Yuval Noah Harari in his book Homo Deus argues when we understand history we free ourselves from it. In that vein numerical central bank inflation targets are only 25 years old. They are not immutable.
Monetary history is littered with examples when acting responsibly relative to orthodoxy failed to generate outcomes consistent with historical experience.
For deleveraging to be benign, the decline in demand from the private sector needs to be replaced to keep overall demand rising over time. If that demand is not replaced, then we are back at forbearance.
One option is a much weaker exchange rate; some countries are likely to try it. But it is a zero sum game in the truest sense of the word and will ultimately lead to unstable, politically-influenced outcomes.
It also involves tradeoffs. While a weaker currency might help growth for a period, it is not a sustainable way to build national wealth. A lower currency reduces a country’s ability to benefit from global technology and expertise, and increases its sensitivity to global demand.
In much the same way, lower interest rates help the economy in the short term but generate longer-term problems around issues like retirement incomes.
The only real macro policy option is fiscal. But clarification on this is important.
This is not just fiscal ‘stimulus’ designed to generate a bit more growth for a year or so. Traditional fiscal stimulus is based on the premise what ails the economy is temporary. Current circumstances appear to be much more secular. While things could return to ‘normal’ we should welcome that if it happens, rather than relying on it as the solution.
We need a fiscal program deliberately calibrated to counter private sector deleveraging with public leveraging. In this context the quality of the fiscal expenditure matters as much as it’s quantum.
More broadly this implies activist micro policy needs to take leadership from macro policy as the policy focus. The allocation of spending and the quality of regulation are better points of focus than the quantity of policy effort.
Secular stagnation is, at its heart, a loss of economic momentum coupled with a loss of monetary policy effectiveness.
Many countries are approaching the point where they cannot rely on monetary policy to achieve short-term economic objectives. Rather than relying on the environment returning to ‘normal’, we should review our policy frameworks on the basis it doesn’t.
Richard Yetsenga is Chief Economist at ANZ