Originally published as A Banquet of Consequences by Penguin Random House Australia in August 2015 Published 2016 by Prometheus Books The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril Copyright © 2015 by Satyajit Das All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, digital, electronic, mechanical, photocopying, recording, or otherwise, or conveyed via the Internet or a website without prior written permission of the publisher, except in the case of brief quotations embodied in critical articles and reviews Trademarked names appear throughout this book Prometheus Books recognizes all registered trademarks, trademarks, and service marks mentioned in the text Cover design by Grace M Conti-Zilsberger Inquiries should be addressed to Prometheus Books 59 John Glenn Drive Amherst, New York 14228 VOICE: 716–691–0133 FAX: 716–691–0137 WWW.PROMETHEUSBOOKS.COM 20 19 18 17 16 The Library of Congress has cataloged the printed edition as follows: Names: Das, Satyajit, author Title: The age of stagnation : why perpetual growth is unattainable and the global economy is in peril / Satyajit Das Description: Amherst, NY : Prometheus Books, 2016 | Includes bibliographical references and index Identifiers: LCCN 2015037561| ISBN 9781633881587 (hardback) | ISBN 9781633881594 (ebook) Subjects: LCSH: Economic development | Economic policy | Stagnation (Economics) | BISAC: BUSINESS & ECONOMICS / International / Economics | POLITICAL SCIENCE / Public Policy / Economic Policy | BUSINESS & ECONOMICS / Economic Conditions Classification: LCC HD82 D31477 2016 | DDC 330.9–dc23 LC record available at http://lccn.loc.gov/2015037561 Printed in the United States of America The truth is sometimes a poor competitor in the market place of ideas— complicated, unsatisfying, full of dilemmas, always vulnerable to misinterpretation and abuse GEORGE F KENNAN In a time of universal deceit, telling the truth is a revolutionary act GEORGE ORWELL PROLOGUE Reality Bites GREAT EXPECTATIONS Postwar Booms and Busts BORROWED TIMES Causes of the Global Financial Crisis and the Great Recession ESCAPE VELOCITY The Power and Impotence of Economic Policies THE END OF GROWTH The Factors Driving Secular Stagnation and the New Mediocre RUNNING ON EMPTY The Resource and Environmental Constraints on Growth CIRCLING THE WAGONS Globalization in Reverse BRIC(S) TO BIITS The Rise and Fall of Emerging Markets ECONOMIC APARTHEID The Impact of Rising Inequality on Growth THE END OF TRUST How a Democracy Deficit Harms Economic Activity 10 COLLATERAL DAMAGE The Fallout for Ordinary Lives EPILOGUE Final Orders NOTES ACKNOWLEDGMENTS SELECTED FURTHER READING INDEX ABOUT THE AUTHOR The world is entering a period of stagnation, the new mediocre The end of growth and fragile, volatile economic conditions are now the sometimes silent background to all social and political debates For individuals, this is about the destruction of human hopes and dreams After the end of World War II, much of the world came to believe in limitless growth and the possibility of perpetual improvement There was an unbridled optimism that all economic and social problems could be solved The increasingly unsound foundations of prosperity and improved living standards were ignored As Ayn Rand knew, “you can avoid reality but not the consequences of reality.”1 A confluence of influences is behind the ignominious end of an era of unprecedented economic expansion Since the early 1980s, economic activity and growth have been increasingly driven by financialization—the replacement of industrial activity with financial trading, and increased levels of borrowing to finance consumption and investment By 2007, US$5 of new debt was necessary to create an additional US$1 of American economic activity, a fivefold increase from the 1950s Debt levels had risen beyond the repayment capacity of borrowers, triggering the 2008 Global Financial Crisis (GFC) and the Great Recession that followed But the world shows little sign of shaking off its addiction to borrowing Ever-increasing amounts of debt now act as a brake on growth These financial problems are compounded by lower population growth and aging populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food, and energy; and man-made climate change and extreme weather conditions Slower growth in international trade and capital flows is another retardant Emerging markets that have benefited from and, in recent times, supported growth are slowing Rising inequality has an impact on economic activity The official response to the GFC was a policy of “extend and pretend,” whereby authorities chose to ignore the underlying problem, cover it up, or devise deferral strategies to “kick the can down the road.” The assumption was that government spending, lower interest rates, and the supply of liquidity (or cash) to money markets would create growth It would also increase inflation to help reduce the level of debt, by decreasing its value But activity did not respond to these traditional measures Inflation for the most part remains stubbornly low Authorities have been forced to resort to untested policies, stretching the limits of economic logic and understanding in an attempt to buy time, to let economies achieve a self-sustaining recovery, as they had done before Unfortunately the policies have not succeeded The expensively purchased time has been wasted The necessary changes have not been made In countries that have recovered, financial markets are, in many cases, at or above pre-crisis prices But conditions in the real economy have not returned to normal Must-have latest electronic gadgets cannot obscure the fact that living standards for most people are stagnant Job insecurity has risen Wages are static, where they are not falling Accepted perquisites of life in developed countries, such as education, houses, health services, aged care, savings, and retirement, are increasingly unattainable Future generations may have fewer opportunities and lower living standards than their parents In the US, which has recovered better than its peers, the middle classes are increasingly vulnerable American families in the middle 20 percent of the income scale now earn less money and have a lower net worth than before the GFC In 2014, 44 percent of Americans considered themselves to be middle-class, compared to 53 percent in 2008 In 2014, 49 percent of 18–29-yearold Americans considered themselves to be lower-class, compared to 25 percent in 2008 The experience of Germany, UK, Canada, Australia, and New Zealand is similar In more severely affected countries, conditions are worse Despite talk of a return to growth, the Greek economy has shrunk by a quarter Spending by Greeks has fallen by 40 percent, reflecting reduced wages and pensions Reported unemployment is 26 percent of the labor force Youth unemployment is over 50 percent One commentator observed that the government could save money on education, as it was unnecessary to prepare people for jobs that did not exist A 2013 Pew Research Center survey conducted in thirty-nine countries asked whether people believed that their children would enjoy better living standards: 33 percent of Americans believed so, as did 28 percent of Germans, 17 percent of British, and 14 percent of Italians Just percent of French people thought their children would be better off than previous generations Global debt has increased, not decreased, in response to low rates and government spending Banks, considered dangerously large after the events of 2008, have increased in size and market power since then In the US, the six largest banks now control nearly 70 percent of all the assets in the US financial system, having increased their share by around 40 percent The largest US bank, JP Morgan, with over US$2.4 trillion in assets, is larger than most countries Banks continue to be regarded as too big to fail by governments Individual countries have sought to export their troubles, abandoning international cooperation for beggar-thy-neighbor strategies Destructive retaliation, in the form of tit-for-tat interest rate cuts, currency wars, and restrictions on trade, limits the ability of any nation to gain a decisive advantage The policies have also set the stage for a new financial crisis Easy money has artificially boosted prices of financial assets beyond their real value A significant amount of this capital has flowed into and destabilized emerging markets Addicted to government and central bank support, the world economy may not be able to survive without low rates and excessive liquidity Authorities increasingly find themselves trapped, with little room for maneuver and unable to easily discontinue support for the economy Unsatisfactory and complex trade-offs complicate dealing with interrelated challenges Lower growth assists in reducing environmental damage and conserving resources, but it dictates lower living standards and increasing debt repayment problems The alternative, faster growth, lifts living standards; however, this would, where the expansion is mainly debt-driven, add to already high borrowing levels and increase environmental and resource pressures Lower commodity prices would also help boost consumption and growth But again, this encourages greater use of nonrenewable resources and accelerates environmental damage Low commodity prices also cause disinflation or deflation—falling prices The resulting lack of growth in incomes, or the shrinking of them, makes the task of managing high debt levels more difficult It also reduces the revenue of those heavily indebted businesses and countries that are reliant on selling commodities, affecting both their growth and their ability to meet debt commitments On the other hand, inflation reduces debt levels but penalizes savers and adversely affects the vulnerable in poorer nations Reducing the free movement of goods and capital assists an individual country, but the resulting economic wars between nations impoverish everyone While the changes that are necessary are actually simple, they're painful, and they require courage and sacrifice Living standards will decline in real terms Citizens will have to save more and consume less Working lives will lengthen For many, retirement will revert to being a luxury Taxes and charges for government services will rise to match the cost of providing them There has to be greater emphasis on the real economy—the creation and sale of goods and services Financial institutions need to return to their actual role of supporting economic activity, rather than engaging in or facilitating speculation Within nations, inequality may rise still further as different groups battle for their share of what is produced and available Between countries, there will be increased competition to gain an advantage, by fair means or foul In the short term, the thrifty will see the value of their savings diminish as they are appropriated to meet the costs of the crisis Future generations will have to pay for the errors and profligacy of their forebears The magnitude of the adjustment required is unknown Its exact trajectory and timescale are also uncertain Denial of the problems is common Refusal to recognize the lack of painless solutions is widespread Governments preach and sometimes practice austerity, while assuring the population that their living standards can be maintained Politicians refuse to accept that popular demand for public services is irreconcilable with lower taxes During summits, national leaders regularly espouse internationalism, which is contradicted by fierce nationalism in their actual policies Conscious that the social compact requires growth and prosperity, politicians and policymakers, irrespective of ideology, are unwilling to openly discuss a decline in living standards They claim crisis fatigue, arguing that the problems are too far into the future to require immediate action Fearing electoral oblivion, they have succumbed to populist demands for faux certainty and placebo policies But in so doing they are merely piling up the problems It is not in the interest of bankers and financial advisers to tell their clients about the real outlook Bad news is bad for business The media and commentariat, for the most part, accentuate the positive Facts, they argue, are too depressing The priority is to maintain the appearance of normality, to engender confidence Ordinary people refuse to acknowledge that maybe you cannot have it all But there is increasingly a visceral unease about the present and a fear of the future Everyone senses that the ultimate cost of the inevitable adjustments will be large It is not simply the threat of economic hardship; it is fear of a loss of dignity and pride It is a pervasive sense of powerlessness ... cataloged the printed edition as follows: Names: Das, Satyajit, author Title: The age of stagnation : why perpetual growth is unattainable and the global economy is in peril / Satyajit Das Description:... manufacturing, and service phases The mid-1980s saw the rise of the finance economy This was driven by the deregulation of the financial sector; a rising appetite for debt and risk; growing wealth and. .. value of their savings diminish as they are appropriated to meet the costs of the crisis Future generations will have to pay for the errors and profligacy of their forebears The magnitude of the