The whole world is obsessed with the idea of growth. The perception is that if we don’t grow we somehow stagnate or go backwards, becoming lesser peoples or nations. Given, however, that compound growth is not even possible over lengthy periods, why this absolute fixation on growth? Is growth truly the ‘be all and end all’ and the panacea, to the world’s woes?
Since many of the solutions proposed following the global financial crisis (the recession) are unlikely to be sustainable, “so much of what we simply take for granted will be challenged,” says Glenn Silverman, Chief Investment Officer at Investment Solutions. As such, a far more balanced and nuanced, understanding of growth is required. Capitalism has proven to be the best economic system that there is but it, too, has its flaws. As such, a more sustainable version of Capitalism is called for, one that focuses on sustainable growth, not growth at all costs.
Despite all the hype around repeated bouts of quantitative easing along with ongoing European Central Bank initiatives, the recession and its aftermath is still with us.
“Millions who were retrenched remain unemployed, hundreds of smaller US and other banks have closed down. Zero Interest Rate Policies (ZIRP) operate in most of the West and Japan. Japan is now in its second decade of recession with no end in sight. Government and central bank balance sheets, in the West and in Japan, are in a deplorable state, with financial repression now an increasing and disturbing reality” explains Silverman.
In the face of this, the governments of the day, supported by their cronies, the central bankers, continue to preach the message that if the world could only get (massive) growth going again - all will be well. Since, “it was massive unsustainable excess, especially with respect to debt, that created the conditions for the great recession, it’s hardly likely that this can also be the cure,” adds Silverman. Or, put another way, if debt-driven growth was the cause of the problem, then more debt is unlikely to be the solution.
In a world of deleveraging, achieving any (non-debt driven) growth, let alone strong and sustainable growth, in the West or Japan, seems highly improbable. Far more likely outcomes in these regions would be:
- increased taxation (both in terms of percent, and spread);
- more regulation and increased government interference;
- financial repression in the form of capital controls, prescribed assets etc;
- increasingly creative accounting and brazen manipulation of rates and markets – already the hallmark of Western economic policy;
- an increasingly challenged welfare state, especially in Europe, where promises made by governments to electorates can no longer be afforded or met.
Default, in some form or another is the likely outcome.
“This may be of the official kind – which is the least likely, if you consider that Greece has apparently not defaulted over the past two years, or through inflation – as the debt numbers, and the associated central bank actions simply become too large,” says Silverman.
Or, put another way, in a world of zero short-term interest rates (and promises by the likes of the US Federal Reserve to maintain these until 2015), with the ‘safe haven’ government bond yields already forced lower through quantitative easing and trading well below both current and future expected inflation levels, the whole fixed income market is (openly) manipulated, unattractive, and vulnerable.
In spite of this, today, markets appear as calm as a lake. Indeed, it appears as if the enormous firepower of the US Federal Reserve, the European Central Bank, the Bank of Japan and the Chinese have achieved their desired outcomes. But can this be sustained? Will the more recent cycle not simply be repeated – with yet more creative measures introduced following further sell-offs – but with sustainable growth remaining elusive.
Only time will tell what the unintended consequences of these enormous unconventional debt-driven measures will be. Many commentators talk of the return of inflation, the more bold, of hyper-inflation. Until then, Silverman suggests “one keeps ones radar on and ones antennae alert to danger as, whilst the current positive momentum may continue for a while, the unsustainable fundamentals are likely to re-assert themselves.”
Until the world is set on a more sustainable path to growth, an environment of volatility, slow or no growth repeated debt-induced crises will likely characterise the world for years to come.
(Article supplied by Investment Solutions)