HSBC has a report "The World Economy's Titanic Problem" which indicates that in the event of a future recession, the world economy has run out of traditional stimulus. HSBC Chief Economist Stephen King says the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s.
Budget deficits are still uncomfortably large and debt levels uncomfortably high: while the US fiscal position has improved, it remains structurally weak.
We investigate the options for policymakers given this shortage of traditional ammunition, including:
(i) reducing the risk of recession;
(ii) reverting to quantitative easing;
(iii) moving away from inflation targeting;
(iv) using fiscal policy to replace monetary policy;
(v) using fiscal and monetary policy together in a bid to introduce so-called “helicopter money”; and
(vi) pushing interest rates higher through structural reforms designed to lower excess savings, most obviously via increases in retirement age.
We conclude that only the final option is likely to lead to economic success. Politically, however, it seems implausible. As a result, we are faced with a serious shortage of effective policy lifeboats.
As for plausible recession triggers, we highlight four major risks:
1) a rise in US wages which leads to a falling profit share and a major equity decline
2) a series of systemic failures within the non-bank financial sector
3) a major weakening of the Chinese economy, sending shockwaves around the world; and
4) a premature attempt by the Federal Reserve to normalise monetary policy, in a repeat of the mistakes made by the Bank of Japan in 2000 and, more recently, by the European Central Bank in 2011.
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Budget deficits are still uncomfortably large and debt levels uncomfortably high: while the US fiscal position has improved, it remains structurally weak.
We investigate the options for policymakers given this shortage of traditional ammunition, including:
(i) reducing the risk of recession;
(ii) reverting to quantitative easing;
(iii) moving away from inflation targeting;
(iv) using fiscal policy to replace monetary policy;
(v) using fiscal and monetary policy together in a bid to introduce so-called “helicopter money”; and
(vi) pushing interest rates higher through structural reforms designed to lower excess savings, most obviously via increases in retirement age.
We conclude that only the final option is likely to lead to economic success. Politically, however, it seems implausible. As a result, we are faced with a serious shortage of effective policy lifeboats.
As for plausible recession triggers, we highlight four major risks:
1) a rise in US wages which leads to a falling profit share and a major equity decline
2) a series of systemic failures within the non-bank financial sector
3) a major weakening of the Chinese economy, sending shockwaves around the world; and
4) a premature attempt by the Federal Reserve to normalise monetary policy, in a repeat of the mistakes made by the Bank of Japan in 2000 and, more recently, by the European Central Bank in 2011.
Read more »
