Solving the puzzle of uneven globalisation
The policy was supposed to lifts all boats, making everybody richer, but it is now obvious some classes of people have not done well out of it
If global policymakers are wrong about globalisation, and they could be, we may be in for more low growth, low rates and the high asset prices they support.
At issue is the bedrock belief that globalisation lifts all boats, making us all richer by allowing the flowering of individual countries' comparative advantage.
That some classes of people - low-skilled workers in the West, for example - have not done well out of globalisation should by now be obvious.
The big question is whether this is a transitional problem, a distributional one or something closer to a permanent condition.
One person who has thought interestingly about these issues is Stephen Jen, a hedge fund manager at SLJ Macro Partners. Jen argues, picking up on points made by economist Paul Samuelson a decade ago, that lagged effects of globalisation may be behind some of the peculiarities in both markets and economics we now observe.
"Traditional economists have been puzzled by the disappointing recovery in developed market employment and capital expenditure. Globalisation, we believe, could help explain both puzzles," Jen and colleague Fatih Yilmaz wrote in a recent letter to clients.
While this is far from mainstream economics, it is worth considering this line of thinking, and the potential implications for financial markets.
One idea is that globalisation, by introducing large new supplies of labour from emerging markets, has changed the relative supply and demand relationship between labour and capital. That helps to explain increasing wealth and income gaps and also wage growth suppression in the developed economies.
A supporting idea is that globalisation is contributing to the so-called secular stagnation that developed market economies seem to find themselves in. With capital in demand and labour in plentiful supply in emerging markets, money, in the form of investment, flows to where it gets better returns. Developed markets as a whole have had strongly negative net foreign direct investment for decades, and even the US has seen negative figures since the financial crisis.
That lack of capex in developed markets is, in part, a factor underlying both slow growth and poor job creation. Combine this with demographic headwinds, and you may have lower potential growth.
That, of course, is not how central banks see things, at least thus far. The result, and implication, is that the policy and growth mix we have seen - very low rates, very low growth and very low inflation - are perhaps a feature rather than a bug.
What this has meant for asset prices so far is that riskier investments have been very well supported by emergency policies which far outlast the emergency.
The puzzling inability of the economy to grow strongly, create jobs and drive wages higher is met by policymakers with low rates and easy liquidity.
"For the financial markets, rather perversely, as long as policymakers see the great financial crisis as an exogenous demand shock, the low inflation and the still lethargic labour markets should allow the developed market central banks to persist with their extreme policies," Jen and Yilmaz write.
"In turn, financial repression ought to keep asset prices supported, all else equal."
Much depends on how central banks read the evidence around secular stagnation, and how their thinking evolves.
If central banks continue down the path they are now on, using asset markets as a means to stimulate growth which may not be all that responsive, you would expect asset prices to remain high, and debt markets particularly to be welcoming places for borrowers.
That might seem like good news for investors, but it does raise the probability of financial overheating and instability. The market goes too far, too fast and eventually we find ourselves in another crisis akin to 2008.
More interesting, if not more likely, is what happens if the views of policymakers evolve more towards Jen's. If central bankers start to believe that low growth is here to stay, then monetary policy will need to be normalised, if only to give some leeway in advance of the next crisis or cyclical downturn.