It’s already hard to get into the United States, says Lord Mervyn King, and he doesn't make it harder for himself by commenting on Donald Trump. Ksenija Pavlovic McAteer reports on how a British Lord has become afraid to criticize the US president, the state of the world economy, and the end of the Pax Americana.
This past weekend at the Annual Meetings, I was interested in attending the Per Jacobsson Lecture: The World Turned Upside Down: Economic Policy in Turbulent Times. The speaker was the esteemed Lord Mervyn King (GBE), academic and former governor of the Bank of England, now a member of the House of Lords in Westminster. He gave a thought-provoking but gloomy assessment of the state of global economic affairs.
“No one can doubt that we are once more living through a period of political turmoil” Lord King reiterated a shared sentiment at the IMF/World Bank Annual Meetings. Next year, Lord King’s new book, Radical Uncertainty, will be published. In it, he calls for policy design to focus on robustness and resilience.
“Ladies and Gentlemen,” Lord King addressed the audience at the IMF/World Bank Annual Meetings with these words we hear rarely at the White House. This weekend, many are participating in annual meetings but “it is no time to celebrate.” Reflecting on the financial crisis a decade ago, he couldn’t help but notice that the financial recovery has proved frustratingly slow with new obstacles appearing on the horizon.
A former Governor of the Bank of England reminded everyone in the room that “there hasn’t been a single year in which the world economy has grown by more than 4% and relative to GDP, global debt is higher today than in 2007.”
Lord King: If the problem before the crisis was too much borrowing and too much spending, then the problem today is too much borrowing and too little spending. The world economy is stuck in a low growth trap.
The End of the Pax Americana
No one doubts that we live in a world of political turmoil. The economic and political climate is fraught. Divisive political conflict in the U.S. have turned the world political order inside out.
Lord King: Trade disputes between the US and China, riots in Hong Kong, the complete collapse of Venezuela are all reminders of the fragile nature of our world today. The European election results in May, and growing tensions between France and Germany over the future direction of the euro area are additional indicators of this turmoil. In addition, politicians in the United States have been turning inwards, in increasingly polarized, dire conflict. The Pax Americana is slowly disappearing.
We live in a world of radical uncertainty
Are we prepared for the next financial crisis? According to Lord King, more gloomy news is forthcoming. The problem today is the world economy is trapped in slow growth with too much borrowing and too little spending. ”We entered and departed the financial crisis to find the world in a state of great stagnation,” Lord King said.
Our world is definitely turned upside down, at least from the American perspective. While Trump claims that the American economy has never been better, it is also true that the damage he is doing on the foundational values of American society is going to show up in the economic picture. Trump cannot be trusted: today he will tell you one thing, the next minute he will deny it. This dishonesty has eroded trust in America.
Lord King: Political turbulence, disputes over trade, all of these have contributed to uncertainty that may not resolve quickly. Radical uncertainty is weighing on investment and growth across the world. And there is simply no way of knowing from where the next financial crisis might come. Radical uncertainty pervades the outlook for world trade.
American Congress Ex Ante
We have entered a period of great stagnation. In the next financial crisis, Hank Paulson’s successor, Lord King argues, will once again be kneeling in front of Nancy Pelosi asking Congress to save Wall Street.
The absence of an agreed on ex-ante framework, Lord King suggests, without political authority to take the necessary action, requires a commitment to use almost unlimited resources. He thinks that now is the time for banks to begin behind closed doors discussions with legislators to make the latter realize how vulnerable they will be in the event of a future crisis.
Lord King predicts that Congress would be confronted with a choice between financial Armageddon and a suspension of some of the rules that were introduced after the last crisis to limit the ability of the Fed to lend.
Is the American economy really doing that great?
In order to regain its previous value and pass it by 2028, 20 years after the financial crisis, at what rate will GDP per head in the US have to grow? The answer to that question is the GDP per head, not GDP, but GDP per head will have to grow at five and a half percent a year. Well, that’s a pretty “tall order” according to Lord King. “And without growth at that improbable rate,” he added, “we will actually be worse off, relative to pre crisis expectations. Such was the case 20 years after the Great Depression. We have entered the great stagnation.”
I asked Lord King about his assessment of the American economy against the backdrop of the America first doctrine but what he said took the audience by surprise.
Lord Mervyn King: It is never easy to get into the United States through immigration cues and questions and I do not think I should endanger my ability to get in , to get in again by commenting on the elected president of the country which I’ve come to admire and appreciate greatly. I will leave it to my American friends to make decisions on all that.
If someone with Lord King’s credentials expects retaliation for speaking his mind, then we have a problem. How can it be the case that so few people have the courage to criticize Trump on the record? Lord King got his point across, but he had to hide it behind a joke: the fear Trump’s retaliation is real. The First Amendment is disappearing before our eyes. The world and America have been turned upside down.