as now. I am less convinced. In many western countries, the biggest problem is that local manufacturing has been exported, and this has led to the hollowing out of middle classes. While the very top corporations are raking in huge profits (and paying increasingly less tax) the wage earners tend to find their wages actually reduced. Governments are compensating by increasing their borrowing, thus taking advantage of lower interest rates. The problem here is, with the exception of the US and others undertaking quantitative easing, while central banks might offer low interest rates, they do not lend because to do so without borrowing is simply to enlarge the money supply. The US has got away with quantitative easing largely because trillions of dollars have been secreted away in foreign banks as a consequence of tax avoidance. However, the debts remain.
For the general economies of countries like New Zealand, while the Reserve Bank recently lowered interest rates, the commercial banks actually slightly raised them. The reason: they need deposits, and as interest rates have dropped, people have gone searching for yield elsewhere. Here, a lot has gone into housing, largely because there is a shortage of houses, but this has not created a lot of new houses. Instead, as King would have noted, this must lead to a bubble happily fermenting, although because of the underlying shortage (which is politician induced) it may not burst. Here, politicians are the problem through sending perverse signals and regulations to the market. Money has also fled towards stocks, but again that tends to raise the price when more money goes there than into new ventures. Now, what happens if this bubble bursts? Governments are in so much debt they have little room to maneuver. By itself, politicians might consider that as merely unfortunate, but the problem then is the consequences, one of which I included in my novel ‘Bot War. I hope that consequence does not come to pass, but I am far from confident.