Satyajit Das Presents a Global Economy Health Check
Mr. Global Economy gets a metaphorical physical and psychological examination. Here are the results.
The patient’s history includes a seizure in 2007/ 2008 including financial losses, banking problems, a major recession, etc. Liberal injections of tax payer cash avoided catastrophic multiple organ failure, and assisted a modest recovery.
Governments ran large budget deficits in the period after the crisis. Interest rates around the world were reduced to historic lows; some were even reduced to zero in many developed countries.
With interest rates constrained at zero, central banks have adopted "innovative” treatments, referred to as quantitative easing, which is the fashionable appellation of a more old fashioned procedure – printing money. Balance sheets of major central banks have increased from around US$6 trillion to US$18 trillion, an unprecedented 30% of global gross domestic product (“GDP”).
As evident from the anticipation of and reaction to decisions by the US and European central bank to provide further support, the global economy is now addicted to monetary easing. Increasing doses are necessary for the patient to function at all.
Mr. Economy has also not made the recommended changes necessary for a return to full health. He seems to have taken rock star Steven Tyler’s advice: “Fake it until you make it.”
Borrowing levels remain unsustainable. Debt levels for 11 major nations have increased from 381% of GDP in 2007 to 417% of GDP in 2012. Debt has increased in Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the UK, and the US.
There has been a shift of debt from private borrowers to governments. There has also been a change in the identity of the lender – governments and central banks have heroically stepped in to take over debt from commercial lenders and investors.
Global imbalances – major current account surpluses and deficits – remain. Large exporters like China, Japan, and Germany remain resistant to abandoning their export-based economic model.
Little progress has been made in bringing the banking system under control. Regulatory initiatives involve activity if little achievement. New regulations of stupefying complexity run to thousands of pages.
The process provides continuing employment to thousands of needy policy advisors, regulators, lawyers, and lobbyists who would otherwise struggle to gain productive employment. Without their heroic efforts and stoic acceptance of privations (first class travel, five-star hotels, constant conferences and symposiums, etc.), the recovery would be even more tepid.
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