Imagine if some of the key patterns in our lives, the length and nature of the seasons for example, were to change. With mounting climate damage, that may well become the case. In other aspects of human life, such as longevity and the length and form of the working day, long established patterns are already changing – on balance we will live longer active lives, and work continuously, from home.
Another deep-seated change is the business cycle. There are not many people who spend time thinking about the business cycle, given it is a dull corner of economics, but the ebb and flow of the cycle affects us in a fundamental way, through pensions, jobs, investment and wealth.
In recent posts I have mentioned the business cycle a few times, in the sense that the rhythm of the business cycle may soon change, and I want to expand a little on this now.
To put this in context we have, by the benchmark of history, lived through an abnormal period over the past thirty years in that it has been characterised by three of the four longest business cycles in modern history (back to 1870 according to the NBER). Starting in 1990 with the fall of communism and the rise of globalisation, they have stretched for an average of 120 months, twice the long-term average. If we go further back in history, using mostly UK data, business cycles have tended to be even more jumpy.
Indeed, these stacato’d business cycles were driven by factors such as poor harvests (1880), wars (Napoleonic wars) and credit crises (1870’s) – each of which is problematic today. In that context, my hypothesis is that the world economy will rejoin the rhythm of shorter business cycles, for the following reasons.
The first, as regular readers will expect, is that globalization is broken. Many of its component parts such as long-run secular trends in technology, the export of deflation from China and a settled geo-economic climate, to name a few, were drivers of long periods of expansion. Now the boons of globalization – low inflation and rates, geopolitical stability and fluid trade/supply chains – are all being reversed.
A second reason is that the latter part of the period of globalization has produced a series of imbalances. The next ten or so years will be marked by the unwind of these imbalances. Specifically, there are three that I would flag – central bank balance sheets and monetary policy in general, international debt to gdp levels and climate damage. The correction of these imbalances will be one of, if not the defining pre-occupation of policy makers this decade.
Central bank balance sheets are, from next week with the advent of ‘QT’, going to begin a difficult contraction, the result of which will be a sharp negative wealth effect, the return to ‘normal’ of markets in the sense that they provide much better, realistic signals about the state of the world. One side-effect is that credit markets will work better, there may be fewer zombie companies and better allocation of capital, though the likely effect of this on the business cycle will be to have a shortening effect.
In turn, an environment where inflation and interest rates are ‘less low’ debt becomes harder to manage, and in emerging markets there are already mini debt crises brewing. One rather dramatic hypothesis of mine is that in 2024 (the centenary of the 1924 debt crisis) we have a world debt conference that aims to reduce debt levels through a grand programme of restructuring and forgiveness. Such a conference might only be necessitated by a 2008 style crisis – which at the current rate is not beyond policymakers.
That’s a dramatic scenario and a more likely one is that the burden of debt across countries and companies makes a repeat of the long expansion cycles of the recent past a difficult act to follow.
Sticking with debt, a favourite comparison of mine is between the rate at which the climate is warming (percentile ranking of recent world average temperatures) and rising indebtedness. Both are symptoms, not so much of globalisation but rather of unsustainable development – in both cases near existential risks are mounting, and there is a failure of collective action to deal with them. So, just as the world economy recovers from the 2024 debt crisis, it will tip over in the 2028 climate crisis.
Enough doom mongering but I do want to focus on collective action. In the recent past the large developed and emerging economies of the world were synchronised in two ways. First, structurally in that the West provided capital and consumption while the East brought manufacturing. This is now disrupted – in very broad brush terms, the west wants to reshore, while the east is happy to consume the goods it makes, and increasingly to enjoy its own wealth.
Second, policy across the blocs was coordinated, or at least there was a sense of openness and fluidity of policy discussions – the Plaza Accord is an early example, as is the ‘Committee to save the world’ that brough the Asian crisis to a close and then the G20 intervention in 2008 is another. Today, China and the US are barely on speaking terms, and the idea of strategic autonomy means that Europe increasingly needs to look out for itself.
A final complexity for the business cycle is that so many aspects of economics are changing – the nature and structure of work, the troubling trend in low productivity, the economic drawbacks of high wealth inequality and the way in which the notion of strategic autonomy will warp investment trends. This makes for much economic noise, and my sense is that all in it adds up to a world where the business cycle is incessantly disrupted and where businesses and policy makers need to think in terms of four rather than ten year business cycles.