By Jeffrey P. Snider, Alhambra Investment Partners
The only common factor on the economy viewed from the mainstream in the past few years is the shrinking standards by which it is judged. Janet Yellen can somehow suggest erratic 2% GDP growth is “overheating” or close to it only because that is the reduction of the “new normal.” Because that has been so declared by the very same people who never saw it as possible, that is the ceiling by which everything was to be measured. Now, however, even the “new normal” is undergoing its own discounting.
In early February, Mohamed El-Erian raised doubts about the term and thus the circumstances of the economy by implication. That was important (supposedly) because he is the person credited with coining it at the 2010 Per Jacobsson Lecture in a speech titled Navigating the New Normal in Industrial Countries. In 2016, what was supposed to be low and steady growth is now doubted even though the very notion of the “new normal” itself already exhibits grave doubt.
Just when the notion that Western economies are settling into a “new normal” of low growth gained mainstream acceptance, doubts about its continued relevance have begun to emerge. Instead, the world may be headed toward an economic and financial crossroads, with the direction taken depending on key policy decisions.
It’s a proclamation that is being echoed throughout the “elite”, as partly due to finally acknowledging reality (the final end of the absurd notion of “transitory”) but also subtly nudging where all this is going next. The head of the IMF, Christine Lagarde, was today less subtle but very much in the same arena. Rather than alluding to shifts out of the “new normal” she outright declared a “new mediocre.”
The world outlook is clouded by “weak growth, no new jobs, no high inflation, still high debt — all those things that should be low and that are high,” Lagarde said in an interview in Frankfurt on Tuesday with Bloomberg Television’s Francine Lacqua. The downside risks have increased and “we don’t see much by way of upside,” she said.
The International Monetary Fund’s view of the world economy has dimmed over the last six months, exacerbated by China’s slowdown, lower commodity prices and the risk of financial tightening in many countries. The Washington-based fund, which will hold its spring meetings starting April 15, is warning that political populism now also poses a growing risk to the economic order, fueled by income inequality and the ongoing fallout from last decade’s financial crisis.
“What we fear is this sort of very new mediocre,” Lagarde said in the interview after delivering a speech at Frankfurt’s Goethe University. In the talk, she urged governments to front-load structural reforms that can boost growth potential and warned that monetary policy can’t bear the burden for supporting output alone.
That isn’t what she proclaimed in 2012 and the last time the global economy was so challenged. If this is the back end of the “new normal”, closer to the front end or its start she was unequivocal that monetary policy could and even should “bear the burden of supporting output.” How things change; from a speech she gave in June 2012:
First, they [policymakers] need to rekindle demand today, to get the growth engine up and running again. This requires a combination of (i) very accommodating monetary policy, (ii) use of common resources to provide direct support to banks, and (iii) when fiscally available, growth-friendly policies.
In this context, fiscal stability is incredibly important. Policymakers must lay out a credible medium-term plan to lower public debt. Without such a plan, countries will be forced to make an even bigger adjustment sooner.
She nor anyone in official capacity will come out and say it but the change in her stance is an admission that her prescriptions in 2012 just didn’t work. Central banks did what she asked, some (BoJ) more than anyone would ever ask, to no effect. No inflation; no recovery; only downgrades to the standards of growth and recovery along with the clichés used to describe them. The fact that none of them are calling for more QE now is very telling. As monetary policy recedes, the shovel ready future suddenly reappears.
Lagarde, 60, a former French finance minister, used a quotation from Goethe’s “Faust,” in German, to chastise governments for not doing enough on the reform or fiscal-spending front to prevent economies from slipping into torpor.
It has already begun, as Japan, a nation drowning in debt that is almost fully monetized now, debates the next fiscal “stimulus” package as if it were the first time anyone thought of it. Now Canada is poised to join, targeting new debt-funded government spending to counteract a distinctly non-transitory oil problem that turned a laughable recessioninto a very serious matter.
Canada’s new Liberal government on Tuesday unveiled a stimulus budget to revive growth with infrastructure spending and said it would run a deficit nearly three times larger than promised during last year’s election.
The government said the budget was expected to raise growth 0.5 percent in the first year and 1.0 percent by the second after the party of Prime Minister Justin Trudeau warned last month an oil price plunge had weakened Canada’s economic and fiscal outlook.
They said monetary policy “accommodation” would do exactly the same for growth and limit the impact of commodities like oil. We need to recognize what this means; monetary “stimulus” did not fail, “stimulus” did. There is no difference between monetary “stimulus” and fiscal “stimulus” as either count as artificial redistribution. That is why fiscal “stimulus” all over the world starting (too late) in 2009 only delivered the “new normal.” Monetary “stimulus” took over from there and instead “somehow” worsened the “new normal” into now the “new mediocre.” In reality, however, there was never a “new normal” to begin with, instead what is increasingly looking to be an established downward baseline or trend for the whole of the global economy. “Stimulus” can never work under such conditions, which is why none of it has and none of it will.
The effects of “stimulus” in whatever format only drive up the future cost of having done it. It is a drag on future growth where no more such drags can be accommodated; there is only so much more impoverishment an already-impoverishing system can accept. They all suggest “structural reform” and even Lagarde still refers to too much debt but only in the context of governments. If they would realize the true monetary circumstances they would see not only the futility and waste of continued “stimulus” but also the real answer to all of it – reforming banking in exactly the manner they seek to reform “fiscal stability.” Get debt and debt-based money out of the global economy – the sooner the better before the “new mediocre” has to be (after the fact) rethought into something still worse.
As I wrote yesterday morning:
In other words, this slowdown or paradigm shift is already several years old, only it hasn’t been noticeable in the mainstream because policymakers and orthodox economists have instead labeled it a “new normal.” And almost as soon as they declared it, this “new normal” of low growth switched signs on them so that what was supposed to be slow but seemingly steady growth turned in 2015 to slow but steady contraction (all “unexpected”). In other words, it was never a “new normal”, it was just something new.
This resurrection of fiscal “stimulus” is just belated confirmation of that slowdown, paradigm shift. It further proposes that even policymakers are worried about what that might actually mean, and have no more faith in monetary policy (for good reason, I will add) to do anything about it. In that respect, the ongoing downgrade of the “new normal” is comprehensive. But like central bankers no longer worthy of the faith, they will not stop. “Stimulus” forever with nothing ever actually stimulated.