Paul Krugman steps back from the stock market’s gyrations and asks the right question, which isn’t about the proximate cause of this most recent stock slide, but instead to question the seemingly endless perturbations of markets and economies today:
Why does the world economy keep stumbling?
On the surface, we seem to have had a remarkable run of bad luck. First there was the housing bust, and the banking crisis it triggered. Then, just as the worst seemed to be over, Europe went into debt crisis and double-dip recession. Europe eventually achieved a precarious stability and began growing again — but now we’re seeing big problems in China and other emerging markets, which were previously pillars of strength.
But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities.
More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a “global saving glut”: a huge excess of savings over investment in China and other developing nations, driven in part by policy reactions to the Asian crisis of the 1990s, which was flowing to the United States in search of returns. He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. (Some of us did.) But his suggestion that the U.S. housing boom was in part caused by weakness in foreign economies still looks valid.
Of course, the boom became a bubble, which inflicted immense damage when it burst. Furthermore, that wasn’t the end of the story. There was also a flood of capital from Germany and other northern European countries to Spain, Portugal, and Greece. This too turned out to be a bubble, and the bursting of that bubble in 2009-2010 precipitated the euro crisis.
And still the story wasn’t over. With America and Europe no longer attractive destinations, the global glut went looking for new bubbles to inflate. It found them in emerging markets, sending currencies like Brazil’s real to unsustainable heights. It couldn’t last, and now we’re in the middle of an emerging-market crisis that reminds some observers of Asia in the 1990s — remember, where it all started.
So where does the moving finger of glut go now? Why, back to America, where a fresh inflow of foreign funds has driven the dollar way up, threatening to make our industry uncompetitive again.
What’s causing this global glut? Probably a mix of factors. Population growth is slowing worldwide, and for all the hype about the latest technology, it doesn’t seem to be creating either surging productivity or a lot of demand for business investment. The ideology of austerity, which has led to unprecedented weakness in government spending, has added to the problem. And low inflation around the world, which means low interest rates even when economies are booming, has reduced the room to cut rates when economies slump.
Whatever the precise mix of causes, what’s important now is that policy makers take seriously the possibility, I’d say probability, that excess savings and persistent global weakness is the new normal.
Welcome to the postnormal, where there is no return to the old sense of ‘normal’ in store. A world economy in which there seem to be no safe havens for investment, where risk cannot be calculated, but huge sums of money have been concentrated in fewer hands. Markets are whipsawed as capital flows from region to region, from country to country, from gamble to gamble.
Krugman correctly diagnoses the situation, but goes on to say that our ‘leaders’ won’t accept the new situation, and instead will continue to operate in ways that are obsolete at best, and at worst were never effective. They won’t accept that we are in the postnormal, an era based on different truths and different rules.
There’s also, I believe, a sort of emotional prejudice against the very notion of global glut. Politicians and technocrats alike want to view themselves as serious people making hard choices — choices like cutting popular programs and raising interest rates. They don’t like being told that we’re in a world where seemingly tough-minded policies will actually make things worse. But we are, and they will.