By Daniel Alpert
Today, the International Monetary Fund announced yet another a reduction in its global growth projections for 2014, with its estimate of U.S. growth also reduced (citing reduced government spending, but not the present U.S. government shutdown — or the heretofore unthinkable notion of the U.S. government defaulting on its obligations). Despite the seeming urgency of global economic slowdown, when world leaders attended their annual fall confabulation at the United Nations in New York last month, they focused on the diplomacy of physical security (Syria, Iran, etc.). Thus another year has passed in which global economic security issues were on no one's reported agenda.
Policy makers continue to fail to appreciate that the most formidable economic challenge today lies in the area outside the borders of any one nation or region — and that multilateral action to address this challenge is arguably more important than efforts at increasingly less-effective internal stimulus.
Present-day economic imbalances — particularly those stemming from the rapid emergence of the post-socialist nations over the past 15 years, with their associated supply of excess labor, productive capacity and global capital, relative to demand — have hamstrung the economies of the advanced nations. Such economic dislocation can no longer be resolved by any one power, or even by two or three. Indeed, there is enormous risk today of unilateral or bilateral actions being viewed by players left out of such actions as economically threatening or even hostile, leading to economic countermeasures. The issue is compounded by the complexity of the relationships among and between developed nations on the one hand and emerging ones on the other. It is hard to imagine moving beyond a global economy that is just getting by, and therefore at material risk of new and deeper crisis, without a more open dialogue among the Group of 20 (G20) nations and proactive steps toward mutual accommodation.
Yet, since the central banks of the developed world have managed to more-or-less stabilize their economies — however tenuously — discussion of a global grand bargain focused on rebalancing international trade and finance has been all but absent. This is unfortunate, as it makes it unlikely that the advanced nations will be able to return to their potential growth trajectories for some time to come.
There is, nevertheless, enormous common interest if nations can find the right way to open a dialogue with one another. Both surplus and debtor nations have so far understood that it is to no one's benefit to attempt to aggressively advance their singular interests at the expense of their trading partners. We're all in this together, our interests are intertwined in a flat world, and we're dealing with more economic interdependence than ever before. And thus far, at least, we have mostly avoided the "beggar thy neighbor" strategies that went awry in previous slumps, either out of wisdom or good fortune of their ineffectiveness. That said, we are a long way from a harmonious, cooperative global trading environment.
Three key multilateral issues need to be dealt with in order to achieve global economic stability:
The situation in the euro zone will continue to plague the global economy until it either self-stabilizes or a solution is found. I do not believe that it will self-stabilize (despite recent quiescence), so several proactive alternatives should be considered. A multilateral effort is going to require give-and-take across the board, and the European situation is at a stalemate. Other regions, I believe, would be willing to aid a European solution if it were part and parcel of moving the entire global economy forward. But no outside power is currently interested in assisting because the remedies that have been attempted to date have done little more than kick the can down the road.
On a similar note, regionally, China is at a crossroads in terms of its internal rebalancing from an oversaving and overinvesting nation (with a national savings rate — not to be confused with the personal savings rate — in 2011 equal to a whopping 51 percent of GDP) to one in which consumption plays a greater role. The same is true, to a lesser extent, of other developing nations.
Finally, part of any G20 grand bargain needs to include banking reform. At the beginning of the financial crisis, in 2007, Warren Buffett was widely quoted as observing, "It's only when the tide goes out that you learn who's been swimming naked." As it turned out, the parade of nude bathers was quite long and included banks, investment banks, insurance companies, government-sponsored enterprises, and, in the case of the European periphery, entire countries.
Some were swept out to sea with the tide, but a sizable number have since obtained swimwear and are walking the boardwalk as though nothing ever happened. The fact is that many financial institutions today look pretty dismal under their cover-ups. Moreover, there is a substantial difference among regions of the developed world in terms of what constitutes a strong financial institution. Given the enormous interdependence of global financial institutions, having multiple standards means that the entire international financial system is as vulnerable as the weakest of those standards — which in the case of euro zone banks is very weak indeed.
The evidence of the global economy's growth-stunting tendencies is abundant. For example, in my recent book The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy I refer to the "triple hoarding" of U.S. dollars in (i) the over $3.5 trillion held in foreign currency reserves; (ii) the nearly $2 trillion in excess domestic liquid assets held by nonfinancial U.S. corporations (together with perhaps another $3 trillion held in liquid form by U.S. business interests outside of the United States) and (iii) the trillions of dollars of uninvested household wealth, 75 percent of which is held by the top 10 percent of households. And I don't blame any of the foregoing holders for not investing their money in new capacity (factories, equipment, offices, etc.) on a scale large enough to move the global needle. There is, after all, nothing very sensible for them to invest in, given the existing oversupply. Similar points can be raised with respect to the world's secondary reserve currencies, the euro and the yen, but the numbers are of course far smaller.
This leaves the developed world with a dilemma. Either allow the pricing mechanism to clear the market of excess (which would mean wage, price, and asset deflation in the developed world, instead of the mere disinflation we have become familiar with) or find some other way of getting excess capital invested into their real economies to return to production potential.
Repairing all of the problems addressed here comprise an ambitious agenda, to say the least. It will require an overhaul of the global economic and financial system of no lesser scope than that of the 1944 Bretton Woods Agreement, which established a new such order for the post-World War Two era, or the de facto Bretton Woods II understanding that has prevailed since the United States terminated the dollar's gold convertibility in 1971 and most major world currencies became free-floating.
Some may argue that the problems are too complex to be resolved and the best we can do is to wait them out. If we were able to do that, policy makers would be saved from having to make some very tough decisions. But economic, political, and social pressures arising during this age of oversupply are not likely to grant us that luxury. It is long past time to sit down and lay out a new economic playing field that is conducive to more evenly shared growth.