By Brendon Harre*
I wonder if the global collapse in interest rates and the spectre of deflation is a reflection of the collapse in expectations for future generations in the developed world; that a process of restricted supply and declining demand is the true cause of stagnation and deflation, with inter-century low interest rates being the desperate policy response to this predicament.
In many countries opportunities for the young are not what they once were.
In much of the world youth unemployment is high even for those educated in areas which once guaranteed entry into middle class-dom.
Generation Rent
In some regions housing costs have escalated creating Generation Rent.
Some socially conservative societies like Japan, Italy and Germany have not been flexible enough to reconcile progressive social movements like gender equality in the workplace with cultural expectations regarding motherhood and childcare.
In response their young have gone on a reproduction strike.
Birth rates have fallen to levels, which if continued, mathematically guarantee the collapse of the societies concerned.
Immigration has often been the policy response to the associated labour and skill shortages, but that is a band aid, not a cure for the loss of hope.
EU struggling
In Europe the post war EU unification project has struggled to add new members and adapt to a common currency in the post GFC economic environment.
The overarching theme is that in many places our political elite has not being able to articulate a positive vision for the future.
Some people welcome this loss of hope.
There is much publicity about what ‘growth’ and our capitalist system has done to the environment.
In fact there are many on the green fringe of our political spectrums who argue that the current global crisis is not a failure of vision, leadership, institutions and society.
Reached the limit
They argue that growth has reached its environmental limits. That we have overshot our resources and we will now fall off the cliff into permanent decline.
These green fringe beliefs have contributed to the spread of growth containment beliefs and policies throughout the developed world.
There has been much debate about whether the resulting increase in house prices, declining quality of housing with respect to its location, size and weather tightness (its ability to be warm and healthy –not humid, leaky or mouldy) and the pricing out of the poor from decent housing is a symptom of growth containment policies or a symptom of the coming environmental collapse.
Some people deny there is a loss of hope. They are heroically optimistic.
Economic commentators such as Bernard Hickey have said such things as: “There is a growing body of thought that cheap and powerful new technology such as smart phones, ageing populations (?) and the globalisation of services are driving prices down all around the world in a way not seen since all of the 1800s, when the first age of industrialisation created regular deflation and interest rates were typically around 3%.”
Failed logic
Taking an optimistic approach to life is understandable but in this case it really fails the logic test.
The GFC started with the collapse of the real estate prices of the high median multiple markets in the US, which threatened the global financial system following the bankruptcy of Lehman Brothers.
Pre GFC only the inelastic cities boomed in prices and post GFC it has been the elastic cities' ability to expand without setting off another asset bubble that has allowed a recovery of sorts in the US.
Although there are some bubbly inelastic US cities now, it seems most US residents have learnt to relocate themselves to more affordable cities, rather than taking on dangerous levels of debt.
Fundamental error
If one assumed that deflation was a beneficial structural problem, then the likes of the Swedish Riksbank is making a fundamental error in lowering interest rates below zero to fight deflation, unemployment and a high exchange rate, when it should be using higher interest rates to fight their housing bubble.
The global financial crisis has led to an extraordinary policy response of quantitative easing, which is a fancy word for money printing.
The intended first beneficiary of this money printing is the banking system. Banks that have created money by issuing private debt –mostly mortgage debt in an unsustainable manner, have needed to be rescued by State controlled Reserve Banks to re-capitalise the banking industry.
The intention was that once the banks were re-capitalised, normal borrowing, economic activity, inflation and interest rates would result.
Somehow the transmission mechanism between the financial industry and the real economy has broken down because seven years after the 2008 Global Financial Crisis, deflation and multiple-century low interest rates are present in much of the world.
Today’s response to the Global Financial Crisis is in marked contrast to The Great Depression as explained by Professor Crafts:
...Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and 279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London and more generally across southern England. The construction of these houses directly contributed an additional £55 million to economic activity by 1934 and multiplier effects from increased employment probably raised the total impact to £80 million or about a third of the increase in GDP between 1932 and 1934…
...Houses were affordable to an increasing number of potential buyers. 85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country Planning Act were still to come…
There is rising level of debate among experts worldwide on whether the growth of the financial industry has been socially beneficial.
New Zealand has been part of this debate with Phil Hayward’s extensive comment being accepted as a response to one of these article’s in VOX’s CEPR's Policy Portal which has research-based policy analysis and commentary from leading economists.
There is also debate about whether the capitalist system leads to an inevitable accumulation of capital wealth in the hands of the relative few –the 1%. Joseph Stiglitz indicates this story of wealth accumulation is more a story of real estate rather than productive capital. Here are his words:
I think most readers of Thomas Piketty’s book (Capital in the Twenty-First Century) get the impression that the accumulation of wealth — savings —is responsible for the rise in inequality and that there is, therefore, in a way, a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth. My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of land, not in the amount of capital goods.
All this discussion of finance, real estate, inequality, Reserve Bank policy and underlying belief systems is mostly over the heads of the wider public.
It takes a lot of effort to build ones knowledge up enough to understand the arguments, let alone have an informed opinion on the best way forward. Added to that there isn’t a clear consensus from the experts on what direction to go.
I believe it is imperative as a society that we ‘the public’ make an effort to inform ourselves so we can articulate a collective positive vision for the future to counter the loss of hope - which in my opinion is underlying cause of our problems.
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Brendon Harre is a reader and commenter on interest.co.nz who says he studied some university economics before embarking on a career was in psychiatric nursing. He lived in Finland until recently, where he retrained as a cook, then spent some time at home looking after two preschool boys before more recently returning to work as a psychiatric nurse in Christchurch.
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