God Save America. 2016 will go down as the year of Brexit and Trump. REM sang, “It’s the end of the world as we know it … and I feel fine.” At the moment, it feels like the end of the global economy as lead by the anglo-countries. It’s hard to feel fine because markets and economies hate uncertainty and we now have uncertainty in profusion.
Why are economists worried? Uncertainty usually puts the brakes on investment. Simply, weaker investment means lower output, fewer jobs, weaker productivity and worse standards of living compared with what might otherwise have been.
Intervention to mitigate these negative effects might be possible … but it’s hard to do that in economies where the public debt is already too high and interest rates are far too low. Without adverse implications, it’s difficult to add to the public debt, spend more and tax less when fiscal policy is over-borrowed. It is very hard to encourage productivity-enhancing private investment when expected returns are so depressed.
President-elect Trump said in his victory statement that his administration would double US growth and hinted that this would be done by recourse to massive infrastructure renewal. That may work but it would be a hard task in good times. Starting from here, it looks impossible without a high risk of scary repercussions – higher taxes, higher inflation and much higher interest rates … eventually.
It feels like the end of the world economic order as we’ve known it over the last sixty years. Maybe, we can look back in ten years time with relief about how well it all went but, right now, it don’t feel fine. God save us all.