- In HBO’s Game of Thrones, viewers have learned that there’s a threat greater than losing the fight for the throne – it’s the Night King and his army coming from beyond the wall. So it is with our global economy. Issues that have been consuming policymakers aren’t touching on the very real, very big threat to growth – deflation. Fighting it will take skill and coordination that our current President lacks.
Let me start this out by first saying, I’m sorry, but we have to have a Game of Thrones analogy about the global economy. We just have to.
So here it is. Spoiler alert to the Philistine’s who have yet to see Season 7’s finale.
By now we all know that everything going on in King’s Landing, the capital of Westeros, is a sideshow. The game for who is in control of the Iron Throne will ultimately mean nothing if the entire continent is turned into zombies. No one will care whether or not the King of the North is bending a knee, or whether or not enough funding is being sent to the Night’s Watch at the wall.
Cersei, in her insistence on continuing to play the game while everyone else goes off to fight the Night King and his army, is being selfish and evil to her own detriment.
And so it is with the global economy. In our King’s Landing, Washington DC, Donald Trump has everyone fighting about funding the wall and where their loyalties lie. The real danger, however, is being ignored – that danger is deflation.
It’s coming for all of us.
The action on the Wall
Since the financial crisis, the US Federal Reserve, like other Central Banks around the world, has been using extraordinary measures to make sure that deflation doesn’t take us all down. That’s what this low interest rate, bond buying policy coordination has been all about. It’s why every central banker is praying for 2% inflation.
Deflation is a state in which there is a ton of supply, but not enough demand. Prices are cheap, and labor is cheap, but people don’t have enough money to buy that stuff. It’s caused, in part, by automation – robots taking people’s jobs. It’s also caused by a lack of purchasing power and economic growth.
Deflation, if you will, has the ability to zombify the global economy. It can make the economy move as slowly as the white walker army.
All of the economics geeks, finance reporters, guys who run money, central bank watchers, and other news freaks have been worried about this for years. At the same time, though, some have been worried about what monetary policy meant to fight deflation is doing to other aspects of the economy.
“We don’t understand very well why inflation is low. And therefore, should inflation be an over-determining factor in monetary policy?” Mohamed El-Erian, Allianz SE’s chief economic adviser said in an interview with Bloomberg. “On the other hand, how concerned is the Fed about elevated asset prices?”
In other words, fighting deflation has made other aspect of the economy, like the stock market, turn bubbly. As such, some people believe that the Fed’s watch is over – monetary must be normalized. The wall the central banks built around the global economy is slowly coming down (inflation does not have an ice dragon, thank the lord) and we now have to use other means to fight this force.
- HBO/Helen Sloan
We need a Jon Snow ASAP
The problem is we don’t have anyone in Washington rallying the world to fix this. We could really use a Jon Snow to rally everyone against deflation, but all we have is Donald “Queen Cersei” Trump in the White House starting fights and creating chaos.
The Republicans in Congress aren’t much better. Let’s set aside the fact that they can’t seem to pass legislation, the legislation they have tried to pass – and the positions they have on the issue of the day – would only exacerbate our deflation problem.
Let me go down the list:
- On immigration: Fewer people means fewer workers, fewer workers means fewer people to buy stuff. Economists pretty much agree about this across the board, which is why no one in corporate American is happy about rescinding DACA. On taxes: Giving rich Americans a tax cut is a blip on the global economic radar, and that seems to be the only thing on the GOP tax agenda that would change the economy. Lowering the corporate tax rates to 20% -25% while closing loopholes would bring the tax rate down to what corporate America pays on average with tax loopholes. Regular taxpayers barely benefit from the “plan” as it is – so no help with purchasing power there. The budget: In times of deflation the government should ensure that people have money, not cut programs and benefits. But that’s what the Republican budget does – especially to the young, the sick, the poor and the vulnerable. Trade and international relations: Trump is upsetting governments that used to be willing to work with us by haranguing them about trade deficits that don’t matter and arguing for destructive tariffs. This has dark implications we’ll get to in a moment.
Back in May of 2016 HSBC economist Stephen King wrote a solid paper about how three countries could save us from deflation – a global demand crisis. It was called “Unhappy Families: The Case for International Policy Coordination.” In it he argued that Germany, the US and China have the power to fight this if they can Jon Snow this thing and work together.
From the paper:
The US could take advantage of its reserve currency status to borrow more. China could encourage its consumers to spend more and save less. Germany could abandon its trade surplus obsession and stop over-investing its excess savings in poorly-returning activities elsewhere in the world. All three countries could become ‘consumers of last resort’.
Yet while a deal is desirable – it would boost world trade, reduce deflationary pressures and pave the way towards tolerably-higher interest rates – the chances of it happening are low: disagreements on prescription, policies and politics will not easily be overcome.
Trump can make this worse
Back to trade and international coordination. Of course I haven’t seen season 8 of Game of Thrones, but I’m willing to bet that if Cersei Lannister doesn’t stop playing her game, she’ll harm the efforts of everyone fighting the real danger.
- Helen Sloan/HBO
So it is with Donald Trump.
As we all know, Trump is itching to slap tariffs on China, end trade agreements with countries we’re friendly with, and destroy the North American Free Trade Agreement. It’s hard to find a legitimate economist on the face of the planet who doesn’t say this would be terribly destructive.
Last year, Citi’s chief economist, Willem Buiter, suggested that throwing up tariffs could lead to retaliation from other countries (a trade war) and “could easily trigger a global recession.” In fact, it would give us something we haven’t seen since the 1970s – stagflation, a cocktail of persistently low economic growth, high unemployment, and inflation. For average Americans, that means prices are rising but a weak economy means incomes can’t keep up.
That would be like giving the white walkers dragon buses so they hop in, ride down, and take over Westeros even faster.
Even without stagflation, though, we are running out of time. We’re still on a slowly growing planet and the wall that central bankers have built since the financial crisis is gradually coming down whether we like it or not. When (and if) if finally does come down everyone will realize that winter isn’t coming, it’s here.