The damp kindling wood of global economic recovery is poised to catch fire.
For the first time in half a decade of stagnation, government policy has turned expansionary in the US, China and the eurozone at the same time. Fiscal austerity is largely over. The combined money supply is surging.
Such optimistic claims are perhaps hazardous, given record debt ratios in most areas of the world and given that we are six-and-a-half years into an aging economic cycle that might normally be rolling over at this stage. It certainly feels lonely.
Goodhart argues that since roughly 1970, the world has been in a demographic sweet spot characterized by a falling dependency ratio, or in plainer terms, a high share of working age people relative to the total population. At the same time, globalization provided multinational companies the ability to tap into this new pool of labor. This positive supply shock was a negative for established workers, forcing down the price of labor as capital flowed to these areas."Naturally, and quite properly, the West supplied much of the management; the East supplied the labor," wrote Goodhart.
Outsourcing labor to less costly locales kept wages at home from rising too fast. This, in turn, entailed that inflationary pressures were benign, as best depicted by the concept of the Great Moderation, or the idea that central bankers were better able to stabilize the business cycle.
As companies were encouraged to boost capacity with workers rather than capital equipment, this put downward pressure on the cost of the latter.
"Access to a new reserve army of cheap global labor through globalization has encouraged companies to invest in this workforce rather than in capital at home. A garment company, for example, could choose to build a highly automated, capital-intensive factory in the U.S. or build a low-tech, high-labor factory in the Far East," said Toby Nangle, who published a column on the connection between labor power and interest rates in May. "For years, companies have been choosing the latter option, which reduces the requirement for capital in the West, thereby reducing the price of that capital."
The ensuing savings glut in China was recycled back into U.S. Treasuries, and put downward pressure on real interest rates. As such, the abundance of cheaper labor was only one avenue by which the world's second-largest economy contributed to these global trends.
So what now, as the conditions that fostered these long- decades-defining demographic trends dissipate?
"So, we believe that demographic trends were one of the main causes of rising (within country) inequality in recent decades; and it was nothing to do with some innate tendency for returns to capital to exceed growth," wrote Goodhart's team in a direct challenge to the French economist's tome, Capital in the Twenty-First Century.
The anatomy of income inequality over the past few decades has been increasing within countries, and decreasing between countries. Goodhart sees income inequality falling in both cases going forward.
A shrinking labor force relative to dependents in advanced economies will work to quell income inequality within countries, while a stretch of stronger growth from emerging economies versus the Western World will continue to help income equality increase between nations.
Perhaps most importantly, Goodhart and his predecessors' works offer a compelling rebuttal to the theory of secular stagnation -- essentially that we'll need negative real interest rates to achieve subpar growth and full employment.
"It puts that in contention, and it puts it in contention with reference to data rather than hyperbole, and puts it in a theoretical framework that people can engage with," said Threadneedle's Toby Nangle. "We can start to think about what data we should be looking for to test this, and luckily enough, we're looking to the fact that dependency ratios in developed markets and some emerging markets have already reached inflection points just about now."
So the Japanification of advanced economies is far from set in stone.
Unlike many other economists, Goodhart does not believe the demographic backdrop of an aging population is inherently deflationary. The pool of labor around the globe that kept wages suppressed domestically on the island nation has nearly run dry; Japan, in other words, was a victim of circumstance. More generally, in order to meet the obligations of the state, the shrinking pool of workers will be forced to pay higher taxes at the same time that they'll be in a position to haggle for better wages.
"This is a recipe for a recrudescence of inflationary pressures," wrote Goodhart. "The present concerns about deflation are fleeting and temporary; enjoy it while it lasts."
Britain was forced to rely on new "last resort" measures to keep the lights on for the first time on Wednesday after coal power plants broke down and wind farms produced less than one per cent of required electricity.
National Grid used a new emergency scheme to pay large businesses to cut their electricity usage, resulting in dozens of large office buildings powering down their air conditioning and ventilation systems between 5pm and 6pm.
The scheme, which is paid for through levies on consumer energy bills, was introduced last year but had never been called upon before.
National Grid blamed the power crunch on “multiple plant break downs”. Several ageing coal-fired power plants had unexpected maintenance issues and temporarily shut down, experts said, reducing available supplies.
Oil is near a bottom and global supplies look poised to close their gap with demand as investments in new production decline and consumption grows, according to Pulitzer Prize-winning author Daniel Yergin.
U.S. crude output, which surged to the most in more than three decades this year and triggered a price collapse, will retreat by about 10 percent in the 12-months ending April, according to Yergin, vice chairman at IHS Inc. Global oil supply and demand will begin to move into balance by late 2016 or 2017 and prices may rise to $70 to $80 a barrel by the end of the decade.
“We are in the bottom part of the cycle and a year from now the the market will be looking different,” Yergin, author of the award-winning book “The Prize,” said in Tokyo on Oct. 30. “These prices are having such a big impact on investment.”
In a record downturn for the oil industry, cash is everything to companies and dividends are everything to their investors. One tool is helping Europe’s three biggest producers preserve both, but there’s a long-term price to pay.A labor strike that began on Sunday has reduced oil production from Brazil's state-run oil producer Petroleo Brasileiro SA by 273,000 barrels on Monday, or 13 percent of its output, the company said in a Tuesday security filing.
Petrobras said it estimated oil production would show a 8.5 percent drop on Tuesday and natural gas output would fall by 13 percent compared with the production level of the day before the strike began. It said fuel distribution has not been affected by the stoppage and does not expect supply shortages in Brazil.
The company earns a 35% return on its best wells even when oil trades at between $45 and $50 a barrel, he said. Pioneer began putting additional drilling rigs to work in the area in July, and says it will add a pair of rigs each month through the first quarter of next year.
“The Permian Basin has the highest quality shale rock in the United States,” Mr. Dove said. “We’re really looking at decades of inventory.”
Bigger players aren’t overlooking the area either. Exxon on Friday said it acquired leases on 48,000 new acres in the Permian to add to the portfolio of its shale-drilling affiliate, and Chevron Corp. also has said it is looking to expand there.
