There is grave concern that the world economy is slipping into what
Harvard professor and former US Treasury Secretary Larry Summers calls
the global secular deflation. In simple terms, growth has slowed without
inflation, despite exceptionally stimulative monetary policy. Larry’s
view is that the advanced countries can use fiscal policy to stimulate
growth, using massive investments in infrastructure. If needs be, this
can be financed by central banks.
Central bank financing fiscal deficits is technically called “helicopter
money”, named by the late monetarist economist Milton Friedman as the
central bank pushing money out of the helicopter. Strict monetarism
thinks that this would cause inflation.
The simple reason why the world is moving into secular deflation is that
the largest economies are all slowing for a variety of reasons.
Unconventional monetary policy applied since the 2007 crisis has brought
central bank interest rates to zero or negative terms in economies
accounting for 60% of world GDP.
Most economists blame current slow growth to “lack of aggregate demand”
or “excess of aggregate production”. The rich countries are mostly aging
and already heavily burdened with debt, so they cannot consume more.
After the 2007 global financial crisis, the emerging market economies
have slowed down, as demand for their exports have slowed. We are in a
vicious circle where global trade growth is now slower than GDP growth,
because the US economy is no longer the consumption engine of last
resort. China, which has been a huge consumer of commodities, has
slowed. Japanese growth has been flat due to an aging population.
European growth has not recovered, partly because the leading economy,
Germany, calls for austerity by its southern partners.
The Brexit shock threatens to weaken global confidence and send growth down another notch.
Former Bank of England Governor Lord Mervyn King famously called the
global monetary order a game of sodoku, in which national current
accounts in the balance of payments add up to a zero sum game. This is
because in the global trade game, one country’s current account deficit
is another country’s surplus. In the past, if the US runs larger and
larger current account deficits, world growth is stimulated because
everyone wants to hold dollars and has been willing to supply the US
with all manners of consumer goods. This has been called an “exorbitant
privilege” for the dollar.
The present global monetary order or non-order is a result of the 1971
US dollar de-link from gold, which gave rise to a phase of floating
exchange rates and rising capital flows, which some people call Bretton
Woods II. The old order, set at the Bretton Wood Conference of 1944,
centered around a system of global fixed exchange rates, based on the US
dollar link with gold price at US$35 to one ounce of gold.
But flexible exchange rates has resulted in a system where everyone
seems to be devaluing their way out of trouble. Has the global secular
deflation something to do with Bretton Woods II?
My answer must be yes. The reason lies in what I call, instead of
sodoku, the mahjong winner’s curse. The Chinese game of mahjong has four
players with a limited number of chips. If one player is the persistent
winner, he or she ends up with all the chips and the game stops. Since
the global game of trade cannot stop, the winner has both an exorbitant
privilege (of being funded by the others) and an exorbitant curse (of
bearing the loss if the others won’t or refuse to pay). To keep the game
going, the winner has to give or lend the chips back to the other
players, who play with the hope of winning the next round.
Indeed, if the winner is generous, the game can be made bigger, because
the winner can issue more chips (defined as a reserve currency), which
the others are more than willing to borrow and play.
The current world situation is that the Winners are the four reserve
currency countries, the dollar, euro, yen and sterling, all of which
have interest rates near zero or even negative. Until recently, the
Winners blame China and the oil producing countries as having too high
current account surpluses. But recently, after the huge European cutback
in expenditure, Europe as a whole is the world’s largest current
account surplus group of nearly 5% of GDP.
Herein lies the winner’s curse. The emerging markets should be able to
stimulate global growth, but are unwilling to run larger current account
deficits because they cannot get financing. The richer economies can
stimulate global growth, but they are unwilling to do so, because they
either feel that they already have too much debt or because they worry
that stimulus would lead to inflation.
However, reserve currency countries have an advantage. As long as they
are willing to run current account deficits, there will be little
inflation because the world economy has huge excess capacity and surplus
savings. If emerging markets run higher current account deficits, they
will have to depreciate, which is exactly what Brazil, South Africa and
others have done.
The winner’s curse is that if Europe is now unwilling to reflate and
spend, the world will continue to slow. Indeed, in a world of greater
geo-political risks, money is fleeing to the US dollar and the yen,
causing both to appreciate.
What these capital flows into the reserve currencies when their interest
rate is zero and they are unable to reflate imply is that the dollar
and yen play the deflationary role of gold in the 1930s. As more and
more mahjong players hold gold and don’t spend, the world global trade
and growth game slows further. The mahjong winner’s curse requires the
winners to stimulate and spend, bearing higher credit risks. That’s the
privilege and responsibility of winners in the global game. If not, look
out for more global secular deflation.
By Tan Sri Andrew Sheng who writes on global issues from an Asian perspective.
Related posts
Mar 5, 2016 ... Modern finance and money being managed like a Ponzi scheme! Economic
Collapse soon? Ponzi schemes and modern finance. Andrew ...
Jun 15, 2016 ... Modern finance and money being managed like a Ponzi scheme! Economic
Collapse soon? Ponzi schemes and modern finance. Andrew.
Mar 19, 2016 ... In other words, growth accelerates exponentially until the economy reaches
maturity and slows down, and if there is no longer ... Modern finance and money
being managed like a Ponzi scheme! Economic Collapse soon?
May 14, 2016 ... Finance is a derivative of the real economy, which can be leveraged or multiplied
as ... value of the underlying asset – which were triggers of the global crash of
2007, ... all lending) can only be implemented after the next and coming crisis. ...
Modern finance and money being managed like a Ponzi scheme !
“Who is the real saboteur of international law?” the editorial outlined the history and legal basis involved in the issue.
Like
mahjong: The current world situation is like the Chinese game of
mahjong which has four players with a limited number of chips. If one
player is the persistent winner, he or she ends up with all the chips
and the game ends.
Winners and losers in the global economy of 2025