The more one is certain about the state of an economy, the more one is likely to be wrong; the more one is certain about the state of an economy, the greater the media coverage. No wonder the public is confused.

I shan’t add to the confusion. In quick summary, the New Zealand’s economic growth seems to be slowing down but we don’t know whether it will go negative and economic activity contract.

* The Australian economy  is in the doldrums.

*Chinese economic growth seems to slowing down from an underlying 15 percent a year to 5 percent. That is not as bad as slowing down from 5 percent p.a. to minus 5 percent p.a., but many firms could still get caught out.

* The European economy remains sluggish; I am guessing it will remain so until it resolves the problems of Greece and some other Mediterranean economies.

* The US economy is a bit of a mixed bag; it has some of the characteristics of the 2007 economy just before the Global Financial Crisis when we knew something was wrong, although the current indications are that 2015 is not as problematic as 2007 was. The only certainty is uncertainty.

These summaries describe the state of the various business cycles, but each fluctuates about a long-term trend. The problem may be that it is changing, not only in China but in the world generally. There are some economists – including the eminent Larry Summers – who think that the world economy may be in secular stagnation and that GDP per capita will not grow much in the long term.(Secular stagnation has been a long term concern of the profession; among those who have pondered on it are David Ricardo, Karl Marx, John Maynard Keynes and Joseph Schumpeter.)

Discussion at the moment seems more around the consequences of secular stagnation, rather than why. I’ll hazard a couple of suggestions (without going into the subtleties which underpin them).*

The first is that there is not really world-wide economic stagnation. It is confined to rich countries as they offshore production to poorer economies. I wrote about this in my Globalisation and the Wealth of Nations. It involves a complicated underlying economic model, but it has the interesting prediction (for us in New Zealand) that the price of foodstuffs relative to the price of manufactures (the terms of trade) will rise. I think I would want to add to my 2006 book that most of the countries to which the business is being relocated do not have high-quality rule-of-law regimes and that will slow down the world economy as a whole.

The second explanation relies on economic growth arising from technological innovation. The American economist who has best studied this in the long run is Robert Gordon. He does not think that current innovations are nearly as significant as those which happened a century ago, (Surely the impact of electricity has been greater than the computer; it is far easier to conceive a modern economy without the latter than one without the former.)

There may be a slightly different explanation to why Gordon cannot find the productivity gains in recent years that he found earlier. Recall the number of ICT applications for which there is no business case (i.e. their owners cannot figure out how to make a profit) but which are valued by the user. In this case their value may not appear in the productivity statistics.

It is this profitability issue which worries Summers et al. Low productivity growth means there have been fewer opportunities to invest, with the consequences that interest rates (and hence profits) are driven down. Perhaps today’s low international interest rates are not just a part of the cyclical adjustment to the Global Financial Crisis but are because of the secular stagnation; in which case they may be with us for a while. That would mean a dramatic change to the nature of the world economy – to capitalism.

For instance, it would invalidate Thomas Picketty’s predictions of increasing inequality (but not the analytic model he developed). Hedge funds would find it more difficult to make profits. (Perhaps that is why they are turning to funding such government-funded projects as improving mental health based on social bonds; it is a basic principle of capitalism that when private projects are not available investors turn to plundering the taxpayer.) Another significant consequence – many would say, already evident – is that macroeconomic policy could not rely upon monetary policy in the way it has in recent years, because interest rates would be very low.

To add to the uncertainties a recent issue of the London-based Economist argued that the US economy may no longer be strong enough to be the banker of the world. It fears that come the next financial crisis (I don’t think it expects one soon), the US, the IMF Old Uncle Tom Cobley and All will not be able to bail the system out, even if the US policy response is more coherent than Congress would currently allow.

OUTC&A includes China. Its renminbi is subject to too many restrictions to act as a reserve currency (say in tandem with the US dollar). The Chinese have a saying ‘may you live in interesting times’. Uncertain ones certainly are.


* Footnote. A decade ago I would have worried about higher energy prices as a consequence of the rising cost of oil choking productivity growth. As I have argued earlier, fracking has delayed that


Comments (10)

by Andrew R on October 20, 2015
Andrew R

Another probable cost to economies will be climate change unless governments agree on action now.  If Paris is, however, successful it could be a big economic opportunity.

by Murray Grimwood on October 21, 2015
Murray Grimwood

Whether you 'argued earlier' or not, I'd suggest fracking has not 'delayed that'.Brian.

A decade ago, I'd have agree with you, but I knew nothing of money, forward debt or fractional-reserve-banking; I was an energy-nut.

Now I can put it all together. Every 'economy' - just like every you and me - needs an energy input. We have tapped into the best stuff we could find, changing from wood to coal to oil (gas was a backward step). We also tapped the best of each genre, first. So the best coal and oil have been burnt. They're gone. We are down to fracking, and Pike River, and deep-sea, and tar-sands.....

Upon that supply - and nothing would have happened without it, zero GDP anywhere - we built a growth-requiring fiscal system; not surprisingly, given that we could grow at that stage,

Obviously, supply of a finite resource peaks.

At that point you can go for efficiencies, but - as you point out - they follow a path of diminishing returns, eventually the effort you put in isn't returned. As with 1st-generation biofuels.

The fiscal problem then is that all this is based on borrowing, on the assumption that the future will deliver ever-more energy, to underwrite the ever-bigger debt being entered into.

Surely, past-peak, that underwrite must get increasingly stranded; less and less chairs every time the music stops. You can fudge it for a while; zero interest-rates, the odd bubble, increase you debt (USA) but eventually the pretence is too obvious.

Ang all that is happening while we attempt to keep a never-bigger set of global infrastructure maintained. All getting older. So we have US bridges and roading decaying, and so on. Expect more random failures, but don't confuse that with the fact that we have more people in more places, more planes in the air etc, so there will be more failures anyway.

But if forward debt has to be incurred to drill for the next lot of harder-to-get energy (essentially, every next one takes more energy to deliver that the previous, so every next source is a lesser net-energy supplier) then there is less real energy per repayment-ability.

So what we 'pay' for energy is linked to what we can re-pay in the future, using future energy. So there is an upper limite to what can be bid, before we go into 'recession'. and it has to get lower with time.

We will end up with renewable energy by default. Either we scare ourselves into it, or we'll exhause the finite; we'll know which happened before 2050. Renewables - and I'm a champion of them - don't do what oil does in EROEI terms, so 'a big economic opportunity' has to be qualified. The first to go there will be the most resilient as the Limits start to be felt, and it may be that fiscal collapse crashes the solar and tech supply-lines.

In that case, low-tech, easily fixed, long-lived, solar, sustainable, are the goals, and a no-growth-requiring monetary system. Natural Capital should not be spent, only the interest thereon; that's renewables and quotas, so laws and limits and monitoring.

So no 'free market', it was a short-term affair the only outcome of which looks like a trashed planet and a crashed population of many species.

Us included.


by Katharine Moody on October 26, 2015
Katharine Moody

@murray - excellent explanation. 

In case you are reading this - you'll be very interested in this rebuttal of tonight's screening in NZ of a 60 Minutes story;

by Katharine Moody on October 26, 2015
Katharine Moody

Brian, excellent piece as well. Although I can understand why you would be reluctant - they underlying implication as I read between the lines, is that we may be witnessing the end of capitalism as we know it?

by Brian Easton on October 27, 2015
Brian Easton

The standard view, Andrew R, is that measures to limit climate change will slow down economic growth (measured by GDP) in the medium run. In the longer run climate is likely to slow GDP growth down. (Think of the costs of building sea walls or relocating entire cities).

I think you have misunderstood the issue, Murray Grimwood. Suppose oil was today $250 a barrel ( instead of $50 a barrel). There would be an enormous amount of investment in alternative energy sources. Yet it would not give any direct return to GDP terms and so the underlying growth of the world economy would slow down. Thus the current low price of oil is putting off this day. Like you I wish we were doing a bit more to prepare for the high energy-cost days.

Of course, Katherine Moody, capitalism has been constantly evolving so in one sense capitalism as we know it is ending, probably to be replaced by another capitalism. What great economists like Maynard Keynes and Joseph Schumpeter were thinking about was that if the world economy were to go into a secular stagnation there would be a ‘euthanasia of the rentier’, that is interest rates would fall to zero and people could not live off the return on their savings. However, the economists allowed that there would still be a return to innovation and so to entrepreneurs. If this were to happen it could be an entirely different capitalism to that with which we are familiar.

by Katharine Moody on October 30, 2015
Katharine Moody

.. there would be a ‘euthanasia of the rentier’, that is interest rates would fall to zero and people could not live off the return on their savings... there would still be a return to innovation and so to entrepreneurs.

I'm thinking the 'return to innovation' stage was the lead up to the GFC. The innovation being, not in physical production/technology, but rather in rentier innovations - i.e., financial sector products, some that went wrong causing the GFC and other that still threaten capitalism today.

by Murray Grimwood on November 02, 2015
Murray Grimwood

Brian didn't read my comment.

To nyone with investigative skills - try reading my piece then his reply, The two cann'ae stand together.

That's the cognitive dissonance of our society, right there,

by Brian Easton on November 02, 2015
Brian Easton

To be honest Katherine, I am not sure that the financial innovation which caused the GFC contributed to material production or human welfare in the way that standard innovation (such as electricity) did. Of course the financial sector says it did, and some casual commentators said it did, although they are less likely to say so today. I'll try to write about it one day, but in the interim remember that a Ponzi scheme is a financial innovation.

I am sorry  Murray, I did read your your comment; I agree that one needs 'investigative skills' to appreciate what it was trying to say. I tried to cut through the length with a simple statement; I am not sure you have understood it. 

by Murray Grimwood on November 04, 2015
Murray Grimwood

Surely the question is whether the currently-held total of future buying-expectations, is underwriteable. If you just keep issuing 'money' as is being done now, perhaps you can inflate the expectations away, but mass disillusionment might be a problem.

Where we seem to differ, is that I don't think we can borrow the capex required for future energy, so we will never actually see '$200 a barrel' energy. We will coast along for a while - perhaps a year - on current production; thereafter the marginal 'price' will be too high to pay - regardless of 'demand'.

Each time we attempt to do so - out of desperation - we will instigate a GFC-type event. Eventually, one will disintegrate the system - you need faith to trade at arms length. No faith, no trade.

by Katharine Moody on November 05, 2015
Katharine Moody

Surely the question is whether the currently-held total of future buying-expectations, is underwriteable.

No, it's not. And I've yet to see any economist use quantitative analysis to prove otherwise. Which is why so many are turning to the debt forgiveness;

I love the graphic labelled "Without money we'd all be rich".

Post new comment

You must be logged in to post a comment.