2013-11-05
A normal economy proceeds steadily at its design speed, something we know as full potential, at which its employable labour, deployable capital and physical capacities are fully utilized, its creative juices are happily running and its institutional fabric can accommodate it all within its design limitations.
A shock event may cause diversion, create uncertainty and pullback in demand and output, known as recession. But as new information is obtained and the surprise overcome, the checked machine ere long is back up to speed and resuming its interrupted journey.
What isn’t normal is to be long thwarted. For an economy to become mired in stagnation, even depression.
After all, for the past 80 years we have known remedies for such conditions, the equivalent of anti-depressants.
So when one of these black moods strikes a country, or more ambitiously the world, we are supposed to know how to remedy this in short order.
Except that major financial crises tend to destroy much, and recovering from them tends to be a long, slow, drawn out affair well beyond the experience reference of most now living.
Such lack of first-hand experience of post-financial traumatic stress is a real drawback, for many tend to seek quick recuperation remedies or at least evidence these are on their way.
Yet the reality tends to be quite different.
The innocence of pre-crisis risk-taking has been fully destroyed. The means by which it was accommodated, whether easy income gains or exuberant credit access and hubristic leverage, have been taken away. Key sectors always in the forefront of economic recovery, such as housing, have been laid low and their regulatory realities changed.
Just so banking and other forms of credit lending. The former easy ways have made way for a sternness long forgotten. Instead of explaining what might be possible, most discussion is regarding what plainly is now but completely out of bounds.
Not only banks and households may have overreached. Normally companies do too (but thankfully not this time). And not all regions have equally overreached, with some indeed unscathed, capable of easing the early recuperation of others.
Still, those countries most heavily smitten usually also find their government overwrought, either as the main instigating agent in the crisis, or as saviour of last resort, but finding there are natural limits even to powerful country finances.
It is usually only the central banks that have really unlimited powers under certain non-inflationary or non-deflationary conditions. But even they often find that they are pushing on a string, requiring unconventional approaches to ensure demand keeps advancing, and with it output as potentially idled resources are kept busy.
Yet it is the many crisis overhangs, the changed channels in which things are done, the general mood of reticence, the subdued animal spirits, the castigated government officials, the general sense of despair and defensive withdrawal among many businesses and some households that keeps recuperation modest, slow and drawn out.
It should be no surprise that the US economy is taking its time recovering, with banking disciplined, housing severely constrained, government politically tied down by sequestering, and the business mood very cautious as uncertainty about direction and speed are all prevailing.
So despite the record low interest rates, the lively asset price gains, the easy wealth lift and its flow through to conspicuous consumption, overcoming at least partially the damage done by property busts and job losses, it isn’t ultimately enough to make for a quick return to normality. Instead, years stretch ahead which is what it will take to overcome all internal damage and have full economic power restored.
The same may be observed in Europe, though with a set of challenges differently structured though with similar net effects.
In comparison, Japan and China and the many EM and commodity producers thriving on their tails, face different challenges.
Japan is in the throes of overcoming a generation-long lethargy that completely becalmed it.
China is coming to the end of a spectacular generation-long growth rush, and now having to adjust to a more sedate pace of advancement while changing its mix of growth drivers, less export and investment driven and more home consumption with less debt binging.
The jury is out on all of these, with a good many pundits in each case claiming none of them will prove successful in what they are attempting.
Yet this may be unduly pessimistic, overly cautious and too preoccupied with respective shortcomings. For all remain remarkably adaptable, reinventing where this is necessary, even if consensus is slow in forming.
It is thus a combination of natural recuperative powers residing in our human creativity and flexibility that allows us to overcome heavy odds and the obstacle course shaped by our reckless failures.
Only, this tends to be a very slow process, often much slower than what experience of more propitious times may have prepared us for.
And thus we tend to encounter two things along the way, namely disappointment that repair and recuperation take much longer than ever envisaged, and secondly the need for central banks to maintain easy liquidity conditions so that we may not relapse into even deeper pits of despair too soon foreclosing all hope of real recovery.
The past six months have been a severe lesson on all these scores, and reinforcing the eventual outcome.
Less haste, more speed as we try to recover from severe structural damage and set a new course in a number of critically important regions.
The Fed seems to be well aware of this, as is the ECB and BOJ. Between them they will keep markets risk-asset friendly a little longer in essentially dormant times, until natural growth recuperation is finally ready to take over this leading role, after which the central banks can gradually fade into the background noise, where ideally they belong.
But not just as yet, as too many countries aren’t ready to fully stand on their own two feet again.
Give it another 6-12 months, and longer to the first policy interest rate hike in the leading countries, and then ever so gingerly taking years thereafter to normalise rates. For these remain trying times.