Joseph Stiglitz on the Great Malaise

Overnight this happened again. China Halts Stock Trading After 7% Rout Triggers Circuit Breaker:

ChinaStockThe worst-ever start to a year for Chinese shares triggered a trading halt in more than $7 trillion of equities, futures and options, putting the nation’s new market circuit breakers to the test on their first day.

Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7 percent. An earlier 15-minute suspension at the 5 percent level failed to stop the retreat, with shares extending losses as soon as the market re-opened. Traders said the halts took effect as anticipated without any major technical problems.

The world’s second-largest stock market began the year on a down note after data showed manufacturing contracted for a fifth straight month and investors speculated that the end of a ban on share sales by major stakeholders may come as soon as this week. Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990.

This caused jitters in markets around the world. U.S. Stocks Tumble After Selloff in China Renews Growth Concern:

U.S. stocks tumbled to begin 2016, with the Standard & Poor’s 500 Index off to its worst start in 15 years as a rout in Chinese equities renewed concern that an economic slowdown there will damp global growth.

Investors returning to the market after the New Year holiday faced a worldwide selloff sparked by weak factory data in China, while a reading that showed the fastest contraction in U.S. manufacturing in six years bolstered anxiety that slowing growth in the world’s second-largest economy is spreading. A flareup in tension between Saudi Arabia and Iran added to the unease.

The S&P 500 Index fell 1.5 percent to 2,012.66 at 4 p.m. in New York, after sliding as much as 2.7 percent as equities pared losses in the final 30 minutes of trading. The Dow Jones Industrial Average lost 276.09 points, or 1.6 percent, to 17,148.94. The Nasdaq Composite Index dropped 2.1 percent. The Chicago Board Options Exchange Volatility Index jumped 14 percent, the most in three weeks. About 8.5 billion shares traded hands on U.S. exchanges, 21 percent above the three-month average.

“We’ve had a number of negatives out there in the U.S., and China is a reminder that there aren’t many things to be bullish about going into this year,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services LLC in Greenwich, Connecticut. “The three catalysts to the bull market were economic recovery, earnings recovery and accommodative policy, and while the economy has gotten better, we’ve lost the other two.”

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The S&P 500’s decline was its sixth-worst start to a year in data compiled by Bloomberg going back to 1927. The biggest rout to open a year was in 1932 when the index sank 6.9 percent, followed by a 2.8 percent slide during the dot-com demise in 2001. In those two instances, the index averaged a full-year loss of 14 percent, though the five worst starts had an average annual gain of 5.1 percent.

So the new year is off to a rough start. Which brings me to economist Joseph Stiglitz, The Great Malaise Continues:

The year 2015 was a hard one all around. Brazil fell into recession. China’s economy experienced its first serious bumps after almost four decades of breakneck growth. The eurozone managed to avoid a meltdown over Greece, but its near-stagnation has continued, contributing to what surely will be viewed as a lost decade. For the United States, 2015 was supposed to be the year that finally closed the book on the Great Recession that began back in 2008; instead, the US recovery has been middling.

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Indeed, Christine Lagarde, Managing Director of the International Monetary Fund, has declared the current state of the global economy the New Mediocre. Others, harking back to the profound pessimism after the end of World War II, fear that the global economy could slip into depression, or at least into prolonged stagnation.

In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise. Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.

The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity. Those at the top spend far less than those at the bottom, so that as money moves up, demand goes down. And countries like Germany that consistently maintain external surpluses are contributing significantly to the key problem of insufficient global demand.

At the same time, the US suffers from a milder form of the fiscal austerity prevailing in Europe. Indeed, some 500,000 fewer people are employed by the public sector in the US than before the crisis. With normal expansion in government employment since 2008, there would have been two million more.

Moreover, much of the world is confronting – with difficulty – the need for structural transformation: from manufacturing to services in Europe and America, and from export-led growth to a domestic-demand-driven economy in China. Likewise, most natural-resource-based economies in Africa and Latin America failed to take advantage of the commodity price boom underpinned by China’s rise to create a diversified economy; now they face the consequences of depressed prices for their main exports. Markets never have been able to make such structural transformations easily on their own.

There are huge unmet global needs that could spur growth. Infrastructure alone could absorb trillions of dollars in investment, not only true in the developing world, but also in the US, which has underinvested in its core infrastructure for decades.

Furthermore, the entire world needs to retrofit itself to face the reality of global warming.

While our banks are back to a reasonable state of health, they have demonstrated that they are not fit to fulfill their purpose. They excel in exploitation and market manipulation; but they have failed in their essential function of intermediation.

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The only cure for the world’s malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system – not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs.

But some of the world’s most important problems will require government investment. Such outlays are needed in infrastructure, education, technology, the environment, and facilitating the structural transformations that are needed in every corner of the earth.

The obstacles the global economy faces are not rooted in economics, but in politics and ideology. The private sector created the inequality and environmental degradation with which we must now reckon. Markets won’t be able to solve these and other critical problems that they have created, or restore prosperity, on their own. Active government policies are needed.

That means overcoming deficit fetishism. It makes sense for countries like the US and Germany that can borrow at negative real long-term interest rates to borrow to make the investments that are needed. Likewise, in most other countries, rates of return on public investment far exceed the cost of funds. For those countries whose borrowing is constrained, there is a way out, based on the long-established principle of the balanced-budget multiplier: An increase in government spending matched by increased taxes stimulates the economy. Unfortunately, many countries, including France, are engaged in balanced-budget contractions.

Optimists say 2016 will be better than 2015. That may turn out to be true, but only imperceptibly so. Unless we address the problem of insufficient global aggregate demand, the Great Malaise will continue.

Dr. Stiglitz has the cure to our economic ills, but world leaders are addicted to supply-side austerity economics, that is killing the global economy.

2 responses to “Joseph Stiglitz on the Great Malaise

  1. captain*arizona

    its etf’s not rtf’s damn spell check!

  2. captain*arizona

    this could be bumpy protect yourself with reverse rtf’s they go up when market goes down. the market may bounce upward on tuesday by reverse rtfs I like tza its a triple so you don’t have to buy so much.