March 3, 2014
I am in Kilkenny this evening, planning some events for this year’s Kilkenomics festival. Kilkenomics is a strange hybrid of economics and comedy. It is not your usual economics conference because the stand-up comedians tease out the logic – warts and all – of what the economists are saying. In addition, the comedians shear away the jargon behind which many economists hide. As a result, there is more clarity delivered in Kilkenny than in many other economic set pieces.
Tomorrow, I head to the Gulf for a much more traditional economics and finance conference at the National Bank of Abu Dhabi. It’s not every day that I find myself speaking on stage just after Larry Summers and just before Ben Bernanke – but that’s where I’ll find myself on Tuesday.
It will be Bernanke’s first speech since leaving the Fed last month and as such, it should be particularly interesting. I just have to come up with something plausible to say – no pressure there so!
And while I’m there, I’ll ask them to come to Kilkenny too. You can only ask; and as the Americans say, ”if you don’t ask, you don’t get.” I’d pay to see one of our top comics grill the former Federal Reserve chairman in Langton’s or the back of Cleeres’s bar, wouldn’t you?
One interesting aspect of both these titans of the US policy world is the different angles I expect them to come at.
In recent months, Larry Summers has been banging the drum for the fact that the West is in secular stagnation. We are passing the baton over to emerging countries and a combination of technology, demography, globalisation and price competitiveness from the East and ultimately Africa, is going to eclipse us in the same way the Americans eclipsed the British Empire the in early 20th century.
To put that in an us and them framework; ”us being the West, ”them being the Rest, what he is saying is there will be more success for ”them – they will have better technology, they will work harder for longer for less cash and we will let them.All told they will get richer faster and we will get poorer quicker. And not only that, but many of us will get a lot poorer a lot quicker than others.
This path of argument is likely to bring him onto the buzzword for the policy elite these days: inequality.
I say ”these days, because for years when inequality was rising, it was seen as an unpleasant but unavoidable by-product of the new economy. Today, even those on the right acknowledge that when the top 85 richest people in the world own more than the bottom 3,500,000,000 people, something is seriously wrong.
Summers may also go on to say something very radical, which is that in the absence of a massive jolt to productivity here or a surprise baby boom in the West, the West needs financial bubbles to push the growth rate artificially upwards for periods in order to get unemployment down to tolerable levels. For example, in Ireland the only period in my life when unemployment fell to record low levels, when anyone could get a job of some sort, was when we experienced the mother and father of all property/credit/banking bubbles.
This is the implication of what he is saying, but I am sure that would be a step too far for the man who was both Clinton’s and Obama’s chief economic thinker.
The other man, Ben Bernanke, is likely to cover his tenure as the head of the Federal Reserve. His record, although it may be too early to set in stone, is, I believe, an extremely positive one. Bernanke tore up the rulebook in the US and unveiled the most unorthodox policies to combat the 2008 recession, preventing it from becoming a Depression.
By identifying that when the bubble burst so too did the personal balance sheets of tens of millions of Americans and by doing something about it, Bernanke deserves huge praise.
Most likely he will talk about what is the best policy when there is a liquidity trap. A liquidity trap is when there is so much debt around that the people have too much ”personal debt and they don’t want to borrow and the banks have so much ”bad debt that they don’t want to lend. In such circumstances, cutting interest rates alone is ineffective. Someone has to come in and spend and invest.
If it is not companies or people, it has to be the government. Otherwise as we see in Ireland, unemployment rises to double-digit levels and emigration becomes rampant. Also, lots of companies that close down don’t re-open and initial unemployment can become long-term unemployment very quickly.
Bernanke’s genius was that he could see that with no demand there would be no inflation and he could print as much money as he felt was necessary, buy as much government debt as he needed to and there would be no increase in interest rates. This is exactly what happened in the US and as US unemployment heads, albeit fitfully, to 6 per cent, it is hard to argue with diagnosis and medicine.
This brings me to the wagon we are hitched to, Europe.
In the eurozone the liquidity trap that Bernanke identified is far, far more dangerous. Bank lending has been falling for years now. Inflation is non-existent and worse still, most of the €1 trillion that Mario Draghi lent to the banks at the height of the crisis, to lend out to the economy, has been repaid to the ECB.
If ever there was an example of a liquidity trap, it is the European banks paying money back to the ECB when companies and people are starved of credit – as is the case here, Italy, France, Spain and Greece.
Yet rather than have a Summers or Bernanke – public intellectuals who are prepared to take risks – we have faceless bureaucrats who read from pre-written scripts and misdiagnose Europe’s problems, allowing the rate of unemployment in the EU to rise relentlessly.
Whatever you think of the Americans, they will not tolerate unemployment at European levels and are prepared to throw everything they have at the problem. True, there may be unintended consequences, but better to have tried and failed than never to have tried at all.
Is it any wonder that mainstream party candidates are likely to get hammered in the European Parliament elections in the coming months?
I will keep you up to date on what these giants of American economics and finance say via twitter @davidmcw, but in the meanwhile, I’d better head off and write that speech.
David McWilliams explains every day what’s going on the global economy at globalmacro360.com