The Usual Stimulus Tricks Won't Work This Time Around

The Usual Stimulus Tricks Won't Work This Time Around

Charles Hugh Smith via substack,

The global economy is slowing, and central banks and governments are deploying the usual stimulus tricks: 1) lowering interest rates to encourage more borrowing and spending, and 2) running large fiscal deficits so government spending fills the gap left by sagging private-sector spending.

But these usual stimulus tricks won't work this time around, and the reason why is very simple: all the conditions that allowed these tricks to work were one-offs that are now done and gone. These one-offs weren't policies that can be tweaked or reinvented; they were real-world conditions that are no longer present. They cannot be brought back with any amount of money or will.

Let's start with China.

China bailed the world out of the last three recessions triggered by credit-asset bubbles popping: the Asian Contagion of 1997-98, the dot-com bubble and pop of 2000-02, and the Global Financial Crisis of 2008-09. In each case, China's high growth and massive issuance of stimulus and credit (a.k.a. China's Credit Impulse) acted as catalysts to restart global expansion.

The context of this is China's unprecedentedly rapid industrialization added a new (initially low-cost) very productive workforce of 450 million to the global economy, roughly equivalent to the entire workforces of the U.S. and the European Union. This was a one-off on multiple layers: an enormous workforce, ample reserves of cheap coal and aggressively mercantilist government policies fueled a boom unlike any other in history. (I first visited China in 2000, shortly before its entry into the World Trade organization, so the boom is not an academic abstraction for me; I was there, witnessing it on the ground.)

This boom generated enormous capital flows into China (a.k.a. FDI, foreign direct investment), soaring corporate profits as developed-nations' corporations slashed production costs by offshoring industries to China, and spurred domestic consumption in China as a nation of 1.4 billion people who had been held back for decades rushed to replace hundreds of millions of bicycles with hundreds of millions of autos and old brick houses with millions of high-rise apartments.

This one-off is now spent.  Even in 2000, there were signs of overproduction / demand saturation: TV production in China in 2000 had overwhelmed global and domestic demand: everyone in China already had a TV, so what to do with the millions of TVs still being churned out?

Daily life in China is high-tech, orderly, busy and prosperous--what visiting Westerners see and praise--but the narrative of China's ascent to global dominance via endless expansion of its economy has been punctured, again for a very simple reason:  China's model of economic development that worked so brilliantly in the "boost phase" of the S-Curve, when all the low-hanging fruit could be so easily picked, no longer works at the top of the S-Curve.

Simply put, housing and mercantilist exports are no longer engines of growth, and China has no replacement. The current strategy of moving up the value chain to dominate electric vehicles and semiconductors is triggering pushback in the form of tariffs and restrictions that will only increase as the global economy slips into recession.

China's credit stimulus--breathlessly anticipated as the savior of the global economy--generated nothing more than a shrug. China has burned through the boost phase and has no answers to the decay phase of the S-Curve.

Constructive demographics were another one-off--for China and for the world.

Where China's workforce was growing during the boost phase, now the demographic picture has darkened: China's workforce is shrinking, the population of elderly retirees is soaring, and China has no national universal pension / healthcare programs like Social Security and Medicare, so the cost burdens of supporting a burgeoning cohort of retirees will have to be funded by a shrinking workforce

This is a global phenomenon, and there are no quick and easy solutions. Skilled labor will become increasingly scarce and able to demand higher wages regardless of any other factors, and that will be a long-term source of inflation. Governments will have to borrow more--and probably raise taxes as well--to fund soaring pension and healthcare costs for elderly retirees. This will bleed off other social spending and investment.

The era of zero-interest rates and unlimited government borrowing has ended.  As Japan has shown, even at ludicrously low rates of 1%, interest payments on skyrocketing government debt eventually consume virtually all tax revenues. Higher rates will accelerate this dynamic, pushing government finances to the wall as interest on sovereign debt crowds out all other spending.  As taxes rise, households have less disposable income to spend on consumption, leading to stagnation.....

MORE...

To recap: here are the one-offs that drove growth and pulled the global economy out of bubble busts / recessions for the past 30 years:

1)  China's industrialization.
2)  Growth-positive demographics.
3)  Low interest rates.
4)  Low debt levels.
5)  Low inflation.
6)  Tech boom.

These one-offs no longer exist. They're gone or have reversed.  What we now have is a hyper-centralized, hyper-connected (i.e. tightly bound), hyper-globalized and hyper-financialized global economy of extreme fragility.

For all these reasons, the usual stimulus tricks won't work this time around.