Why Growth is Stalling around the World?

Why is Growth Stagnant?

We read in the print and online media about why governments worldwide are unable to revive growth especially since the Great Recession of 2008. We also read how policymakers are trying their best to jumpstart growth but are being unable to do so.

Moreover, we see stock markets going up while the average person does not see any noticeable difference in his or her financial condition.

If you are wondering about why despite the best efforts of the public and private sectors worldwide, there is no growth, then this article would be able to help you understand some of the factors at play and the dynamics at work in the present growth slowdown.

Too Much Credit in the System

To start with, the world “binged” on credit since the 1970s when the first wave of monetary expansion began with central banks all over the world doing what is colloquially known as “printing money”. This term refers to the practice of the central banks buying up governmental bonds, lowering interest rates, and providing more money or liquidity in the system.

Now, what happens when there is too much money in the system?

Businesses, individuals, and all economic entities that are flush with cash buy more goods and services. This in turn helps growth in the shorter term though it also leads to inflation since more money is chasing fewer goods.

On the other hand, there are limits to which any entity or individual can spend and spend.

At some point, the net income which is the difference between the money borrowed and money earned would turn negative meaning that debts pile up and hence, they have to be repaid. Thus, central banks cannot keep “pumping money” forever into the system since at some point, either inflation rises or there is too much debt to be repaid.

Excess Capacity and Stagnating Demand create a “Double Whammy”

Next, when there is easy debt to be had, then economic entities such as private businesses tend to invest in more capacity which leads to excess supply thereby leading to more goods and services in the system.

For some time, this excess supply is absorbed by growing demand since consumers have the necessary cash to buy them. Once the consumers start to borrow to buy goods and services, the boom can still be sustained as long as the economies overall are doing good.

However, economics teaches us that “what goes up has to come down” and when there is too much debt in the system, it needs to be “flushed out” especially when crises such as the Great Recession strike.

Debts have to be Repaid

On the other hand, businesses that have also taken on too much debt have to repay it as well as ensure that their capacity is utilized. However, when consumers slow down their spending because of the reasons mentioned earlier, then the businesses find that they cannot go on selling goods and services to the extent that they did earlier. Thus, they revert to a situation where they do not invest in additional capacity since the existing capacity itself is not being utilized.

After all, which businessperson would go on producing goods and services if there is no demand unless he or she has access to endless credit? As we explained earlier, when such credit tightens and the debts have to be repaid, the businesses realize that they need to first sell the existing stock and then, go in for more capacity and at the same time, repay their debts. This is the reason why growth is slowing down since demand is stagnating, supply is more, and there is too much debt in the system.

Why Policymakers cannot do anything?

As any individual who plans his or her finances would realize, once there are enough goods in the house and there is much debt to be repaid, the first priority would be to ensure that the essential purchases are taken care of and then use the disposable income to pay off the old debts.

Even if one wants to borrow for some more time, the realization that the debts have to repay at some point and the time of reckoning would come would mean that an individual would simply stop consuming what is unnecessary.

If one takes the case of both the businesses and the individuals together, then the situation is such that despite all measures by the policymakers, growth is not being revived.

The New Normal Explained

Some economists have called this the “new normal” wherein the economies’ slowdown and stagnate and this situation would continue for some more time before the debt is manageable and then growth begins to revive.

Further, the new normal is also expected to be a time when some entities such as the stock markets would boom because of the excess money being invested in what is essentially a casino wherein there are booms and busts at regular intervals.

Thus, if you were to see the stock market going up while the overall economy slows down, you can infer that the rise in the valuations is not because of “fundamentals” but too much money being diverted there in the hope of higher returns.

Indeed, everybody likes returns on their money and hence, more and more entities invest in markets which is again sustainable only to a certain extent as some point, the artificial inflation in the prices has to crash and return to normal.

We hope some of the points explained in this article would help you make sense of the world around us at the present time and hence to plan and prepare accordingly.

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