It may be time to question our common faith that the only natural and acceptable path is growth: for population, for prices and for the economy itself.
From central bank inflation targets to almost all reporting on and analysis of the economy, this assumption is built into our view of the world.
With population shrinking in Japan, close to topping out in China and with birth rates in Italy, for example, now at their lowest in its history as a modern state, growth of all sorts may be scarce, leaving us in need of a better way to frame the problem. The question may not be how to get growth, but how best to live without it, even if that brings phenomena like falling prices, or deflation.
Take the example of Japan, which has spent decades in an increasingly expensive and acrobatic attempt to battle recession and deflation.
The textbook argument justifying all of the deficit spending and quantitative easing Japan has used as weapons against deflation is that falling prices make people defer consumption and can thus bring on a self-perpetuating cycle of shrinking prices and economic output.
Stephen Jen, a hedge fund manager and economist of SLJ Macro Partners, takes issue with this, pointing out that while Japanese GDP growth since its labor force peaked in 2000 has trailed almost all industrialized nations, output measured per worker adjusted for the purchasing power of the yen has grown at a more robust rate than in countries like Germany, New Zealand and Canada.
In other words, Japan started off well-to-do and, in terms of what individual workers can buy, has only gotten richer, all while cycling in and out of mild recessions and mild deflation.
“Does Japan need to grow? Our answer is ‘No,’” Jen and colleague Joana Freire write in a note to clients. “If measured in terms of real GDP growth, it is far from clear that Japan, in the aggregate, needs to grow over time to improve its standard of living, if the population is shrinking.’
It is also true that, although consumer inflation has averaged only 0.3% annually since 1990, far below the 2% many central banks target, self-reinforcing deflation of a very damaging sort has not taken hold.
The trouble with transitions
To be sure, we don’t know what might have happened in the absence of government and Bank of Japan recession and deflation fighting. And with government debt running at something approaching 250% of GDP, a future of low or no growth does cause considerable transitional problems, not least – how to pay it all back.
It isn’t just our expectations that seem to be unhinged by a failure to grow. Everything else in the public and corporate world is also predicated on upward movement, from planning to investment to hiring.
Matt King, a credit strategist at Citigroup, is not sanguine about the impact of a shrinking pie, or one that fails to grow as we’ve come to expect.
“Think of the reaction to falling (and now rising) oil prices, for example. What ought just to be a redistribution of wealth between oil producers and oil consumers has turned out not to be,” he wrote in a note to clients. “Both markets and the global economy have proved an awful lot happier when prices have been rising than when they have been falling. The same applies in multiple other spheres.”
King also points out that global corporate revenue outside of the financial sector actually shrank in 2015, a trend that extended into the most recent quarter.
The worry, in the corporate sector as at the national level, is that flagging or negative growth self-reinforces as companies try to get themselves into a profitable size for a smaller stream of customers.
All of this in large part explains the behaviour of central banks, which have tried to use credit as a means to provide the growth we used to get more naturally from population expansion.
China’s opening the credit spigots in recent months is the most striking example, a tactic that definitely increased growth and calmed global markets but may well ultimately be a failure in terms of how productively the money was put to use.
Elsewhere in the developed world though, very low interest rates have not succeeded in spurring a strong revival in investment.
If population growth is waning and credit no longer works as an accelerant, the problem may not be just with our tools, but our goals.
(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
