What’s NZ’s Plan B for a growthless world?

It hasn’t dawned on John Key, but the idea that growth in the developed world may have stalled for more than a year or two is now dawning on central bankers, economic thinkers and protestors around the world.

The realisation that real and sustainable growth may not have happened in the developed world for the last 20 years is even more unsettling.

Here’s the thinking. Oil production essentially peaked around a decade ago. Technical innovation has been stagnant for at least 20 years. Populations began ageing. This meant that per-capita growth in output was much slower than in the post-war years up to the 1970s. See more here from Peter Thiel on The End of the Future.

Any growth that was produced was gobbled up by the richest 5 percent of the population as the financialisation of the economy shuffled more profits to banks, traders, executives and their shareholders. A relaxation of the Depression-era rules stopping investment banks from joining up with commercial banks, along with an increasing focus on rewarding executives many multiples of average incomes accelerated the surge of income to the top tiers.

This non-growth and the increasing inequality of incomes was essentially disguised, particularly for the middle classes in developed economies such as the UK, the US and New Zealand, by borrowing from the savings in export-rich economies such as China, Japan and Germany.

The debt crunch we are now seeing in Europe and America is essentially the moment of truth for this strategy. When debts grow faster than income this eventually ends in unserviceable debts. Greece and the Eurozone is trying to control that moment of truth right now and is failing.

The various desperate attempts over the last four years to prop up a system smothered by debt with even more debt, or just to shuffle it around, is also now being exposed with the return of debt crises in Europe and America, often as the private debt shuffled to public balance sheets reaches festering point.

The extraordinary outpouring of anger in America and Europe in recent weeks is the sound of the streets waking up to this fact.

The debt can’t be sustained without some sort of debt jubilee, where debts are forgiven, or by a burst of inflation.

This is shaping up as a battle royale between savers and borrowers, with the shareholders of banks and taxpayers stuck in the middle. Regular savers want a debt jubilee where bank shareholders and bond holders take the pain. Borrowers want inflation where regular savers take the pain.

Policymakers and ultimately voters have two choices.

They can destroy banks and their bondholders and shareholders by forcing them to forgive the now unsustainable debts. That creates obvious problems for financial system stability and creates a monster moral hazard for borrowers.

Or they can bail out the banks and shift the debt onto the balance sheets of taxpayers while encouraging inflation. This spreads and delays the debt problem, an eventually ends with sovereign credit rating downgrades and ultimately the bankruptcy of countries. That’s what we’re seeing now in Greece.

So far politicians in the United States, backed by their political funders in the banking sector, have chosen to bail out the banks and shift the burden to taxpayers generally while inflating away the value of money. This is fueling much of the anger and has created a monster moral hazard problem, along with banking monsters that are even more dangerous and too big to fail.

New Zealand has also had its own share of bailouts, including South Canterbury Finance, and the relatively silent and so-far painless guarantees of banks and their wholesale bonds (which is still in place). It is also seeing plenty of inflation.

All of this debt shuffling and kicking of the can down the road obscures a basic fact that most policymakers and voters have yet to accept.

Unending strong growth in the developed world cannot be sustained. There isn’t enough oil, young workers and technical innovation to sustain it.

So what is New Zealand’s Plan B?

I doubt we’ll see it in this election campaign.

interest.co.nz