MILAN – When World War II ended 70 years ago, much of the world – including industrialized Europe, Japan, and other countries that had been occupied – was left geopolitically riven and burdened by heavy sovereign debt, with many major economies in ruins. One might have expected a long period of limited international cooperation, slow growth, high unemployment, and extreme privation, owing to countries’ limited capacity to finance their huge investment needs. But that is not what happened.
Instead, world leaders adopted a long-term perspective. They recognized that their countries’ debt-reduction prospects depended on nominal economic growth, and that their economic-growth prospects – not to mention continued peace – depended on a worldwide recovery. So they used – and even stretched – their balance sheets for investment, while opening themselves up to international trade, thereby helping to restore demand. The United States – which faced considerable public debt, but had lost little in the way of physical assets – naturally assumed a leadership role in this process.
Two features of the post-war economic recovery are striking. First, countries did not view their sovereign debt as a binding constraint, and instead pursued investment and potential growth. Second, they cooperated with one another on multiple fronts, and the countries with the strongest balance sheets bolstered investment elsewhere, crowding in private investment. The onset of the Cold War may have encouraged this approach. In any case, it was not every country for itself.
Today’s global economy bears striking similarities to the immediate post-war period: high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.
Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.
Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.
Likewise, international cooperation is just as critical to success today as it was 70 years ago. Because the balance sheets (public, quasi-public, and private) with the capacity to invest are not uniformly distributed around the world, a determined global effort – which includes an important role for multilateral financial institutions – is needed to clear clogged intermediation channels.
There is plenty of incentive for countries to collaborate, rather than using trade, finance, monetary policy, public-sector purchasing, tax policy, or other levers to undermine one another. After all, given the connectedness that characterizes today’s globalized financial and economic systems, a full recovery anywhere is virtually impossible without a broad-based recovery nearly everywhere.
Yet, for the most part, limited cooperation has been the world’s chosen course in recent years, with countries believing not only that they must fend for themselves, but also that their debt levels impose a hard constraint on growth-generating investment. The resulting underinvestment and depreciation of the global economy’s asset base are suppressing productivity growth and thus undermining sustainable recoveries.
In the absence of a vigorous international re-investment program, monetary policy is being used to prop up growth. But monetary policy typically focuses on domestic recovery. And, though unconventional measures have reduced financial instability, their effectiveness in countering widespread deflationary pressures or restoring growth remains dubious.
Meanwhile, savers are being repressed, asset prices distorted, and incentives to maintain or even increase leverage enhanced. Competitive devaluations, even if they are not policymakers’ stated objectives, are becoming increasingly tempting – though they will not solve the aggregate-demand problem.
This is not to say that sudden “normalization” of monetary policy is a good idea. But, if large-scale investment and reform programs were initiated as complements to unconventional monetary-policy measures, the economy could move onto a more resilient growth path.
Despite its obvious benefits, such a coordinated international approach remains elusive. Though trade and investment agreements are being negotiated, they are increasingly regional in scope. Meanwhile, the multilateral trade system is fragmenting, along with the consensus that created it.
Given the level of interconnectedness and interdependence that characterizes today’s global economy, the reluctance to cooperate is difficult to comprehend. One problem seems to be conditionality, with countries unwilling to commit to complementary fiscal and structural reforms. This is especially evident in Europe, where it is argued, with some justification, that, without such reforms, growth will remain anemic, sustaining or even exacerbating fiscal constraints.
But if conditionality is so important, why didn’t it prevent cooperation 70 years ago? Perhaps the idea that severely damaged economies, with limited prospects for independent recoveries, would pass up the opportunity that international cooperation presented was implausible. Maybe it still is. If so, creating a similar opportunity today could change the incentives, trigger the required complementary reforms, and put the global economy on course to a stronger long-term recovery.
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CommentedAlexandros Aslanidis
70 years ago there was no globalization, and exchange-rates were fixed (Bretton Woods). Therefore governments could use their balance-sheets to promote domestic growth. Now they can't do that because instead of growth they'll promote domestic bubbles, and growth is going to take place abroad.
I am no Nobel laureate but I understand this, so I wonder why the actual Nobel laureate doesn't. National competition caused Bretton Woods to collapse, and national competition is causing the Washington Consensus to collapse as well. It's as simple as that. Read more
Commentedcamille hurn
Given the advanced economies' adoption of loose monetary policies, there is plenty of money available for investment. It is not being used. There are two possible reasons - 1. there is no need for investment (e.g. in what exactly) or 2. because the money passes through financial intermediaries, it is not arriving at a proper (valuable) end destination. Read more
CommentedBarry Edwards
If you would like to read a solution to the problem you have described go to www.txtreme.co.uk/txtremebusinessforum and click on the Economic Growth Plan in the right hand column. It was written a few years ago but is still very relevant today. Read more
CommentedJohan Luthor
I guess the leaders after WWII all were raging socialists. Besides, what could such investment be directed towards that would make overall sense? Renewable energy bridges to nowhere that save the planet? Na, only for the tree huggers Read more
CommentedJames Falkiner
All very interesting but one fundamental issue is different this time round. Whilst sovereign debt was high, household sector debt was negligible. Today both are very high as is total debt, a legacy of the post war consumer boom. Countries like Australia and Canada feature very high total debt due to over leveraged household sectors, primarily due to real estate bubbles. Read more
CommentedJose araujo
James,
I think a major diference is that nowadays we are living in the so called liquidity trap conditions where agents have a strong preference for liquidity and high risk aversion.
This implies the accumulation of liquidity and safe assets, i.e. bonds and deposits and other savings instruments.
When you have high level of savings you will have high level of loans (savings have to be transformed, in the end its a zero sum game), so its natural to be living in a a time with high levels of debt.
Regarding the drag debt has on the economy, namelly on consumption, well its true if interest rates are high, but with this level of interest rates, household debts is more a political argument then anything.
In addition,if there is any correlation between household and private debt with GDP and growth, the correlation works directly, .i.e. the most developed countries are the ones with higher levels of debt. Read more
Commentedgeorge sos
There use to be a time when human lives where respected,dignity had value and self respect and respect of human rights was a good thing.
Today ,after 100 years of corruption taking hold of every aspect of society,after big "powers" gave repeated examples of greed and disrespect for human life,after years of diminishing the idea of United Nations (by USA mainly and UK ,during the nice years of criminals Bush and blair),and after many years of ruling of "small" in every aspect leaders,who got there either because they were rich or they had rich friends rose to semi god status ,dont expect anything but blood,violence,more blood and eventually total destruction.
And for those who believe all this is far away over some ocean,you better believe it,it is coming soon to a theater near you....
Unless we reverse fast, and redistribute wealth globally equally to all people of every society,unless e stop trying to ignore the shiploads of desperate peoples
No fences,and n dogs,no policemen ands no mercenaries will be able to hold back the wave of revenge of the poor upon every one .
The people (well some)are fed up,and the vultures are still stealing,still trying to con the rest of the world.Bankers , investors respectable (!!) politicians and strategists of the "think tanks"(all these retards who because the other kids didnt play with them and the girls didnt go out with them ,now they "revenge" on everyone ,playing designers of society...Social architecture by the retards...what did you expect?
Since people were greedy and stupid enough to make these morons powerful,well now should suck it and shut up.
....if you have money go help someone you greedy bastard dont expect to make more !!
As for think tankers and politicians ,i hoe they know their future holds bad things..they are too on the same planet like us.. it is the capitalism idiot as says the poet..
Revolt,rise uup ,simplify your lives and destroy all they hold dear.(the money )..Then the federal reserve wil have zero authority on you .Then the ECB will have nothing to threat greece with.Merkel would have nothing to give and schoible will be just another retard on a wheel chair,which i hope gets a flat tire every day .I d like to see some of these vultures really suffer...I was a good man once..
PS:Tell the german big mouth racist nazis (most of them are anyway no matter what they pretend),tell them they still havent paid Greece.They havent return the forced loan their fathers took from the dying Greek people during the war.Tell them we want every penny back.And then they can start paying for the racist rubbish they keep on about .tyhe hard working thieves...germans.pfff....I dislike most of them.Their common thing,the past they dont remember.( ive asked countless germans what were you doing during the WW2?Mostly ,pretend not to know what i am talking about.Some try to claim they didnt know what was going on"I was young i dont remember claimed the 90 year old bastard on holidays in mallorca all year...I can remind you her nazi.
I feel and see in their eyes ,the truth.No guilt.
Just a sense of "we should have baked these grease greeks when we had the chance together with the jews and the gypsies...they look alike anyway"...
Yes lots of germans are racist and like Nazism.
No they dont admit it and they do everything to look in the eyes of ther international law,as humans...
They arent.Just like the USA yellow faced black tie mother fucking retards who think they can rule the world.
Same shit.Thats the reason after the war US invited the nazi criminals and kept them and used them for its own purpose.....you ve been nazified..
anyway bye now.We all will die horrible deaths like the kids in the indian ocean.in suyria,in libya,in iraq,in kurdistan,in so many places..
Peace has no more life on this planet.We are all in a downward spiral soon to end with a big big crash.
But dont take my word for it,look outside your box and then decide if i speak the truth.
As for the investments...it sounds like a joke..recovery?for who?the rich?who cares?The thieves that steal billions and get away with it?LOL!!!you are funny...Really.:):)#not Read more
CommentedManuel G Samuel
Interesting points made by MS, especially regarding the differences between the end of WW 2 and now. The are indeed similarities in terms of high unemployment, rising debt and lack of sufficient aggregate demand (AD). But there are also significant differences between now and then. For one, the human mindset at large has evolved and arguably humans and their political leaders care now less about solidarity. In 1945 most the international community were emerging from of one the darkest nightmares of human history. The fear of war made nations more cooperative, bolder and definitely more resolute to sort things out. 70 years have lapsed since then. Almost everything has changed. The explosion of mass media fuels fears that impact negatively in the economic expectations of people. Thanks to the media and the Internet, we are daily witnesses to growing global threats and this can only impact negatively on how we perceive the world and the future. There is therefore an inherently general tendency in each of us to spend less. The latest US figures show that even with cheaper energy pieces due to fracking, US consumers are not pushing up AD as expected. QE, per se, is not fueling demand as expected and the effect of low energy prices in the cost of life doesn't seem to be encouraging people to increase spending in proportion. A new global mindset is thus needed but it's hard to come by. As MS clearly says, we need reinforced cooperation between governments (and central banks). Furthermore, the world needs to get rid of its ghosts to properly tackle our growing global fears. Stop fighting drug lords and legalize drugs. Prohibition only serves obscure worldwide rings and vested interests. Eliminate all fiscal paradises and offshores. Fight tax evasion at a global level. Measures such as these will surely reduce the scourge of inequality which is unfortunately increasing as the most recent OECD report clearly highlights. And inequality is for sure one of the main roots of insufficient AD. A strong global will is needed to effectively secure long-term recovery but unfortunately it doesn't seem to be in the offing at this point in time. Read more
CommentedJonathan Lam
Gamesmith94134: A World of Underinvestment
“Today’s global economy bears striking similarities to the immediate post-war period: high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures.” However, QE relieved the collapsing equity and banking by using the short multiplier to leverage the financial and equity market that is oversupplied; in addition, such leverage also under cut the future earning like pensions and long-term investment. Currently, the shortage of future pensioner’s income is hammering the price on growth that causes value to thrive on the depreciation or devaluation. Even though the stock market advanced as it never before; and housing prices went even surpassed level during the recession of 2008; so, it is all balanced with equity and capital investments. Where has our Underinvestment go?
It is true that we underinvested in human capital which generates aggregate demand, it sustained during the mending process. By using the short multiplier or ground zero interest rate that we often called inequality; because many believe inundation of cash flow to foreign soil and manipulate their labor to work can cut costs and more profits. Throughout the Merger and Acquisition, these low cost funds cut their debt levels impose a hard constraint on growth-generating investment. So, “The resulting underinvestment and depreciation of the global economy’s asset base are suppressing productivity growth and thus undermining sustainable recoveries”, because of the side effects of the short multiplier or ground zero interest rate; because they are short-term and must repay in dollar only and Euro is not valid.
Inevitably, the problem seems to be conditionality, less countries are willing to commit to complementary fiscal and structural reforms after the liquidity relief, like Europe political reforms are not desirable, it remain anemic even after ICE or ClubMed. Hereby, it is the end of the most favorite nations till they sell US their assets or buy American goods in trillion. I believe there is 9 trillions of it overboard whether these are gave away, or just the deposit on part of the underwriting on their assets, or loans will ever paid. These conditions impose threats on sovereigns in a less favorable investment. American over-invested in foreign assets that made their assets depreciated. Their loans may default also even rollover; because the QE ended and their currencies are depreciation under the throw weight system or the current exchange.
“Competitive devaluations, even if they are not policymakers’ stated objectives, are becoming increasingly tempting – though they will not solve the aggregate-demand problem”, it is why boom and bust is the condition in the short multiplier or low rate loans; and there are no available balance sheets under our partnership or investment agreement.
Finally, I would not say of a world of underinvestment happened; evidently, the data of the stock and equity market proved otherwise, except for the rogue EFT and long term investors.
Bear in mind short term multipliers must take place inbound to the long term investment like infrastructures, education and so on. You may have a hard time to move if you put the carriage before the horse, even for men.
Men survive to consume. If men consume to survive, it often takes place in jail rather than credit. It is the law.
May the Buddha bless you?
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CommentedLuca Grande
I agree that public spending would boost growth but I don't see why this would require international cooperation. Every government could do that on its own initiative (with the exception of Europe, thanks to the EU straitjacket), partially like what the US did. But rather than using public money to help the private sector, a more or less universal decision to use private money to help the financial sector was made. This tells you a lot of the current state of democracy around the world. Read more
CommentedAvraam Dectis
.
All true, but, there is no point in using logic with the insane.
The Germans, the linchpin of Europe, resist spending for what seems mostly like a psychological impediment. The Republicans in America, having only low taxes and low deficits as policy offerings, cannot unmoor themselves from their only pathetic reason to be.
The Chinese, to a large extent, due to their huge public investment, are already doing this and it shows in their much higher GDP growth.
So the problem is how to move the Germans and the Republicans, and you may need a psychologist instead of an economist for that.
One thing that seems obvious, is that we should be willing to monetize debt and put in place other measured to limit inflation. This would boost demand and allow more spending. Alas, I think that is two bridges too far.
Avraam Jack Dectis Read more
CommentedMr Econotarian
Avraam, your IMF data is not just government investment, but all fixed capital formation, including private capital formation.
That said, you may have a point that China's government spending may be more investment and less cash transfer than say Greece whose spending is likely mostly cash transfer and very little investment.
But we should note that US real net government investment was at a 40-year high during 2022-2009, but that didn't seem to stop the financial crisis: http://research.stlouisfed.org/fred2/series/A889RX1A020NBEA
I will also suggest that countries with leaders that espouse socialism and name their child after "Che" Guevara (like Mr. Tsipras of Greece) may discourage private business investment. Read more
CommentedAvraam Dectis
.
Thank you for the comment Mr. Econotarian.
I think the point of the article was that more public investment would boost economies and their GDPs.
Countries like Greece, in such an environment, would see social spending as percent of GDP drop since those are generally fixed costs.
The imperative is to focus on growing the economy.
You motivated me to look up the actual percent of GDP as investment numbers. Greece is about 10%. USA and EU about 20%. China is pushing 50%.
This is one link:
http://www.economywatch.com/economic-statistics/economic-indicators/Investment_Percentage_of_GDP/
So boost investment, GDP grows, people better off, fixed cost spending decreases.
It is what we did in WW2, when GDP increased by 100%! , for 2 years in a row. Many problems go away when you quadruple the size of the economy in 2 years. Unlikely we could duplicate that performance but we could emulate it.
Thank you
Avraam Jack Dectis
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CommentedMr Econotarian
Greece's government spending is 58.5% of GDP.
German government spending is 44.7% of GDP.
US government spending is 34% of GDP.
China's government spending is 25% of GDP.
Which country is growing the fastest? Which is the slowest? Read more
CommentedJose araujo
In a global economy, is there a thing called too much debt?Doesn't debt equal deposits? Isn't it a zero sum game?
So considering debt is a zero sum game, the problem is that the agents holding the resources don't put them to good use.
We don't have a problem of to much debt, our problem is that rentiers want to extract an income from a resource that is abundant (money). In the end, debts and deposits are just a bunch zero and ones in a system, the real loss is not using resources and unemployment.
We have to change our social contract to acomodate this notion. The notion that wealth is just a social contract, and that if you actions are causing a general a problem, society has the right to act in your behalf, take your money away and put it in good use. Read more
CommentedJose araujo
By the way Luca, for a finance professional you should refresh your money & banking and specially the Mogdiliani - Miller, maybe then what I'm saying doen't appear so stupid, specially for the ones with a keen eye for macroeconomics ;-) Read more
CommentedJose araujo
Luca,
Many things that are obvious can look stupid, specially for the ones that are uninformed.
Loans are the conterpart of deposits, and debt is just one way of financing investments, so be definition there isn't such a think like excess debt in a global economy. Read more
CommentedLuca Grande
Jose, I saw a lot of stupid comments from you in the past but this beats them all. Read more
CommentedEd de Bruin
Mr. Spence's economic views are from the same period. People's views have changed however. Sharing today's views that spurring demand should not be pursued sine qua non, I disagree with the personalisation of life that has led to skewed income distributions across regions and within countries. Governance, sustainability and new views on value creation have changed they way people wish to live'leading to less "top line" growth but to a higher quality of living. Unfortunately the distribution of that quality of living over people has not taken place. Here Mr. Spence has a point. We will have to reconsider concepts such as fairness and solidarity within our current democratic and capitalist framework. Read more
CommentedVelko Simeonov
I am not sure I agree with the author. He says that increased investment is the key, but investment in what? I don’t need 2 cell phones, 6 cars or 8 LCD TV’s. Increased investment will not make me buy more than I need and I already have enough. The people that do not have enough and could buy from the increased production, do not have the money to do so (Africa, ME, India, Pakistan…) and no amount of investment (public or private) can change that in the near future. The meaningful investment opportunities given the current state of the world (political, economic and social) are dwindling fast and that is the big problem. Perhaps a new major technology breakthrough can change that (ultra-cheap energy production for example) but I am not aware of such developments. Read more
Commentedjagjeet sinha
The brilliance from MS that we are privileged to receive on this platform. The causes underlying UNDERINVESTMENT leads him to attempt towards concerted cooperation in overcoming the barriers. The barriers are plenty - most of which MS has outlined. Unlike Households and Corporates who can dimension their Debts versus their Asset Values, Sovereigns and Multilaterals are unable to dimension their Debts versus the Asset Values they create. There is no doubt that both Sovereigns and Multilaterals create enormous value - but the wealth they create seemingly appears to be captured in the Asset Values of Households and Corporates - the quintessential 1 %. Yet hope and salvation both always expected from Sovereigns and Multilaterals. The link between the Asset Value they create and the Debts they take on, needs to be palpable. So that Democracy allows them even more leverage than they currently undertake in turbocharging growth. As they did 70 years ago. In China the link between their Infrastructure Debts that the Sovereign creates and the resultant Asset Value of its Real Estate holdings essentially dimensions the upper bounds - limitless Asset Value financed with correspondingly dimensioned Sovereign Debt. Read more
Commenteddan baur
Actually not hard to comprehend if you understand that today is more like 1938 than 1946 except with an aging population - and you should not wish for the utter destruction following the war. Read more
CommentedJoão Lídio Bezerra Bisneto
Very interesting point. However, cooperation towards coordinated policies may be more difficult nowadays. Total spending on capital is low, but the capital stock is high, unlike the post-war period. The point is: consensus about the need for investment was easier when a large amount of capital was destroyed in war than when it was unchanged by the Great Recession. In this scenario, alternative solutions emerge and take the focus away from the needed investment. Read more
CommentedMichael Public
Bam. You hit the nail on the head about the problem. The solution I think is more elusive - governments are far more partisan and populist today than they were then. The idea of a unified nation is a relic and when international co-operation is attempted local politics use this as a divisive topic - see US trying to solve their Iran concerns. Overall, very thoughtful article. Read more
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