The headlines about yesterday’s speech by Glenn Stevens naturally focussed on his warning about over-heated housing and his failure to rule out raising interest before unemployment has peaked.
But he made another remarket that was even more significant, when he said: “There is no real way around a period of adjustment involving lower consumption for awhile.”
It underlies the whole discussion about interest rates and “exit strategies”.
He was talking about the idea that households in the western world have found that “earlier spending” was based on unrealistic assumptions about future income and wealth, and that it would now be reduced – “for awhile”.
A world of lower consumption is definitely not one with rising inflation and interest rates, or booming house prices. In that context the question of when interest rates will start rising again is moot.
It is a world with persistent high unemployment and over-capacity, accompanied by political instability.
Glenn Stevens’ discussion in his speech following the statement that there is “no real way around…lower consumption” was slightly disappointing.
He said: “… the adjustment could…be eased if a better foundation for optimism about future income could reasonably be established. Productivity is the key to that. In fact, it is the only real basis for it.”
He then went on to talk about the importance of open and competitive markets and for governments to resist trade restrictions. Well yes, but is that it?
If he is right – and he might not be, for reasons I’ll explain in a minute – improving productivity in the conventional sense would not work. Using less labour and capital to satisfy shrinking demand for goods and services would not, it seems to me, help matters at all if the problem were over-capacity and unemployment.
That only works if you believe the problem is a lack of confidence, leading to higher savings and less demand for credit.
That seems to have been what Governor Stevens was on about yesterday with his statement that we need a “better foundation for optimism”.
I bumped into a senior Labor politician at the airport last night and he observed, during the course of a long conversation, that a big part of the job of governments in the years ahead will simply be to employ people – especially relatively unskilled workers.
In fact, there are already a vast number of jobs at all levels of government that are pointless, and simply exist for employment. He also referred to the huge and rapidly growing “bullshit industry” – public relations and lobbying – which produces virtually nothing useful, but employs an army of relatively unskilled people.
Governments’ share of the global economy has grown rapidly over the past 12 months as political leaders have tried to replace declining household consumption with debt-funded stimulus packages.
This is not coming to an end in a hurry. But as Glenn Stevens pointed out yesterday, for many governments debt is already too high, and rising quickly for others. There will have to be fiscal consolidation or what he called the “inflation tax”.
What there won’t be, I’d suggest, is fiscal consolidation by cutting back government expenditures – taxes will rise instead.
Glenn Stevens was warning yesterday that he and other central banks stand ready to prevent politicians from using the “inflation tax” (monetising the deficits), and capital gains will be hard to come by, so it is income taxes that will have to rise to pay for ongoing government employment.
The hope that he might not be right about a world of lower consumption revolves around Asia. President Obama spoke this week about the need for China to pull its weight on consumption, and so does India.
Yesterday, the Indian Reserve Bank raised its inflation forecast because demand is rising surprisingly strongly. Other Asian countries like Korea and China are also seeing booming demand for credit.
All this might come to a sticky, bubble-bursting end, but Asian consumers must take over the burden of over-consuming from the exhausted west.
This article first appeared on Business Spectator.
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