For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital. For reasons I discuss below, this will have a large adverse impact on private consumption.
The only question left is how we deal with it. In the end, the response is more of a political question than anything economic -- modern politics specializes in sweeping problems under the rug long enough for them to become someone else's ... ad infinitum. Pettis goes on to point out that the most likely version of events is something akin to Japan. They have had banking problems for 20 years now, and all the while they have forced their consumers to continue bailing and bailing via passing this debt onto the state's books (sound familiar?) and then holding interest rates for short term depositors artificially low (sound really familiar?) while letting the banks rake in a fat spread.
... in Japan, during the past twenty years the Japanese government and the beleaguered Japanese household have been tasked with keeping the banking system alive. I don't know whether or not the banking system has finally been cleaned up, but for the purpose of my calculations it doesn't really matter. The Japanese government has been saddled with a huge nominal debt burden, which is only bearable because interest rates are kept artificially low. Forcing down the interest that depositors and bondholders receive means that borrowers are getting (albeit not visibly) substantial amounts of hidden debt forgiveness funded by household depositors.
So while he outlines a variety of logical possibilities for dealing with the aftermath of our recent giddy surfeit of trust, they all basically boil down to household consumers footing the bill one way or another as in Japan. Somebody that thought they weren't going to have to work so hard or live so well is now going to have to get off their keister. Politics is there to help us decide who.
One thing that he doesn't really go into in this post is the possibility of distributional differences. From a macro perspective this question is meaningless. Households will pay. It doesn't matter to a first order approximation whether these are rich or poor households. It seems clear to me though that there is a political dimension to the division of this burden. Perhaps one of the reasons that Japan's Great Recession has been so smooth (honestly, I know it sounds crazy, but Japan might be a success story, at least when compared with the Great Depression) is that they have a relatively egalitarian society. Here in the third world, we might expect a few more bumps in the road.
The end of his post also contains a very interesting suggestion that I haven't thought through yet completely.
Until the banking messes are cleaned up, I think we shouldn't count on household consumption to save us. The only solution I can think of for this problem is if governments — especially China, Germany and Japan — use their resources of wealth to clean up the banking mess without forcing households to do it. How? they need to privatize their vast holdings of assets and use the proceeds either to clean up the banks or to prop up household wealth. This will require a major political reform, especially in countries like China, but I have no doubt that eventually we will get there.
Privatization is sort of a bad word today, especially in places like China, but I bet it will become eminently respectable again in a few years. But until then, and as long as the banks are in such bad shape, do not expect consumers to ride to the rescue.
If the basic issue is getting people to trust one another and their government enough to get back to fucking work, then letting them feel some access to the wealth they have collectively built up in the form of State ownership might be a good solution. Unfortunately, the biggest problem we have everywhere is that the mechanisms that hold these collectives together are malfunctioning. We are at the point of completely dropping any pretense that any political party can act "for the people". It was always a bit mystical, this "people", but perhaps there was some amount of mechanism there for their "will" to get transmitted. Now, it's like we've got one guy working the brake and another handling the wheel, and the two can't even talk to one another. So it's hard to count on these guys to come up with the most equitable and efficient division of labor.
No comments:
Post a Comment