In "Perfect Storm" the head of Research at Tullett Prebon, Dr Tim Morgan predicts the end of Western Growth arguing that the last 250 years were an anomaly of the industrial revolution, which is now over.
To summarise the argument, Morgan identifies four trends which will mean Growth is going to be anaemic or non existent for the long-term, all coming together in the perfect storm. These trends are 1) The benefits of the move away from human muscle as a primary source of power have been largely spent, and there are no further equivalent gains to be had. 2)We are at the end of a credit super-cycle which has been inflating a bubble for the last 30 years. 3) Policy-makers have been blind-sided by rubbish data, and 4) the west is vulnerable to globalisation.
He's not even half right.
Let's look at his trends in detail: First he suggests that the debt bubble is equivalent to the south-sea bubble or the Tulip-mania. The UK and US are enormously endebted. There was not just a vast increase in public debt, but also private debt too over the past 30 years.
Gordon Brown, for example, proclaimed an end to “boom and bust” and gloried in Britain’s “growth” despite the way in which debt escalation was making it self-evident that the apparent expansion in the economy was neither more nor less than the simple spending of borrowed money. Between 2001-02 and 2009-10, Britain added £5.40 of private and public debt for each £1 of ‘growth’... Asset managers have a very simple term to describe what happened to Britain under Brown – it was a collapse in returns on capital employed. No other major economy got it quite as wrong as Britain under Brown, but much the same was happening across the Western world...While he is, of course right our economies are more indebted than ever before, the damage to the economy (or at least growth) from this has already happened. There was almost no private sector growth during the Labour years. Almost all the growth was due to immigration and increased public spending. Brown's "boom" was merely a public spending spree, masking a recession which was already happening. Much is made of the collapse of investment returns over the period. It's almost as if that huge increase in public debt sucked investment out of the private sector!
That process reversing would explain the no growth, but rather solid employment numbers that we've seen recently. Meanwhile the private and corporate sectors have been busily using the low interest rates to deleverage faster than at any time in history. The good news is the UK and USA are not going to go the way of Japan, because instead of committing to ever more "stimulus" we're all agreed on Austerity. Japanese debt now stands at 250% of GDP and they've enjoyed little growth in the last 20 years as a result. The Anglo-Saxon economies, in contrast have instead purged the bad debt from bank's balance-sheets (incompletely, but better than Japan in the 90's), refinanced, and hit the monetary nuclear button (Quantitative Easing) after 6 months, not 6 years.
Yes there's a 30-year asset bubble to unwind. That's not what drives real wealth. There is capital for innovative technology, so this isn't going to stop the long-term driver of growth: productivity. Yes, we're at the top of a 30-year bond bull-market driven by falling interest rates and falling risk appetites, and yes, interest rates will rise over the next few years. But the overall debt burden (including public, private and corporate) has already started to fall. Let's not forget the South-Sea bubble and Tulip Mania didn't derail western growth because the shape of balance sheets don't ultimately drive long-term growth. Technology does. There's no reason to suppose the credit crunch will do so in the long-run.
Next up, Dr Morgan channels the Socialist Workers' Party by suggesting globalisation is a disaster for the west because it's sucked "production" out of our economies. This is pure "manufacturing is special" wibble. Globalisation has, of course been a boon for Chinese wages, and as a result the phenomenon of offshoring jobs has run its course. Western manufactures now cost about the same, when the extra transport and extended supply-chain of Chinese manufacture is taken into account. Meanwhile, the Chinese, vastly wealthier than they were a decade ago thanks to offshoring, are now clamoring for Jaguars. We've created a market for the high-value manufacturing and services which never existed before. We in the west aren't producing less - the UK is a net exporter of cars for example - we just employ fewer people to make more.
The big problem with globalisation was that Western countries reduced their production without making corresponding reductions in their consumption...Morgan makes the standard pessimist mistake. Making things we can drop on our feet with fewer people means those people not hammering metal in Birmingham car-plants can train to be lawyers, or web-designers instead. We get cars AND websites. We're richer. We don't need to cut our consumption, or at least not as much as Morgan thinks we do.
In the interface between these first two trends Morgan identifies, there is a glimmer of truth. Because much of the growth in the noughties was debt-financed and ephemeral, we simply weren't as rich as we thought we were in 2008. The recession is the process by which we cut our expenditure to meet our income. Great. The economy is healing itself, and has been doing so for the last four years.
Any economic historian could tell you that recoveries from balance-sheet recessions are always slow. The credit crunch was the mother of such, and so the slow growth subsequently is not exactly unexpected, however unwelcome. The enormous private and corporate deleveraging, combined with public sector Austerity should, if the Keyensians are right trigger a depression. The fact that growth is merely flat should be grounds for optimism.
Trend 3) is that the financial statistics used are a grand exercise in self-delusion.
The critical distortion here is clearly inflation, which feeds through into computations showing “growth” even when it is intuitively apparent (and evident on many other benchmarks) that, for a decade or more, the economy has, at best, stagnated, not just in the United States but across much of the Western world. Distorted inflation also tells wage-earners that they have become better off even though such statistics do not accord with their own perceptions. It is arguable, too, that real (inflation-free) interest rates were negative from as long ago as the mid-1990s, a trend which undoubtedly exacerbated an escalating tendency to live on debt.I've long argued the current recession's seriousness is the direct result of Governments' efforts here in the UK and in the USA to use public debt to prevent a recession which should have happened in response to the .com crash in 2000. There has been little private sector growth in the UK from when Gordon Brown turned on the spending taps in 2000, to the crash of 2009. Furthermore, the use of CPI (which doesn't include house-price inflation in the inflation number) and failure to deal with the known problems with RPI, left were handy fictions in the public data. This probably massaged the true figures down, helpful to government, which stealthily cuts people's real incomes. There's more: open abuse of the disability benefits and education system was used to massage the unemployment numbers.
But you're not really surprised that I'm sympathetic to the idea Government and bureaucracy will indulge in self-serving self-delusion, are you? The good news is the Coalition has addressed some of these problems.
Because of this tendency for bureaucracy to indulge in self-serving lies, they pose the biggest risk to western growth. Increases in wealth are, as Morgan correctly observes, all about productivity growth. Where is productivity growth weakest? In the public sector which operates without competitive pressure. And which part of the economy has been growing the most for the last 15 years? That's right: the Public sector. It may take a decade of cuts and austerity for this trend to be reversed, but that's why I'm optimistic. Europe, the USA and UK have all made a start on trimming the burdens a much-derided but absolutely correct policy of Austerity. The EU is imposing Austerity on the nations with the biggest deficits, and the US fiscal headbangers of the Republican party are using the debt ceiling to impose a modicum of sanity on an unwilling president and the coalition is making cuts to services.
Shrinking public sector headcounts may be hurting GDP growth in the short term, but this is bringing the economy back from the debt-financed insanity. It may take a while, but unlike Japan, we seem to be willing to face the reality. Japan's experience shows clearly the party cannot be made indefinite.
It's the final trend: that the growth engine is winding down which is the weakest in the whole piece, yet forms the basis of the conclusion. Morgan suggests the growth which started with the industrial revolution is spent. He's wrong. The heat-engine: Steam and internal combustion power, hasn't even been fully deployed around the globe when a billion people are still using the ox-plough or digging stick. We've not deployed the technology of the 18th century to the world. There's still economic growth from crop-rotation, something which was cutting edge when Europe was recovering from the Black death.
Furthermore Morgan suggests there is no further equivalent growth to come. He's wrong. We're only just scratching the surface of what telephones for example can do for growth, let alone computers. Less than 10% of humanity has access to the internet, and that 10% hasn't yet worked out how to use pocket devices with access to all the world's knowledge available generate money.
The idea there's no growth to come is just laughable. The agricultural revolution and industrial revolution aren't even over. The telecoms revolution has barely started, and the information revolution is just a glint in the milkman's eye. There's two-centuries of growth for humanity right there. And that's before we start harnessing fusion power, driverless cars, abundant solar energy or whatever we come up with next.
Anyone who says "this time it's different" on the way up is wrong. The same is true on the way down.
The only unlimited resource is human ingenuity. That's why I'm an optimist, tempered by cynicism about Government's motives and competence. Simply by applying what we already know to those who don't, we can drag the billions currently in poverty out of it. Even better, when Governments facilitate rather than control the process, we can all get rich doing so. Globalisation isn't a zero-sum game. Innovation is happening. The credit super-cycle is being addressed (everywhere except Japan). The only thing I'll agree with Morgan, is that the public data is rubbish and so too was Gordon Brown.