Contributed by Joe Montero

The International Monetary Fund (IMF) has just downgraded its forecast growth for the global economy. The official growth has been revised from 4.4 percent in January down to 3.6 percent. Ukraine and the Covid pandemic get most of the blame. A fall in in foreign investment and covid related slowing on consumer spending gets a part of it.

Too much can be made of the China component. The imposition of more conditions on direct foreign investment in the productive economy and trade war have slowed the flow into China, and Covid has had a temporary effect on consumer demand. Since China is now the world’s primary economic engine this does as measure of impact on the global economy.

Truth is, there is something far deeper going on. The global economy has not been going on all cylinders for decades, since well before either Ukraine or Covid. The new shocks have made a tough situation even worse, and every nation is impacted by this in one way or another.

Like the rest of the world, Australia can’t escape importing the problems of the global economy and adding this to the domestic economic weaknesses.

According to the IMF, the situation infecting the global economy is so serious, that it’s unlike anything seen since the 1990’s, when pressures built till, they resulted in the Great Financial Crisis of 2008. The situation then and the one the world is facing now are continuations of a longer-term problem.

A paradox is that the United States economy, although faced with the same problems, is officially doing better. The reason is that it has the world’s largest banks and is the main supplier of global credit. Rising credit and rising interest rates are profitable for the banks best able to take advantage of them.

The table below shows some examples of forecasts for the banks, with the United States in line for the best performance

Table from  Business Standard

Today’s symptoms of this are rising food and energy prices. This is called inflation, and it is associated with already unsustainable rising debt. The United States and Europe are the most affected by this. According to the IMF, inflation is expected to average 5.7% in developed economies and 8.7% in emerging economies this year, which is 1.8% and 2.8% higher than the January forecast.

The graphs below show current and projected growth for the global economy and a selection of national economies.

Image from the International Monetary fund (IMF)

This indicates a serious underlying problem. If the role of money lending is taken out of figures representing global economic growth, economic performance is much worse than it looks by counting in money lending.

An accurate estimation requires considering the difference between finance and the real economy, where we create what we consume. This is the true measure of economic performance. Finance is concerned with the circulation of money, goods, and services, not real economic growth.

The IMF is saying that the emerging debt crisis is so severe that there is little prospect for the billions owed to ever be paid back, and the options for the global financial system to cope with this are disappearing.

According to Christine Lagarde, who is the President of the European Central Bank, the main problem for Europe lies in soaring energy costs compounded by rising interest rates. She said this in a recent appearance on a recent episode of CBS’s Face the Nation.

There is no way of avoiding the leading role played by finance, and the current shift, is that the era of exceptionally low and even negative interest rates may well be over.

This will cause a shift away from speculative investment in futures markets, including property, money, and commodity trading. Cheap money provided the opportunity for a quick return on speculation of future price. The shift has also affected the bond market, which had attracted a reasonable return. The prospect of rising interest rates makes bonds less attractive. Investors are starting to pull away and looking towards earnings on deposits, rather than either direct investment in the economy or purchasing bonds. This trend will rise in proportion to the rise in the rate of interest.

It is this that is most likely to fuel inflation, simply because a fall in investment in the economy takes money out of circulation, while not reducing the demand for it. The value of money consequently falls, and this is measured as inflation.

The problem is the separation of finance from the real economy. Driving this division is that that profitability from investing in the real economy has been declining for a long time. This is best seen in the decimation of manufacturing in the west and the shift to increasing reliance on the financing of debt.

Any solution must face the reality that the real economy must be restored to health, and the only way to achieve this, is to ensure that investment goes to where its needed. This is impossible without adequate regulation of the financial sector.

Government intervention is about putting conditions on major investment decisions, minimising speculative investment, and establishing a public system to pool financial resources and make them available for use in areas of need.

In the global context, this would mean the establishment of new regulatory and lending institutions, which drive investment towards meeting clearly defined objectives, like the reduction of the debt burden, and the provision of jobs, goods, and services to the world’s population, along with sustainable development of the real economy.

Within the nation context, this must be brought into the banking system.

For instance, Australia could help resolve its own weaknesses through the establishment of a public national savings bank that sets the standards for all banks. This could be supplemented with specialised banks providing for investment for economic growth priorities and the building of infrastructure.

The difficulty in achieving this is that it is a political decision and there must be the political will to make it happen. But circumstances might start putting more pressure to find this will, and it is up to all of us to be part of it.