When the International Monetary Fund met for its spring meeting in Washington 10 years ago the global economy was booming. The world was experiencing the strongest period of sustained growth since the late 1960s and early 1970s and the fund thought the good times would continue.
There was a bit of concern about the rip-roaring US housing market, but no suggestion that a crisis in the sub-prime mortgage market would be the catalyst for the biggest recession since the 1930s. Even when the trickle of foreclosures turned into a flood the assumption was that it was merely a localised problem that would soon be sorted out. Only when the entire global financial system froze up a year later did everything become horribly clear.
The IMF meeting of the past few days was supposed to be about how the global economy has at last emerged into the light from its long dark tunnel. Christine Lagarde, the fund’s managing director, radiated optimism. For a change growth forecasts were revised up. The impression was given that everything is back under control.
The reality is somewhat different. There will be no return to the world as it was in the spring of 2007 for many years, if ever. It was a moment when many trends peaked.
Firstly, it represented peak America. The years leading up to 2007 had been dominated by a particular view of the world. Some called it the Washington consensus. Some called it the advent of a unipolar world, in which the US emerged victorious after its cold war struggle with the Soviet Union. Francis Fukuyama called it the end of history. Whatever the nomenclature, the basic idea was the same: the US creed of free markets and free trade would lead not just to better economic performance but to the spread of the values that underpinned western capitalism.
The US remains an economic and military superpower, but it was the Chinese and not the American economy that hauled the world out of recession in 2008-09. American attempts to prevent China setting up an Asian infrastructure bank failed. When Donald Trump wanted to get tough with North Korea he had to drop plans to brand China a currency manipulator. The period between 1990 and 2007 when the US was unchallenged is over.
Secondly, 2007 was peak growth. It is now apparent that the period of rapid expansion in the early 2000s was only possible because the financial system was out of control and households were taking on record amounts of debt. Banks were lending money that could only be paid back if asset prices kept on rising. They had insufficient capital to cope if – as was inevitable – the loans started to go bad. The decade since has seen so-called de-leveraging, more restrained lending backed up by bigger capital buffers and tougher regulation.
To the extent that growth has been picking up over the past 18 months it is because interest rates have been kept at record lows for such a long time. Borrowing has never been cheaper and lenders have started to forget just how tough life was back in 2008.
Ruchir Sharma, chief global strategist and head of emerging markets at Morgan Stanley Investment Management, noted in a recent essay in the magazine Foreign Affairs that “no region of the world is currently growing as fast as it was before 2008, and none should expect to. In 2007, at the peak of the pre-crisis boom, the economies of 65 countries – including a number of large ones, such as Argentina, China, India, Nigeria, Russia and Vietnam – grew at annual rates of 7% or more. Today, just six economies are growing at that rate, and most of those are in small countries such as Côte d’Ivoire and Laos.”
In other words, there should be no desire to return to the pre-2007 growth because that would suggest another colossal bust was just around the corner. It should be a cause for concern, not celebration, that China’s recent growth has relied so heavily on a credit binge that has financed infrastructure that is not really needed and factories that don’t make a profit. Central banks and finance ministries have used conventional and unconventional policies over the past decade which have succeeded in preventing a second Great Depression. But they have not even got close to returning to the pre-2007 growth rates.
Thirdly, the sub-prime crisis marked peak globalisation. From that moment, there was never any realistic chance of concluding the multilateral trade talks begun in Doha in 2001. Moreover, while publicly opposing protectionism, rich and poor countries alike have been putting up barriers to trade. As Lagarde noted last week, there have been around 3,000 violations of trade rules since 2008. Trump is at least upfront about his “America first” strategy.
But it is not just trade. Free movement of capital was a key component of globalisation in the 1990s and early 2000s, but these peaked at the time of the recession and have fallen back sharply as a percentage of world GDP.
Finally, the crisis represented peak democracy. Although there is not the remotest possibility of a return to the pre-2007 growth rates, there is an expectation that there will be and anger that the governments that were in power at the time of the crash are incapable of delivering it.
The reason for the discontent, perhaps, is that for the lucky few life is as sweet now as it was then. Giving a lecture at the IMF meetings, Raghuram Rajan, until recently the governor of the Reserve Bank of India, said the forces that were causing so much anger – automation and trade – had been at work for several decades but were now much more powerful because the global financial crisis had “delegitimised the system”.
Rajan said: “The global elite didn’t foresee the crisis and they didn’t prevent it, they didn’t take us out of it. Who paid the price? The people on main street. The bankers were helping themselves to big bonuses within a couple of years. The global elite knew how to look after themselves.”
Populist leaders have tapped into this discontent and there is now a cult of the strong leader. Trump in the United States, Vladimir Putin in Russia, Recep Tayyip Erdoğan in Turkey, Narendra Modi in India all fall into this category, but there are many others. Liberal democracy is firmly on the back foot. There has been an increase in the number of people who like the idea of a strong leader who does not have to bother with parliament and elections.
Trump’s strongman pitch is that he can make America great again. The plan involves doubling the US growth rate and returning it to its pre-2007 trend. This is not remotely feasible and eventually the American public will realise as much. At that point a fifth peak will be reached: peak anger.