Please find the complete interview here.
The fallacy of synchronized growth.
We have been hearing from international bodies, from central banks that we were living in a synchronized growth territory. That we were seeing developed markets grow faster than what was typical while emerging markets were also growing in tandem. And that
the economies were much healthier, that everything was much better, and that 2018 was a year in which we would see the confirmation of that synchronized growth trend and the reflation trade.
Well, it wasn’t the case. The case actually was that what we were being told was synchronized growth was actually synchronized debt growth. And that massive increase in debt that led to the highest level relative to GDP in history last year was creating massive problems, internal problems, in many economies that were getting used to cheap and easy money.
A very small, minuscule and completely moderate reduction in the balance sheet of the Federal Reserve of less than $260 billion, has created this reckoning. This reckoning that the reality that we were seeing globally was not a reality of higher growth, better
productivity, and more positive surprises. But the reality that it was just debt led bump up of a much clearer trend of secular stagnation.
So what happens is that we will likely see solutions that, instead of cleaning the system, will be solutions that will basically lead to more secular stagnation. Why?
Because what most central banks, what most governments will be doing, will be to try to avoid the pain. Avoid the pain of improving the economy.
What will they do then? What they will likely do is to perpetuate the problem via more demand-side policies. Therefore, this constant bailout of the less productive parts of the economies is actually more likely to be the “solution”.
What this leaves is higher debt because the misallocation of capital is actually incentivized,
and malinvestment is actually promoted. Central banks being way behind the curve and at the same time, potential growth is being eroded.
We get out of crises in each of those countries with less growth than before and with higher
debt. It’s a very, very difficult combination because if you think about what would be an ideal solution, it would be for governments to do less of what they are used to do. And
governments never see the problem as a problem of excess supply. And even less, a problem of excess spending.
Governments always see the problems of economies as a problem of demand, making a wrong diagnosis. Then they incentivize malinvestment and excess debt expecting that the collateral damage of higher debt will end up in a little bit more growth.
We will continue to have governments that see that the critical part is not incentivizing saving and incentivizing adequate investment, but credit growth at any cost.
And so if we put it all together, the reason why in 2018 we are seeing markets react aggressively to global imbalances is not that this is news to anybody. It’s because, in 2017 and 2016, the consensus was building to believe that magic actually existed. And that synchronized growth, all this beautiful central planning magic, was actually going to happen.
But the reality is that there is a longer-term trend, which is that rising
debt, more demand-side policies, and constantly subsidizing and bailing out the lower
productivity sectors in order to avoid pain, generates lower growth, low productivity, and
obviously, higher debt. Secular stagnation.