From HSBC’s Global Macro Economics team on Thursday:
Matters are being made worse because the world’s savers would rather buy Treasuries than global goods.
Quite. So whose fault is the crisis really?
Over to HSBC:
It would be unfair to blame the eurozone entirely for faltering global growth. One of the biggest problems is that, while Western debtors continue to repair their balance sheets, the world’s savers are either unwilling or unable to step in to fill the void.
The only way to return to the pre-crisis world growth sustainably is for an amicable resolution to global imbalances. This involves former surplus nations starting to pull their weight for the collective good of world demand. We’re not blaming China. Whether you consider current account surpluses or the behaviour of domestic demand, China is the one large surplus nation that is changing its ways. The same cannot be said for Germany, Japan, or particularly in recent years, the OPEC oil exporters, whose surpluses have grown dramatically
That’s right. Over in Europe we’ve done our bit. It’s now time to pass the buck over to the savers of this world. To quote HSBC, the “collective good of world demand” may even depend on it.
As the analysts point out:
These savers may not be willing to buy Western goods, but they’re still willing to buy the government bonds of perceived safe havens.
So we’ll have less of this please:
And more of this:
But there may be a role to be played by the deficit countries too. As we know, interest rates in countries like the UK, US and Scandinavia remain incredibly low due to unprecedented demand for ‘safe’ sovereign debt. A temptation HSBC believes may prove difficult for some countries to resist.
After all, if the world is still willing to provide cheap money, why not spend it?
And yet it might not make sense for them to turn their back on austerity entirely. Market favour is fickle, notes HSBC. This is something the Eurozone periphery knows only too well. Hence why loading up on debt could prove to be a risky strategy.
What’s more, how do you incentivise the world’s Scrooge McDucks to spend their cashpiles if the number of safe assets in circulation doesn’t start contracting? In the current dismal economic environment, where an abundance of goods and surplus capacity dominate, there must increasingly, it seems, be a trade-off for not spending.
So, either have savers hoard and suffer outright capital loss via negative interest rates — because there isn’t enough safe assets to go round — or have them spend and receive tangible goods in exchange for what would otherwise be lost value.
Only in this way may western output gaps finally be closed.
As HSBC conclude:
The easiest way out of our current dilemma is for the world’s savers to step up to the plate, driving global consumption. But with the exception of China, this isn’t happening. Germany, Japan and the OPEC oil exporters continue hoarding their surpluses.
So in a nutshell: hoarding equals pent up demand which is bad. Spending equals consumption of goods, which is good.
In a global system which has an ever growing capacity to produce goods, meanwhile, we’d add that such spending becomes an even greater priority. Goods which are wasted otherwise contibute to a widening negative output gap.
If demand still fails to materialise, economies go on to restructure via the supply-side.
A vicious circle ensues as capacity is reduced at the expense of the least efficient businesses. Unemployment rises. The economy contracts.
All the while those who still have wealth are encouraged to hoard even more, a fact which only exentuates the contraction in broad money supply, preventing liquidity from reaching those who would most likely be prepared to spend.
In short. Time to stop worrying about savings, and start spending.
The global output gap: measurement issues and regional disparities – BIS
Beyond scarcity – FT Alphaville