The Global Monetary Non-System

As 2015 ends, the world boasts few areas of robust growth. At a time when both developed and emerging-market countries need rapid growth to maintain domestic stability, this is a dangerous situation.

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NEW DELHI – As 2015 ended, the world boasted few areas of robust growth. At a time when both developed and emerging-market countries need rapid growth to maintain domestic stability, this is a dangerous situation. It reflects a variety of factors, including low productivity growth in industrial countries, the debt overhang from the Great Recession, and the need to rework emerging markets’ export-led growth model.

So how does one offset weak demand? In theory, low interest rates should boost investment and create jobs. In practice, if the debt overhang means continuing weak consumer demand, the real return on new investment may collapse. The neutral real rate identified by Knut Wicksell a century ago – loosely speaking, the interest rate required to bring the economy back to full employment with stable inflation – may even be negative. This explains central banks’ attraction to unconventional monetary policy, such as quantitative easing. The evidence that these policies boost domestic investment and consumption is mixed, at best.

Another tempting way to stimulate demand is to increase government infrastructure spending. In developed countries, however, most of the obvious investments have already been made. And while everyone can see the need to repair or replace existing infrastructure (bridges in the United States are a good example), badly allocated spending would heighten public anxiety about the prospect of tax hikes, possibly increase household savings, and reduce corporate investment.

Arguably, industrial countries’ growth potential had fallen even before the Great Recession. Former US Treasury Secretary Larry Summers popularized the phrase “secular stagnation” to describe weak aggregate demand caused by aging populations that want to consume less and the increasing income share of the very rich, who are unlikely to increase their already-large consumption.