July 8, 2013, 4:29 PM ET
Horror Story: Rude Awakening Awaits Western Economies
By Michael J. Casey
That HSBC group chief economist Stephen King shares a name with a famous writer of scary stories is a coincidence that he may tire of hearing.
But it’s fair to say that with his latest book, When the Money Runs Out: The End of Western Affluence, he is dabbling in the financial equivalent of the horror genre. Perhaps even scarier, his is the stuff of nonfiction.
Mr. King’s thesis — outlined in an interview at The Wall Street Journal — is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the U.S., we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year.
Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already.”
Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the U.S., Europe and Japan with long-term debts.
Mr. King worries that central banks are only exacerbating the problem, feeding the optimism bias by propping up financial markets with aggressive monetary policies such as the “quantitative easing” pursued by the Federal Reserve, the Bank of Japan and the Bank of England. Although QE was appropriate at the height of the crisis in 2008 and 2009, when it helped avoid a repeat of the Great Depression, it now used as means of falsely promising a return to the bygone years of strong growth, he said. As the economist put it, “QE became less of a powerful antibiotic and more of an addictive painkiller.”
And whereas central bankers have viewed their accommodative policies as having modest benefits with zero costs, Mr. King finds all sorts of inefficiencies and costs from these actions. Mostly, it comes in the form of income redistribution, he said. For example, lower rates allow large U.S. corporations to borrow cheaply but in an environment of perpetually low growth they distribute the gains to shareholders via buybacks and dividends in lieu of hiring more workers. And because the holders of financial assets who benefit from such transfers tend to be wealthier individuals with a “lower propensity to consume,” there’s little accompanying jolt to the wider economy from their wealth gains.
This plays out in the disparity between the stock market’s multiyear advance and the underperformance of the economy, which Mr. King said reflects “the growing gap between hope and economic reality.”
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