Collective and mutual understanding needed to get out of oncoming global deflation
Rajan: ‘We can no longer ignore the elephant in the room, either theoretically or practically. – Bloomberg
SPRING is the time for conferences. I was lucky to join two excellent conferences last week. One was in Singapore organised by the Nanyang Technological University Para Limes Institute on “Silent Transformations”, followed by another on “Advancing Asia – Investing for the Future”, organised by the IMF and the Ministry of Finance, India in New Delhi.
Para Limes (www.paralimes.ntu.edu.sg/Pages/Home.aspx) is an institute dedicated to complexity studies – the idea that we cannot see the world from partial analysis, but must take into consideration the interconnected complex whole.
Professor Geoffrey West, former President of the Sante Fe Institute (the first of the complexity institutes founded out of the scientists that participated in the Los Alamos nuclear programme) and a leading thinker on growth, innovation and urban life, delivered a brilliant view on the sustainability of present growth models.
Modern life and culture is increasingly urban, because the larger the city, the more efficient the usage of energy and resources, but there are costs in terms of pollution, crowding and spillovers.
In other words, growth accelerates exponentially until the economy reaches maturity and slows down, and if there is no longer innovation and change, growth can even become negative.
Life follows an S-curve (sigmoid for the technically-minded), and therefore growth can only be sustained with continued innovation and reform – exactly what the Chinese are attempting.
West’s ideas resonated with me during the “Advancing Asia” conference, where the future of India became a major theme within the Asian growth story.
India is today one of the youngest (demographic labour force) growth stories, today the fastest growing and by 2050 the largest population in the world.
Without doubt, the Indians intend to use 21st technology to leapfrog traditional forms of growth, including development through knowledge and services, and less through manufacturing, currently dominated by East Asia. In contrast, the Chinese economy, currently the world’s number 2, is slowing and also aging.
In Beijing, the world sighed with relief as the Chinese Premier Li Keqiang committed to steady growth, stability in the RMB and continuous reform.
As oil prices seemed to stabilise at around US$40 per barrel and the Fed committed to slower interest rate adjustments, financial markets actually turned back upwards.
The Delhi conference was marked by extremely high quality debate on the future of growth models.
The key question before us is whether Asia, as one of the fastest growth regions, can overcome the global debt deflation. There is an existential question that the West (advanced countries including Japan) is unwilling to address.
Reserve Bank of India Governor Raghuram Rajan, arguably one of the most thoughtful of central bank governors, posed the question as the “elephant in the room” – a big issue that is right in front of us, but none of us want to address.
The basic question is why current growth is slowing and what policies can we adopt to get out of this debt deflation trap.
The advanced countries refuse to adopt fiscal expansion, because of internal politics and the growing debt overhang. Increasingly, they use quantitative easing (QE) or unconventional monetary policy to try and expand aggregate demand.
The trouble is that QE is outliving its usefulness, but has very negative spillovers on emerging markets, such as volatile capital flows, declining trade and lack of long-term investments.
The unspoken policy conundrum is that advanced countries refuse to admit that these spillovers matter.
Firstly, these spillovers are notoriously difficult to measure accurately. Secondly, central banks owe their allegiance to domestic authorities and would ignore pleas by neighbours or foreigners.
Thirdly, no one wants to admit that QE basically amounts to currency depreciation, which then forces emerging markets to also devalue in order to maintain their competitiveness.
Governor Rajan’s view is that we can no longer ignore the elephant in the room, either theoretically or practically.
If we continue to do so, the whole system could degenerate into a global deflation or worse.
Hence, he argued cogently for the beginnings of a conversation on how to grow stably and sustainably together, namely a consistent and legitimate set of international monetary rules.
The Delhi conference laid out the fundamental dilemmas in today’s growth trap. Monetary and fiscal policies are conducted through national agendas, which have spillovers onto others, but these policies do not add up in a global system.
Both the theoretical and geopolitical framework are partial, interactive and contradictory, because what is right for a single country can be wrong for the system as a whole.
Partial views are like blind men trying to describe an elephant. None of them get it right.
But partial or silo views end up with individual action or non-action that may be collectively wrong. For example, former Fed Chairman Dr Bernanke famously argued in 2005 that the US lost monetary control because of excess savings by the emerging markets.
From a system point of view, this is like an elephant complaining that it has become fat because the grass is growing too much. The grass grows because the elephant’s piss and poo fertilises the plain, whereas the gas emitted increases carbon as a spillover. Indeed, if there is too much liquidity provided, some of the smaller animals get drowned.
The yuan faces a similar dilemma. If it devalues, temporarily Chinese trade will recover, but if everyone devalues at the same rate, there will be no advantage.
However, China will have to undergo even more painful deflation with a stable exchange rate against the US dollar.
Because of China’s size, many of its trading partners could be hurt if China slows further.
Collectively, the current global monetary rules do not acknowledge a collective action to help make such adjustments more smoothly.
There is an old African and Asian saying that when elephants fight, the grass gets trampled.
The grass gets trampled even when elephants are dancing. We need collective and mutual understanding to get out of the oncoming global deflation.
But leadership and statesmanship are scarce when the dark clouds loom. For the next year or so, electioneering and partisan views will trump moderation and mutual understanding.
When bull elephants like Trump trumpet their charge, beware of global consequences.
By Andrew Sheng
Tan Sri Andrew Sheng writes on global issues from Asian perspective.
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Trump victory a major global risk: EIU
Short-sighted: Trump's unpredictable foreign policy policy is making many observers nervous - AFP
LONDON: The prospect of Donald Trump winning the US presidency represents a global threat on a par with militancy destabilising the world economy, according to British research group EIU.
In the latest version of its Global Risk assessment, the Economist Intelligence Unit ranked victory for the Republican front-runner at 12 on an index where the current top threat is a Chinese economic “hard landing” rated 20.
Anonymous launch ‘total war’ on Donald Trump to avenge ‘hateful’ campaign
Justifying the threat level, the EIU highlighted the tycoon’s alienation towards China as well as his comments on extremism, saying a proposal to stop Muslims from entering the United States would be a “potent recruitment tool for militant groups”.
It also raised the spectre of a trade war under a Trump presidency and pointed out that his policies “tend to be prone to constant revision”.
“He has been exceptionally hostile towards free trade, including notably NAFTA (the North American Free Trade Agreement), and has repeatedly labelled China as a ‘currency manipulator’.” it said.
“He has also taken an exceptionally right-wing stance on the Middle East and terrorism, including, among other things, advocating the killing of families of terrorists and launching a land incursion into Syria to wipe out IS (and acquire its oil).”
By comparison it gave a possible armed clash in the South China Sea an eight — the same as the threat posed by Britain leaving the European Union — and ranked an emerging market debt crisis at 16.
Defiant Trump stares down protesters after rally violence A Trump victory, it said, would at least scupper the Trans-Pacific Partnership between the US and 11 other American and Asian states signed in February, while “his hostile attitude to free trade, and alienation of Mexico and China in particular, could escalate rapidly into a trade war.”
“There are risks to this forecast, especially in the event of a terrorist attack on US soil or a sudden economic downturn,” it added.
However, the organisation said it did not expect Trump to defeat his most likely Democratic opponent, Hillary Clinton, in an election and pointed out that Congress would likely block some of his more radical proposals if he won November’s election.
Rated at 12 alongside the prospect of a Trump presidency was the threat of Islamic State, which the EIU said risked ending a five-year bull run on US and European stock markets if terrorist attacks escalated.
The break-up of the eurozone following a Greek exit from the bloc was rated 15, while the prospect of a new “cold war” fuelled by Russian interventions in Ukraine and Syria was put at 16.- AFP