I have a video from my appearance on the BBC last Friday for you below but I wanted to make a few points before you look at it.
For almost a year now, the Obama Administration has been extremely concerned about the goings on in Europe. The official line from the White House is that the US is in a moderate but sustainable recovery which risks being derailed because of the European sovereign debt crisis. Last year, I noted eerie parallels between Obama’s view and the view of Herbert Hoover in 1930 before the bank runs began after the failure of Credit Anstalt in 1931.
Recently, the Obama Administration has been pushing forcefully both to get Europe to change tack toward growth and in getting out the message that the slowdown in the US is due to what’s happening in Europe. And while I agree that Europe’s policy responses have made things considerably worse, I don’t believe what is happening in Europe actually is the reason the US recovery has stalled. Michael Hudson makes some good points as to why, pointing to the continuing overindebtedness of US households due to the Obama Administration’s prioritisation of bank bailouts over the real economy in 2009 and 2010. I’d probably be a little less critical of Obama rhetorically on this score than Hudson, but only a little.
And let’s be clear, it’s not just the US and Europe that are seeing a deceleration in growth. It is global. I call it a global or synchronised global growth slowdown. In December I warned:
We are in a second synchronised global growth slowdown. Moreover, the policy response must be more muted this go round as the public sector is more indebted and has less policy space than in 2008 or 2009. Expect policy inaction followed by fits of volatility due to inaction, followed by vigorous policy responses to keep the muddle through from collapsing into Depression. Overall, all of the risk is to the downside, not just in the euro zone but globally.
And just today, Economist Nouriel Roubini echoed these sentiments in a post at Project Syndicate, writing:
Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.
I would submit then that the problem is the debt. This is true right across the developed economies. Until the debt is reduced, global growth will be slow and that makes economies susceptible to recession. As much as the President wants to deflect attention toward the disaster building in Europe, he should admit to himself that more needs to be done on household debts, incomes and jobs. A banking-centric policy response has caught up with us and we’ll just have to see if we can ride this one out.
P.S. – As always I should remind you that I am mostly concerned with private debt because it is high levels of private debt that cause the secular deleveraging waves that lead to major financial crises.