Years of robust growth had fostered the belief that China was led by infallible technocrats who always knew what levers to pull, and when. But their handling of the stock market crash and exchange rate volatility since last summer undermined confidence in China’s ability to pull off a tricky transition to a consumer-driven economy, even though they’ve calmed market jitters for the moment. Please recall, the latest Fed minutes mentioned the word “global” 22 times.
We’ve talked about the Fed’s predicament, but the real issue is the fear that, in the event of another recession, the U.S. will essentially “become Japan.” Hence the concern about falling long-term inflation expectations.
But if you do “become Japan,” Abenomics was supposed to be the way out. Yet after three years, Abenomics is clearly failing, with GDP falling in five of the 12 quarters since its launch. Two years ago, Japan had its fourth full-blown recession since 2008, and last year it had negative GDP growth in two of four quarters. Looking ahead, we’re monitoring the risk of yet another Japanese recession in 2016, which would be a deathblow to Abenomics.
This is quite a global predicament to be in after years of unprecedented stimulus.
In the summer of 2008, before Lehman blew up and many years before the secular stagnation debate, we showed that the pace of expansions had been stair-stepping down since the 1970s.
We’ve also shown why the case for a strong recovery beyond the first year following a deep recession is not supported by the evidence, as we had originally concluded way back in 2009.
Therefore, the discourse among policymakers, trying to explain their disappointment and prescribe additional solutions, has been based largely on flawed assumptions that trend growth was actually higher than it’s turned out to be, and that we were somehow owed a return to that long-term trend.
As a result, policy initiatives designed to blast the economy toward “escape velocity” wound up being not only misguided, but also futile.
As Sherlock Holmes observed in “A Scandal in Bohemia,” “It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”
We would submit that the first step in correcting this mistake is to restart the theorizing from a closer look at the evidence.