​When you can ship a freight container half way around the globe for the cost of a cozy dinner for two something is seriously wrong with the global economy. And what’s wrong is governments' sole reliance on monetary policy to stimulate growth. In an environment where supply of almost every commodity – from shipping capacity to steel to macaroons – far exceeds demand, it is almost impossible to generate extra demand via monetary policy alone. As the old economic proverb goes ‘you cannot push on a string’.

Markets need to be able to price inputs and purge failures, but that mechanism has been short-circuited with near zero interest rates that fail to punish bad commercial decisions. Capital with no cost drives bad investment decisions through mis-allocation spurring meaningless acquisitions (corporate inversion anyone?), share buybacks and expansion without customers. And whatever demand there is or was has been pushed forward and already consumed. Stores and restaurants cannot give away inventory fast enough - on a recent trip to a major US city, we were given free food and beverage for no particular reason. A drug store took 30% off our bill because “we looked like nice people”. Clothing discounts were regularly in the 70-80% range for barely out of season fashion.

So how did we get to a point where (excess) capacity so exceeds demand and no one ever goes out of business (remember those shipping companies…)? There are three reasons. First, since the GFC of 2008-09 central bankers around the world have tried to keep economies afloat and employment in tact with near or sub zero interest rates. Unique in world economic history, a handful of desperate central banks have driven interest rates into negative territory. The Bank of Japan has done this in a vain attempt to get banks to lend more to stimulate an economy that has been on life support for over two decades. The FT paints a sad picture of octogenarian Japanese meandering around Tokyo trying to buy gold to stave off the devaluation of their hard saved Yen. Retirees want yield on their savings and currency stability not a shopping spree.

The second reason is China’s reliance on a heavy fixed investment economic model that has incentivized local government and state owned firms to invest in industrial capacity regardless of demand. China’s excess capacity has no where to go but “out”, so China is exporting deflation globally and plowing capital into infrastructure abroad (the ‘Stans, SE Asia and Africa) to allow those countries to buy more “stuff” from China.

Finally, there is a global ‘overhang’ of savings driven by growing wealth in emerging markets and aging populations in developed market. This high savings rates is also due to the absence of global wars that destroyed accumulated wealth in major economies in every century of the modern age. In some cases savings has been used to kick start small and mid-sized entrepreneurship. In most cases however, investments from these savings has been stuffed into real estate investments in a handful of global cities or used for structured deposits, both of which allow people to live off their passive investments in lieu of investing in original business ideas.

Generally speaking these are positive trends – but not when the phenomenon is so badly managed by our respective central bankers, and the bank lending limited to the investor class. What this has meant for the average Joe is broadly two things. Firstly, a distorted employment market favoring real estate agents and "expendable" PT employees, with depressed wages among white-collar workers.

Second, in the search for yield, investors have just about tapped out most asset classes from bonds to real estate to dividend stocks, another historical first for asset classes that are accustomed to rather predictable negatively correlated cycles. This means, investment demand, like demand in everything else has been brought forward in time. This will result in a reversion to mean for all asset classes at some point. Hopefully not all at once like in 2008.

So, where's the exit?

The solution to this continuing disaster is fiscal stimulus – a trick at least as old as Keynes. Governments need to increase capital expenditure, rebuild and expand infrastructure and in the process drive demand and inflation (and ultimately higher interest rates). Most major global economies – developed or emerging are in severe need of infrastructure upgrades. Justin Trudeau gets that. So does Singapore’s Lee Hsien Loong. Yes governments have to borrow to build, but with the average cost of capital near zero that is not a burden.

Fiscal stimulus on major infrastructure projects can spur steadier and longer term “Main Street” level job growth and lift all boats economically speaking. So when the purge of poorly run businesses begins and the current tech bubble implodes and unicorns prove to still be fictitious, the economy as a whole will be less severely impacted than if there’s a cascade of popping bubbles with no real underlying growth. Leaders of smaller economies have already figured this out, so let’s hope the next leader of the United States can.

This was drafted with Dane Chamorro.

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