Here We Go – Again

Japan’s surprise interest-rate cut pumped up world stock markets. Enjoy it while it lasts.

Last year at this time, I was sitting in a café in the Greek islands and working on my current book. While I was there, my son and his girlfriend came to visit. The night before I returned to London, I took them out to dinner in a restaurant in Plaka, the old city of Athens. In the shadows of the Acropolis, we had a magnificent meal spread over several courses, starting with Ouzo, followed by Greek salad, huge plates of mixed meats accompanied by wine, dessert (on the house) and to top it all off, shots of raki (also on the house), all while the owner played his bouzouki with the folk band.

Afterwards, I said my goodbyes, and told the staff to look after them now that I was leaving. Arriving in London late the following afternoon, I felt a bit peckish. Deciding to switch gears from the previous night, I went to buy fish and chips from a take-away on the walk home. And the bill for that modest English fare came to just a couple pounds shy of what I’d spend for the three of us the night before.

You could object that I’m comparing apples and oranges, that the Greek economy is in a deep recession and the British economy is growing, and moreover that London is one of the world’s most expensive cities and Athens is not. All well and true. But it’s also worth bearing in mind that my fish-and-chips dinner for one was neither a posh meal nor taken in a posh neighbourhood, whereas my multi-course meal for three in Athens was both. And as for the difference in quality? This is England, after all.

Paying the same price for a vastly-superior product in Athens reflects the fact that most of what I paid for in London was the cost of the real estate on which the restaurant sits. This, remember, is a city in which a tiny labourer’s cottage, with two ‘bedrooms’ and a cupboard of a yard goes for £1,500.  Most of that rent, in turn, goes to someone who may well do nothing but collect rent, and is investing little back into the property — or in any other productive activity for that matter. Real-estate values in London are currently growing three times faster than the economy. That kind of discrepancy can’t continue forever. Either the economy catches up, or house prices come down.

There’s no sign of the first happening. As I have written elsewhere, the problem in Britain — as it is across the developed world — is that the productivity spurts of the golden years (the two decades after World War II), which supported average annual economic growth rates of 4-6%, lie in the past. Productivity growth has been declining ever since. Today, the average rate of economic growth in the West is closer to one percent, and trending still downwards. But politicians have made promises, such as generous pensions, that presume continued growth at the rates of old. To try and restore them, they have used the increasingly desperate strategy of what can be called bubblenomics.

Bubblemonics can be thought of as a government-sponsored Ponzi scheme. Changes in tax policy, cutbacks in government spending, globalisation, the weakening of unions and deregulation have together constrained wages over the last generation, all while juicing profits. This has created a ‘savings glut’ which, amid slowing growth, seeks out the next boom. Amid government austerity, central banks have been able to cut interest rates, further driving speculation. Once speculators find the target of their speculation, the government’s job is to talk up the bubble as some kind of manifestation of a ‘new economy.’

Politicians have been doing this for a long time. Sixteen years ago, at the height of the dotcom boom, then-President Bill Clinton convened a White House conference to celebrate the ‘new economy.’ By that, he meant the productivity transformation which information technology was supposedly bringing to America. Over the previous five years, the tech-heavy NASDAQ index had increased five times over, making Americans feel rich again. ‘From small businesses to factory floors to villages half a world away, the information revolution is changing the way people work, learn, live, relate to each other in the rest of the world’ Clinton told his guests. He waved aside those who insisted America had walked this dangerous path of riding a bubble before, saying that the New Economy had ‘challenged our very understanding of economics.’ He then invited one of his guests to open the first panel discussion, ‘Is the New Economy Rewriting the Rules on Productivity and the Business Cycle?’

Had you got swept up in that bout of euphoria and invested your money in the booming tech sector, each dollar you’d invested then would today be worth — ninety-five cents. That’s what you get for listening to politicians. The bubble was bursting even as Clinton was speaking. So the government cut taxes, the central bank cut interest rates, and the next bubble inflated — housing, whose crash in 2008 nearly destroyed the world economy. So central banks again cut interest rates further, housing re-inflated, and we are once again hearing happy days are back.

Over recent weeks, stock markets had begun re-aligning once more with the slowing economies of the West. So today, the Bank of Japan provided another burst of electroshock therapy to world markets (central banks seem to take it in turns to do this periodically), cutting interest rates to below zero. Markets around the world rallied euphorically. Clever investors will use the opportunity to cash in, because there’s still no sign of growth returning. On the contrary, the US today reported that it’s economic growth has slowed once more, just as Britain reported recently.

We’ve been here before.  We hadn’t rewritten the rules on productivity then, and we still haven’t.


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