As the global balance sheet shows, quick gains are costing us our future

The fillip from fast and loose monetary policy has ended, and growth is set to plunge to its lowest level in 30 years
Reviving this requires thinking and acting for the long term – and it might take a deep and painful recession to get everyone on board

Andrew Sheng

Published: 3:30am, 3 Jun 2023

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The planetary system and global economy are hugely unbalanced because of climate warming and widening social inequities. Furthermore, Big Power rivalry and disruptive technology threaten to push these imbalances beyond fragility, possibly even towards collapse. What should we be doing about these existential threats?

The simplest way is not to think about them; another way is to deny they exist. One option is to consider that these huge issues are way beyond our paygrade, so it’s really the responsibility of our political leaders or someone else to solve. We can’t solve them individually, so someone else must do the work.

We might as well add political and business dysfunctionality to the “what, me worry?” box. All I need is another media report telling me it’s all the fault of the Chinese, Russians or pesky foreigners.

My training as an accountant is to default to the balance sheet. What is that telling us?

The McKinsey Global Institute’s report last week, “The Future of Wealth and Growth Hangs in the Balance”, showed that, until recently, the global balance sheet has been inflating faster than real economic growth. A report two years ago warned that the global balance sheet had tripled over the 20 years from 2000 to 2020, mainly due to asset price inflation.

Asset prices rose under loose monetary policy and lower interest rates, essentially short-term action to pump up growth. After the 2008 global financial crisis, interest rates in advanced countries fell to near zero, until last year. After the Ukraine war shock, the US led a rebound in interest rates to deal with higher energy and food price inflation, and global households lost US$8 trillion in net wealth last year as equity and bond prices tumbled.

In its latest report, McKinsey undertook four long-term scenarios to see how the world balance sheet will evolve: a return to the past; higher (interest rates and inflation) for longer; a balance sheet reset; and, productivity acceleration. Under the first, essentially more of the same policies of the past 20 years, we will have weak investments, a savings glut and sluggish growth.

In the second, higher interest rates are maintained, keeping the real rate positive so real growth and investment is stimulated, but there will be losses in real wealth.

The third scenario is like Japan after its real estate and equity bubble burst in the 1990s, with drawn-out deleveraging and a sharp contraction in asset prices. This could be very painful for many rich and ageing economies and bad for emerging markets, with sharp drops in both the equity and property markets.

The fourth and ideal scenario is to accelerate productivity, so that economic growth catches up with the balance sheet, and the global economy gains in income, wealth and balance sheet health.

McKinsey’s scenario-building (not forecast) comes on the heels of the World Bank’s long-term projections that the world’s potential growth rate will fall to a three-decade low over the rest of the 2020s, because all drivers have weakened, such as investment growth rates, total factor productivity (a measure of how efficiently an economy uses capital and labour) and international trade growth, even as the global labour force ages.

Add to this a fragmenting global consensus, decoupling supply chains, climate change, disruptive technology and war, and it’s small wonder the outlook is gloomy.

McKinsey argued that accelerating productivity growth will require not just policy imagination, but bold investments in youth, empowering underprivileged groups with education, skills training, health support and infrastructure. In short, think and act long term.

While we recognise that Great Power rivalry stalls global cooperation, this does not mean that many countries, like those in the Association of Southeast Asian Nations, cannot undertake imaginative policies to enhance domestic productivity and build regional cooperation regimes in trade, investment, education and infrastructure. The ants will still build their nests even as the elephants fight.

Economists and technologists always seem puzzled by the “missing” productivity numbers despite the rapid acceleration of computer technology. Specialists often forget that productivity is an ecosystem trait that can only show up when you manage the ecosystem’s functioning as a whole.

Asean wants no part in US-China rivalry or an unjust war over Taiwan

In other words, management and organisational skills are key to ensuring that all parts of the system function to deliver productivity as a whole, rather than in parts. You do not get productivity gains by taking short-cut drugs for a quick boost. You do it through persistent exercise and hard work.

Many policy objectives have wonderful aspirations and inspiration, but delivery is dull. This is because ecosystem building is for the long haul and takes time; those who only go for the low-hanging fruit find that these are not sweet enough or else they rot too quickly.

One defect of electoral democracy and free-market policies is that both politicians and businesses tend to focus on the short-term election or reporting cycle. Politicians need to meet a four- or five-year election cycle at the national level, but if you add local elections, most are electioneering every two years or less. The businessman who reports every quarter on profits will focus only on delivering short-term profits rather than long-term projects.

Short-term gains always come at the cost of long-term growth. How to get everyone to focus on the long term? Only through a deep recession or everyone hurting badly at the same time. Those are the sad facts from mad politics and bad economics.

Andrew Sheng writes on global issues from an Asian perspective