The economic deficiencies of our political leaders

The “Japanisation” of our Western economies that I have been talking about and describing for years has now reached its climax with the world’s two most influential central banks – the ECB and the Fed – getting (back) out the heavy artillery in the hope of putting more pressure on their interest rates. The heated – sometimes shameful – debates against central banks accused of all sorts of wrongdoing, held to be – because of their very relaxed monetary policy – responsible for the new economic downturn : this flimsy and on all accounts populist stigmatisation of the ECB and the Federal Reserve completely overlooks a crucial point, which is at the source of the recession. Namely, that monetary policy, intended to control and regulate the flow of finance, seizes up when people and businesses are no longer looking to borrow money. This led to negligible growth and the absence of inflation in Japan between 1990 and 2010, so nearly twenty years, and was the result of a dearth of borrowers, and not of a lack of lenders…

In fact, the appetite for credit dried up in Japan following the implosion of its bubble, which saw the price of commercial real estate collapse by 90% during the 1990s.This abrupt return to the price level of the start of the 1970s ruined the financial health of all the property owners of the time who had acquired pretty much all of their assets through financing that they nevertheless had to continue to pay back, even after the value of their properties had crumbled. Twenty years wasn’t too long for these wounded debtors to finish their payments and find a bit of financial colour and strength again.However, and even in an environment of zero rates such as had been imposed by Japan toward the end of the 1990s, an economy crashes when all the debtors repay their debts at the same time and no one else borrows. This basic principle was outlined by Keynes because – my expense being your gain – economic growth freezes up when no one buys or borrows to compensate for those who are repaying their debts and those halting their investments. A central bank’s monetary policy that, thanks to their interest rate mechanism, makes liquidity available is alas inefficient when faced with such a deflationary spiral.

Today, despite an outstanding unemployment rate of 2.3% in Japan and a private sector that’s cleaned up all its balance sheets, this country’s businesses are still not borrowing due to the severe trauma of the last twenty years.The United States, as for them, suffered the collapse of their GDP by nearly 50% between 1929 and 1933. The consequence was that the whole generation that suffered the Great Depression, that was reduced to paying back loans taken out in exchange for assets that had disappeared, refused to take on any more debt for the rest of their lives. Nowadays, the combined effects of the 2007 subprime crisis, the 2008 credit crunch and the 2010 European sovereign debt crisis saw the appetite to borrow of households and of businesses money vanish. Despite the zero, even negative rates in some countries such as Switzerland, Japan and some of the Scandinavian nations, these economic actors have become net savers.

It is therefore the state that must take the helm and become a net borrower, but our political leaders possess so little economic education that they understand nothing of these mechanisms and that they therefore barricade themselves in a fiscal consolidation that will harm the economy and employment even more. The run by investors and by savers on Western countries’ Treasury Bonds – that day after day is constricting sovereign debt borrowing rates – should wake our leaders up, because the state must go against the grain and transform itself into a borrower of last resort in such an economic situation. It’s at this price that the Japanisation of the West will be avoided, and that the traditional monetary policy of central banks will then resume its course.