The developed economies, mainly the US and in Europe, have yet to see a full recovery from the global financial crisis. US economic prospects have continued to lag behind even the most pessimistic early predictions. The average growth rate of the US economy between 2008 and 2017 was only around 2%.
All the financial measures put in place by the US Federal Reserve and the European Central Bank in the form of bailouts, quantitative easing and lowering of interest rates have not been able to deliver sustainable growth in their respective economies. Unsustainable levels of growth have led to sick recoveries that feed on themselves, further impacting the rate of employment growth and creating an excellent case for secular stagnation.
The case for new secular stagnation
In the Great Depression era, secular stagnation was considered to be a condition where an economy endured negligible or no growth, low employment, and uncertain market behavior for a long period. Such a phenomenon is considered a result of monetary-policy failures.
But the new secular-stagnation hypothesis is quite contrary to earlier beliefs and boasts about the limits of monetary policy. it will be quite impossible for an economy to achieve reasonable growth, full employment, and financial stability through traditional monetary-policy measures.
Various other factors contributed to secular stagnation after the 2008 recession apart from the monetary-policy failures. The foremost among them is debt deleveraging, demographics, and declining productivity (deflation). These three factors are considered the “three D’s” monster threatening the global economy.
The next crisis for the global economy
Almost 10 years after the 2008 financial crisis, one of the critical issues policymakers face is why growth remains so sluggish in many advanced economies. One of the main factors contributing to this problem is debt deleveraging.
The financial panic caused by the great credit boom resulted in declines in property prices as well as too much consumer and household debt in the developed countries, as the bulk of the debt is owned by them. Afterward, uncertain market conditions, poor job prospects, and stagnant growth forced average people to tighten their belts and deleverage or reduce their debts.
Debt deleveraging has reduced the credit cycle and demand from the economy. It’s the key reason that the pace of the global economic recovery has been below normal across the world, especially in developed economies. The rise of a “demographic cliff” in developed nations has also contributed to the low credit cycle and debt deleveraging.
The demographic cliff
“Demographic cliff” is a term coined by the noted American economist Harry Dent. It’s mainly used to denote a phenomenon in a country in which the percentage of people of working age declines considerably. The root cause of this problem is declining fertility rates, as there will be fewer young people joining the workforce in the future.
A demographic cliff always contributes to a consumption cliff. A declining working-age population always creates less demand in the economy. For example, retirees don’t directly produce anything and they rarely spend as much money as carefree youth. They don’t embrace risk-taking opportunities by either entrepreneurship or investing in stocks. Resistance to risk-taking behavior and a saving glut create a problem for the economy and have long-term impacts on prices of real estate, commodities, and stocks.
According to Dent, the US reached to its peak spending in the period from 2003 to 2007 and now is headed for a demographic cliff. A recent US Census Bureau report states that by 2030 one in every five residents will be of retirement age.
According to reports from the World Economic Forum, the US fertility rate has dropped to the lowest in 30 years, and the situation is similar in South Korea. Low fertility rates are also seen in various developed countries such as Germany, Japan, Italy and others, below the required level of 2.05 births per woman in some economies.
The problem with low-fertility societies is that the pace of innovation slows down quite considerably, as much of the society’s spending goes on health care. Rising social spending and need for better healthcare standards shift a greater share of state capital toward preserving and extending life, instead of investing in innovative projects, thus impacting overall growth of an economy.
According to a new report by the US National Institutes of Health titled “An Aging World,” the older population will see an unprecedented rise in coming years. By 2050 nearly 17% of the world population will be aged 65 and over, numbering about 1.65 billion.
An aging world is always a deflationary one, which is the central bankers’ worst nightmare. We are seeing the signs of a deflationary collapse on the horizon. Historically low interest rates and comparatively crazy monetary-policy experiments over the past decade in the forms of zero and even negative interest rates were not able to pick up the inflation in the world economy. With an average 2% inflation rate, demographic problems and trade wars have further distorted the current situation.
At this point, it’s worth thinking about the need for international policy coordination to tackle these three threats to the world economy. Otherwise, the only option is to embrace the age of secular stagnation.