No economic recovery without political courage

Seven years of growth, and three rates rises in a few months. But the US economy is nevertheless at the dawning of a recession! In spite of the monetary policy which seems to be on its way to normalisation, interest rates will never be – when the next, imminent crisis comes about – at levels which would allow the Federal Reserve to efficiently intervene in order to soften and attenuate its perverse effects. With US rates having reached absolute zero in December 2008, they have been raised three times these last few months by 0.25 basis points each time. The ball will therefore really be in the court of political leaders when the next recession hits since central banks will be lacking munitions.

In this light, debates are raging over the nature of the stimulus measures that should be adopted in order to bail out an economy, because macroeconomic measures take on a completely different colour once interest rates hit zero. In other words, what may be efficient when rates are at 4% is certainly no longer so in a situation of zero rates. In reality, the current situation is even more delicate than that because economic slowdowns are much harder to combat when they come just after a recession.

It is with this in mind that the simulations led by the US Federal Reserve, with the objective of evaluating the way in which its economy might be in a position to deal with all sorts of shocks in light of historical data, have had stress-inducing results. Coming from a “normal” interest rate of 4%, there is only a 2% chance of it reaching 0% in the context of a fight against a depression. This result must however now be analysed in light of the current economic climate, because times really have changed, so much so that interest rates now find themselves approaching 0.

It is a situation which brings about a brutal asymmetry in the functioning of an economy, because, while it is easy to fight against inflation by bringing rates up again, the room for manoeuvre becomes non-existent when the 0 level is reached, whether it be to fight against recession, or simply to stimulate strong growth. We should therefore prepare, consequently, for a future punctuated by more noticeable economic slowdowns than the historical average, for much more meagre growth levels, and for endemic and enduring levels of unemployment, because macroeconomic readjustments will be just as slow and sluggish to materialise as interest rates will be close to 0.

However, all is not totally lost, nor is there complete desperation, since a lifebelt that goes beyond the remit of central banks and their interest rates exists, as long as, of course, it gets utilised. As it happens, it is the fiscal and budgetary policies of States which – through the drivers of increasing public spending and lowering taxes – serve as stimulus measures, which are in reality much more efficient than a central bank’s monetary policy ever will be. Economic stabilisers, and mechanisms to relaunch the economy and demand in times of torment and uncertainty… But these will of course only be achieved with gutsy politics.