On Friday, we brought you the 4 “D’s” of deflationary doom from BofA’s Michael Hartnett.
For those who missed it, Hartnett says the reason “an almost manic monetary policy been so ineffective at generating a broad, sustained economic recovery,” is that the following four secular deflationary factors are conspiring to impede a robust recovery:
- 1. Debt levels remain very large: according to the BIS, global debt as a share of GDP was 246% in Q4’2000, 269% in Q4’2007 and 286% in Q2’2014.
- 2. Deleveraging has impeded the housing recovery and its “multiplier” effect: CoreLogic’s Housing Credit Index, which measures mortgage credit availability in the US, has plunged from 100 to 42 in the past seven years; US mortgage credit outstanding has fallen more than $1tn since its peak of $14.8tn in ’08.
- 3. Demographics reveal a dramatic aging of the developed world’s population: in the next 10 days, 112,000 people in the US, Europe and Japan will reach the retirement age of 65.
- 4. Disruption via innovation in robotics, AI and so on, which the World Economic Forum forecasts will cause the loss of a net 5.1mn jobs in the next 5 years.
And so, those are the factors that explain why the DM world is stuck in neutral when it comes to economic activity. As BofA also suggested, the fact that the "recovery" isn't really a recovery goes a long way towards explaining why populist candidates and political parties are polling so well across the developed world.
So what, pray tell, can policy makers do to right the ship now that the world appears to have been thoroughly Japanified?
Well, to let BofA's Hartnett tell it, there needs to be some manner of "global policy coordination" à la The Plaza Accord to reignite "corporate and household animal spirits" and combat the dreaded 4 "C's": China, commodities, credit, and the consumer.
This policy coordination could come at the G20 Finance Ministers and Central Bank meeting in Shanghai next month, Hartnett writes.
We've long argued that if you want proof that the Keynesian insanity employed by DM central bankers has demonstrably failed, you needn't look further than global demand and trade, which are both in the doldrums.
In short, if you want to resuscitate demand, you need policies that have a real impact on those from whom final demand emanates. Inundating Wall Street with fungible liquidity doesn't accomplish that. It may drive asset prices higher, but Ben Bernanke's fabled "wealth effect" pretty clear doesn't exist.
So what's the answer, you ask? Is there any hope for centrally planned markets in the wake of the extreme turbulence that played havoc with equities in January? Can central bankers reclaim the narrative on the way to orchestrating a real recovery?
Well, probably not, but BofA says there are 4 points that must be addressed if officials intend to attempt a coordinated policy response to anemic global growth. Below, find commentary on a possible "Shanghai Accord".
* * *
In addition to the risk of a deeper profit recession, there is no doubt the recent sell-off has been exacerbated by policy impotence; the sense that policy-makers have little solution for global demand deficiency. A weak, disjointed recovery may also be threatened by the political shift toward capital controls in China, border controls in Europe and the US, as well as more aggressive redistributive taxation at a time of ongoing fiscal austerity.
There are some echoes of the period leading up to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the US dollar to help the US improve its huge trade deficit and spur economic growth out of the doldrums of the early-1980s. This pro-growth agreement was spurred by weak growth, macro divergence, and interestingly in light of the current political trends, rising protectionism in the US. Leading up to the 1985 accord, interest rates and inflation were low, but macro cycles were out of sync and exchange rates were targeted to induce macro convergence. In addition, West Germany agreed to tax cuts, the UK agreed to reduce its public expenditure and transfer monies to the private sector, while Japan agreed to open its markets to trade, liberalize its internal markets and manage its economy by a true yen exchange rate. All agreed to increase employment.
Most important was that the global policy cooperation inspired corporate and household animal spirits.
In a similar fashion, we would argue that the upcoming G20 Finance Ministers and Central Bank meeting in Shanghai (Feb 26-27th) offers an opportunity for policy-makers to seize the “expectations” initiative. It’s probably too early to expect a Shanghai Accord, and our deep concern is that the macro and the markets may first need to worsen to inspire the correct policy response. But absent a rapid improvement in the 4C’s, we believe the investment bulls will need to sit on the sidelines until a G20 meeting announces:
- A one-off devaluation in the Chinese currency
- Fed announces swap lines, or other measures of financial system support, to avert contagion into fragile EM’s
- The US Treasury announces it will act to pursue dollar stability, so as to help end the death spiral in US manufacturing, oil, and EM
- The US, Germany, UK and France promise fiscal stimulus to boost public investment, especially in high-quality infrastructure
* * *
The danger, Hartnett concludes, is that in order for officials to agree on the four measures outlined above, markets will need to collapse first. We close with BofA's simple conclusion:
"2016 risk is that markets need to panic [before there's a coordinated policy response]."