The world is in the throes of a demand crisis, so to save the global economy, three countries should take it upon themselves to buy the world.
This was an idea floated by HSBC economist Stephen King in a note on Wednesday morning called “Unhappy Families: The Case for International Policy Coordination.”
The countries that he says should take on this buyer’s burden are the US, Germany, and China. They have the savings (or the dollar power) to spend us out of the global growth drought we’re in.
But they won’t. And that’s because of a nebulous concept that’s been quietly floating around in bearish circles for almost two years. Wall Street is beginning to realize that in 2014, when everything in the market seemed to be turning around, a bubble burst.
This bubble isn’t an asset class. It’s not housing or stocks or bonds. The bubble is trust. And what the bursting of that bubble has done is made it impossible to fix our economic problems. We are frozen in our stagnation.
Because you see, as we’ve argued before, trust isn’t actually nebulous concept at all. Trust is credit, and it’s what makes the world go round. Without it, the world stops, just as it’s doing right now.
Even in the best of families
This is the world right now. Economically, the US is the best house in a bad neighborhood, as the EU still struggles to recover or even stay together as a concept (think Brexit). Emerging market economies are reeling from low commodity prices and political turmoil (the president of the seventh-largest economy was just impeached). In China, an attempt at economic reformation is leading to a worse-than-expected economic slowdown.
How do we fix it?
“We argue that a concerted effort from the world’s new economic G3 – the US, China, and Germany – could lead to higher levels of global demand,” King wrote in his note.
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.
Instead of working together, King argues, countries are pointing the finger of blame for this slowdown at one another. The US at China, China at the US, Europe at the financial crisis – and so it goes.
In past efforts at coordination, the culprit of anemic growth was clear. King specifically references the battle against dollar strength starting in the 1970s and the subsequent Plaza Accord of 1985 as examples of when the world was able to coordinate against an obvious economic threat.
This time around, though, the culprit of this economic malaise is not as clear. Currency moves have been incremental, for example. From King:
Between January 1980 and February 1985 – the month in which the US dollar peaked – the ‘synthetic’ euro fell from USD1.49 to USD0.67, quite some decline. Over an equivalent timeframe – from January 2010 to the dollar’s more recent peak in November 2015 – the actual euro fell from USD1.39 to USD1.05, less than half of the early-1980s tumble. For the most part, the huge imbalances seen in the 1980s have disappeared … The only thing that really can be agreed upon is that global economic growth is distinctly lackluster. Agreeing on why growth is lacklustre is, unfortunately, a much trickier challenge.
Every man for himself
It’s trickier, in part, because of a concept King only swiftly touches on, but that we’ve been thinking of since 2014. That’s thanks to portfolio manager Dylan Grice of Aeris Capital, who wrote a brilliant note about what he called “Cycles of Trust.”
Back in 2014, the market was going nowhere but up and everyone thought the global economy was entering the next chapter after the financial crisis. Not Grice, though. He saw the writing on the wall. He saw that trust was breaking down.
“We … see it in the economic data,” he wrote. “The Latin word for ‘credit’ is ‘credere,’ which means to trust … And I think the cycle of trust has turned.”
Grice cited corporate lawsuits between companies and nations, building rhetoric between the US and Russia, and even squabbles between allies (thanks to NSA spying) as key clues that the cycle of trust that began with the G20’s Plaza Accord-like statements after the financial crisis was dead.
Enter King. He argues that China was really the only country that engaged in enough stimulus to prop up its domestic economy alone after the financial crisis.
The US and Germany abandoned the project and tightened fiscal policy.
And so it went.
Someone must consume
Where King improves on Grice’s work is in finding a solution. He comes up with a concept called the “consumer of last resort” and writes that the US, Germany, and China should share the burden of unlocking savings (or in the US’s case, the power of the dollar as the world’s reserve currency) and getting domestic spending going in full force.
These three countries need to buy the world.
Now think about the implications of these policies collectively. If all three ‘consumers of last resort’ were to deliver these concerted actions, they would not only boost their own economies: they would also boost the world economy: as such, they would themselves benefit from faster growth in world trade. In other words, although in all three cases, imports would rise more quickly in the short term, exports would also eventually grow, even if not at the same rate. By focusing on those countries which are in the best structural position to borrow more or save less, there would be less risk of financial instability. And, because global recovery would be more easily sustained, there would be a better chance of interest rates rising from zero.
But they won’t do this. The US is arguing with China about everything under the sun, from cybersecurity to the South China Sea. China is also, of course, doing whatever it has to do to guide its economy through a rocky transition to being consumer-driven.
Germany is dealing with a Europe where problems seem to never end – a feeling that makes a country want to squirrel money away for safekeeping, as Germany has done with its current account surplus.
Oh, and there’s the US presidential election, which … oh my God.