Economic Hibernation

How have we lost our bearings? And why do the right and left – in all Western countries – appear to be applying the same economic policy, with only a few cosmetic nuances in difference? Where are the contentions of old that we used to have and which would pit us against each other? It was the left who defended public spending and the redistribution of wealth which were meant to establish a more equal society. While the right pleaded for balanced public finances in order to reduce the power and reach of the State to its most simple expression.

The essence of the debate and the divides was therefore centred around fiscal matters, until monetary policy – the one put in place by central banks – came to cloud the issue and harmonise the traditional rifts. A school of thought appeared and was to dominate public debates basically from the moment Reagan took power in the US and Thatcher in the UK whom, influenced by Milton Friedman, eventually united under his banner of left and right which made life easier from one day to the next. These two irreconcilable sides had been calmed – and at the same time disempowered – by Friedman’s teachings which proposed that central bank policy was a much greater determinant of economic activity and growth than the overbearing State’s fiscal policy.

In a position to recover growth by reducing the cost of money, central banks were thus able to put their reserves at the markets’ disposal, which would then have had more of it to use wisely and at optimum efficiency. In fact, the ‘90s and the beginning of the ‘00s were prosperous times for the West which came to support this monetarist theory. As for the cracks in the stock market during the 2000s and particularly 2007/8, they represented only slight hiccups. These were brought on by the slowness of these same central banks to bring interest rates back up in order to contain the speculative bubbles of the time. This new approach therefore reduced the former existential and impassioned debate on taxation – that is to say by society’s choice – to technical readjustments and to the central banks’ opportune moment.

The question was therefore no longer in any way about knowing which sort of capitalism we wanted, but rather which levers had to be pulled and at which moment in order to ensure that the liquid reserves tap could adapt itself to market needs at any given time. As a result, the definition of capitalism passed from politicians’ hands into those of central banks, and more generally those of the financial system. Except that our world now finds itself in a grotesque situation where central banks have absolutely no power anymore since they are faced with zero interest rates. Whereas all they had to do was press a few buttons to rekindle growth and inflation by lowering rates when they’re at around 4 to 5%, growth and inflation have now been reduced to making their rates negative – in other words making borrowers pay! – in an attempt to fight against deflation.

While our economies are certainly going into a phase of unwavering glaciation, central banks have been walled off and are unable to react due to a lack of ammo. It’s pretty much at this time that our politicians should intervene and bring politics – the real and the noble politic – back to the centre of democratic debate.