It’s time for global money printing

Governments need to muscle up on deficit spending initiatives, especially attuned to infrastructure and public works investment

PUBLISHED : Monday, 18 July, 2016, 10:45am
UPDATED : Monday, 18 July, 2016, 11:05pm

Without a shadow of a doubt, the world is in deep trouble and in desperate need of fixing. Whether it is the threat of another hard landing, growing security risks or rising political instability, it all underlines that the world is in a fragile state right now. It hardly helps that leading policymakers are at a loss on how to solve the crisis. Something needs to be done soon or global investor confidence risks imploding.

World events in recent weeks underline the threats are escalating. The Brexit vote in the UK, the latest terrorist attacks in France and the attempted coup in Turkey hardly help the global mood. It would not be so bad if the world economy was on a surer footing, but there are major doubts creeping in over the sustainability of global growth and the ability of policymakers to ensure that momentum keeps going for recovery, not recession.

Laissez-faire market economics failed spectacularly in the run-up to the 2008 global financial crash

Just at the time when nations need to rally together, policymakers are pulling in different directions. The US Federal Reserve is hardly inspiring much confidence right now as it is still not clear whether US interest rates are going up or down in the next few months. Global monetary stimulus seems to be losing traction and especially while so many nations are fixated on fiscal austerity and beating down budget deficits. Europe is a major case in point.

Global leaders are running round in circles while the world economy is facing some of its gravest dangers. It is clearly time for a change in thinking. A coherent, universal plan should now be the top priority for the world’s governing bodies like the International Monetary Fund, the OECD, the World Bank, the Group of Seven nations and the G20. The world needs to embrace a new age of economic co-operation and harmonisation. Global policy-making needs a profound shake-up.

The world needs reasonable growth targets that look achievable. The IMF’s expectations for world growth running upwards of 3.5 per cent in the next five years should be downgraded, especially with world trade in the doldrums and continuing to fall well below long term growth trends. Strong growth rates in the past are no guarantee of future performance. The present paradigm has changed profoundly. Governments need to muscle up on deficit spending initiatives, especially attuned to infrastructure and public works investment, where strong multiplier spin-offs benefit the broader economy. Bigger budgets should not be an anathema.

Laissez-faire market economics failed spectacularly in the run-up to the 2008 global financial crash and it has only been the impact of Keynesian-style monetary and fiscal policy responses by the major economies that subsequently rescued the world economy. It is no good hoping that a QE-inspired boom in global financial markets can spontaneously spark consumer and business confidence into a new economic renaissance. The world needs better proactive leadership before it hits rock-bottom again.

The world needs a credible plan going forwards that can deliver sustainable recovery. It also needs better coordination. Britain is already making amends for the “shock of Brexit” with the Bank of England pre-committing to a big package of monetary measures in August, while new UK Prime Minister Theresa May has opened the door to easier fiscal policy by abandoning the last government’s balanced budget target. It is a small start but it needs to be repeated in a much bigger way by all the major economies to make any difference.

Unilateral actions need to give way to co-ordinated multilateral policy initiatives. Post-2008 reflation efforts would have had a much bigger impact in the early days of the crash had the euro zone joined in with the US, UK and Japanese QE programmes and not dragged its feet until 2015.

One of the major worries is that with signs that QE and zero interest rates starting to lose their potency, policymakers are turning to increasingly desperate measures to deliver faster recovery. The global economy is already loaded to the gunwales with a massive amount of derivative money thanks to QE and the central banks need a clear plan of action on how to reverse out of this when normality returns. The Fed’s US$4.5 trillion legacy of QE assets could be extremely toxic for global interest rate levels if released too quickly. It needs careful managing over the future.

There is too much at stake for market forces to tackle the problems alone and official intervention is urgently needed. Time is running out and global leaders need to get their skates on.

David Brown is chief executive of New View Economics