Why has the recovery from the crash 6 years ago been so slow and feeble?

The ‘new mediocre’, as the response from the deepest recession in post-war history is now often called, is an anomaly that cannot be accounted for by the factors that mainstream economic models normally consider important.   One explanation which is gaining currency is that excessive inequality is to blame.   Even Lagarde, IMF Director, admits that inequality is casting a ‘dark shadow’ over the world economy, on the reasonable grounds that the rich and particularly the super-rich tend to save a larger proportion of their income than the poor, so that the huge increase in inequality, at least in the G20 and OECD countries in the last 30 years, is not just a source of social tension but also a major drag on demand.   That then invites the further question: why has inequality increased so much in the last 3 decades?   Probably the most powerful underlying factor is the rise of the neoliberal Thatcher-Reagan ideology which via untrammelled markets, deregulation of finance, widespread privatisations, and deep limitations on trade union rights which then allowed the rise of excessive corporate power to dramatically expand its share of national income.

Another view is that the vast overhang of public and private debt that the advanced economies have accumulated since 1980 is to blame for their stagnation.   When States seek to squeeze economies in order to pay down public debt accumulated in bailing out a financial collapse, it is unsurprising that households caught in the squeeze of shrinking incomes try to pay down their own debts by reducing their borrowing.   As a consequence employers have a disincentive to invest because they see that shrinking aggregate demand reduces the market for any increase in their goods or services.   There are only two other sources of demand available.   One is foreign demand, the excess of exports over imports, which has kept Germany dominance until the process of contraction in the surrounding periphery shut off even that source.   In the case of Britain the biggest balance of payments deficit in the country’s history has meant that has never been an incremental source of demand from that source at any time in the last 35 years.   The fourth source of demand is of course government expenditure, but 5 years of enforced austerity has put paid to that.

There are two real lessons from all this.   One is that Thatcherism and ordoliberalism inaugurated the pre-crisis era of debt-fuelled growth which the ideology of self-regulating capitalism allowed to get completely out of control.   And then, secondly, when a profound financial crash tanked virtually the global economy, very big and continuing cuts in government expenditure are the wrong way to seek recovery because of the adverse impact on demand, when what is really needed is public investment to kickstart the economy into sustainable growth to the point where businesses will perceive a rising level of demand sufficient to justify their own increased investment.

4 thoughts on “Why has the recovery from the crash 6 years ago been so slow and feeble?

  1. Excessive inequality is a symptom rather than a cause of the slow, sluggish snail like recovery.

    Japan has been using Quantitative Easing for twenty five years and they are still not out of their recession, so why on Earth did Gordon Brown and George Osborne agree to go along with this method of creating central bank money then buying back Government Debt? One reason is that if the Banks don’t have the Government Debt, then we don’t have to pay interest on it. Sounds good so far, so why isn’t it working.

    Mervyn King explained that all it does is prevent the Banks from failing by boosting their reserves. It slows down the decline without boosting the main economy. £375 billion pounds of central bank reserves was created by the Bank of England then used to swap out Private Banks Assets. It does prevent a collapse but does not create a strong recovery because Banks (partly through additional lending restrictions) haven’t been lending.

    This is like having a foot on the accelerator and a foot on the brakes simultaneously.

    Private Banks used their influence to persuade the Government (partly through lobbying firms and campaign funding) to stick with this method as it’s the one that helps them the most, not us. During the ICB (Independent Commission on Banking) Full Reserve Banking was discussed but dismissed in favour of “Ring Fencing”.

    The Glass-Steagall Act was also rejected which would have separated Retail from Investment Banking. The ICB recommended the minimum changes they could get away with and so could be considered a Pro-Private Banking lobby group – it was NOT “Independent”.

    The argument against Full Reserve Banking was that it would restrict lending by Banks. They also used the argument that money in deposit accounts would not be able to be lent as they had to maintain 100% reserve. What they totally ignored is that Money creation would be transferred from the Private Banking domain to the Public Government Domain and that there would be investment accounts that would allow lending. The creation of money by the Government (through an independent body like the MPC) would restrict the Government from creating too much but allow newly created non interest baring money to by used to fund public works, so injecting money directly into the economy bypassing the Control of the Bankers.

    Obviously this had to be stopped, and so the ICB recommended against it – and of course – they are the “Experts”.

    That’s why Housing Prices and going up and wages aren’t, that’s why Stocks and Shares in the Casino Financial World are going up, and it’s business as usual.

    That’s why Deloitte is still the Auditors of RBS because if another auditor took over, they might question the value of the Assets on RBS’s balance sheet which would trigger a new Financial Crisis. This is also why House Prices aren’t part of the Inflation Index and why we have the rigged figure of CPI to give the illusion that inflation isn’t that bad.

    But food seems to be increasing a lot more than 1.2% (CPI). RPI is 2.3% (September 2014), but the real rate of inflation as calculated twenty years ago is closer to 8%. House Price Inflation is above 10%.

    Wage increases are no where near the actual rate of inflation. That’s why disposable income is reducing which will feed back as reduced sales and spending, and lending. When that happens, the “credit” supply or “Money” will reduce and a new deeper recession will occur which could result in another twenty years of low interest rates and QE. We’re going Japanese.

  2. It is indeed is your birthday, so then many happy returns and wishing you many more of them:

    Dipsychus

    By Arthur Hugh Clough

    (English poet and scholar, friend of Tennyson and Matthew Arnold, 1819–1861)

    AS I sat at the café, I said to myself,
    They may talk as they please about what they call pelf,
    They may sneer as they like about eating and drinking,
    But help it I cannot, I cannot help thinking,
    How pleasant it is to have money, heigh ho! 5
    How pleasant it is to have money.

    I sit at my table en grand seigneur,
    And when I have done, throw a crust to the poor;
    Not only the pleasure, one’s self, of good living,
    But also the pleasure of now and then giving. 10
    So pleasant it is to have money, heigh ho!
    So pleasant it is to have money.…

    I drive through the streets, and I care not a damn;
    The people they stare, and they ask who I am;
    And if I should chance to run over a cad, 15
    I can pay for the damage if ever so bad.
    So pleasant it is to have money, heigh ho!
    So pleasant it is to have money.

    We stroll to our box and look down on the pit,
    And if it weren’t low should be tempted to spit; 20
    We loll and we talk until people look up,
    And when it’s half over we go out to sup.
    So pleasant it is to have money, heigh ho!
    So pleasant it is to have money.

    The best of the tables and best of the fare— 25
    And as for the others, the devil may care;
    It isn’t our fault if they dare not afford
    To sup like a prince and be drunk as a lord.
    So pleasant it is to have money, heigh ho!
    So pleasant it is to have money.

  3. just pure greed by all isnt life strange when your tables full of food whilst the begger goes without life it seems starts at that great house but they forgot the plebbs allowing them to suffer the abuse of greed if its your birthday happy birthday micheal but many wont get that they starve they die they go without they are the ones paying the price for all the greed isnt life strange when you turn on the heating sorry leave it on many cant afford this strangly but greed its got the lot of you jef3

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