Why Western economies will languish: zero growth until 2020

This one is pretty simple if you understand economics at a basic level. In response to the liquidity crisis of 2007-8 governments around the world have progressively lowered interest rates to stimulate growth. This does work ! We avoided a depression by the skin of our teeth by re-inflating the economy with cheap or even free money, and sure enough it spurred enough investment to slow and even stop the economic death spiral we likely would have experienced.

So what’s the problem? Well cheap money has some unintended consequences that go unreported in virtually all press reports – but are well known to the policymakers. The big two are

  1. Businesses with high capital requirements find it easier to borrow
  2. Businesses with low margins make profits

The first one is kind of a good thing for a while, but when combined what we should be seeing in the private sector (real) economy is lots and lots of capital intensive businesses building huge plants and whacking out products like no tomorrow. Only that is not what is happening…. Manufacturing, the prime consumer of capital goods, is shrinking.

What growth there has been is largely focused in low margin companies that are living off the “froth” of high liquidity. With normal interest rates of 5-10% prime, these companies will die off like they have the plague. So monetary policy folks have a problem… raise rates and the economy implodes, leave them too low and we’ll never climb out of the recessionary treadmill we are so close to.

The net net of all this is that regulators will slowly raise rates up to normalized levels over time, but will do so at such a pace as to avoid killing off too many of these froth-eating companies at any one time. This fine tuned response means rates must rise very slowly indeed… just slowly enough to maintain the illusion of growth and stability. As the real economy recovers this will happen – it is inevitable. In my view we have at least 5 more years of zero growth as the froth gets replaced by real businesses that generate real profits.

And one last thought… ever notice that every wealthy country on earth produces automobiles ? Not an accident friends, manufacturing is the mother of wealth. It is because making cars creates wealth not because rich people buy cars !


– Dave