1 A new economic era: is inflation coming back for good?

 Chris Giles in The FT 

The December meeting of the Federal Reserve’s most important economic committee was routine. Policymakers agreed that the economy could cope with rising levels of spending “without any strong general upward pressure on prices”. 

Although prices of a few raw materials were rising sharply, “finished goods have not been subject to pervasive upward cost pressures”. 

Generalised inflation, the committee concluded, was not a serious concern. 

This meeting of the Federal Open Market Committee was held on December 15 1964, just two weeks before the start of a 17-year period the Fed now dubs The Great Inflation. Inflation: 

Turning points in price trends tend to occur just at the moment when the authorities and expert opinion dismiss the risks. The current consensus is that price rises in commodities and goods markets have clear pandemic-related explanations and that the risks of a resurgence in global inflation remains remote. 

Three decades after the authorities in advanced economies managed to suppress the beast, they remain confident they are in control. The mantra of the moment is summed up by Andrew Bailey, Bank of England governor, who likes to say he is watching inflation “extremely carefully” but not worrying. 

This view is still the mainstream but it is losing supporters. One notable recent defector is Roger Bootle, author of the book The Death of Inflation, who spotted the coming decline in price rises in the mid 1990s. He is now worried. “Financial markets are going to have to get used to the return of troublesome issues that had, until recently, seemed long dead,” Bootle wrote in May. 

Central bankers have not had to deal with an inflation problem during their careers. Having averaged around 10 per cent a year in the 1970s and 1980s, global inflation rates fell to an average close to 5 per cent in the 1990s in the rich world countries of the OECD, 3 per cent in the 2000s and 2 per cent in the 2010s. The question today is whether their view is complacent. Is the world entering another inflationary era? 

While many households think the definition of price stability would be an absence of inflation, economists and policymakers favour a gentle annual increase in prices of around 2 per cent. This reduces the risk that an economic crisis could spark a deflationary spiral with spending, prices and wages all falling, raising the real burden of debts and further hitting spending. Holger Schmieding, chief economist of Berenberg Bank, explains that a little inflation also greases the wheels of the economy, allowing declining sectors to fall behind gracefully. 

“Higher inflation eases economic adjustments as it creates more scope for changes in relative wages without a need for an outright fall in wages in sectors under pressure,” he says. 

In most advanced economies — the US, the eurozone and Japan — central banks have fallen short of meeting their targets of inflation of around 2 per cent despite having slashed interest rates to zero and having created trillions of dollars, euros and yen, which has been pumped it into their economies by purchasing government debt. A modest rise in inflation therefore would be welcomed by central banks, which have generally been delegated the task of achieving price stability. 

And until this year, the main economic concern regarding prices was the risk that countries were turning Japanese and might soon emulate the nation’s 30-year struggle with mild deflation. Such was the difficulty of keeping inflation high enough that some economists even began to question the doctrine of Ben Bernanke, former Fed chair, who argued in 2002 that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation”. 

But this view of the world has turned on its head in 2021. A new whatever-it-takes borrowing and spending programme by the Biden administration, enforced savings during the coronavirus crisis giving households additional firepower, bottlenecks in the supply of goods and a reversal of longstanding downward pressures on global wages and prices have rekindled fears of excessive inflation. 

No one is talking about hyperinflation of the sort seen in Weimar Germany in 1923 or Latin America in the 1980s or even the 10 per cent global rate of the 1970s, but a creeping rise to persistent levels of generalised price increases not seen in a generation. When the April rate of US inflation jumped to 4.2 per cent, financial markets swooned. 

The new concern about a return to inflation is not just the result of immediate economic forces but also reflects longer-term, underlying changes in the structure of the global economy. The aggressive economic stimulus is being adopted at the very moment when the global economy is feeling the impact of ageing populations and the maturing of China’s 40-year transition. 

Moreover, history also tells us that neither politicians, economists nor policymakers can guarantee the world will maintain low and stable inflation. As the Fed’s experience from the 1960s demonstrates, turning points in inflation arrive with little warning. Unlike in the US, where there was no fear of inflation after the second world war, concern about inflation was “always rumbling on” following devaluations of sterling and higher import prices in the UK during the full employment years of the 1950s and 1960s, according to Nick Crafts, professor of economic history at Sussex university. 

But it only really took off in the 1970s after the first Opec oil shock and a switch in government policy from austerity to “a massively excessive stimulus, pushing the economy beyond any reasonable estimate of the sustainable level of unemployment”, Crafts adds. 

Research from Luca Benati, professor at Bern university, suggests that the world’s faith in central bankers being able to tame any similar episodes is probably overblown. The UK’s inflationary pressure in the 1970s was so strong, he found, that when he ran history again in multiple simulations assuming an independent central bank is in charge of controlling prices, inflationary forces would have been more powerful than any likely action by a Bank of England with an independent Monetary Policy Committee. In the 1970s, it would have had only a “limited impact” on quelling price rises which reached an annual rate of 26.9 per cent in 1975. 

According to Karen Ward, chief European market strategist at JPMorgan Asset Management, this means the Bernanke doctrine still stands and should not be forgotten. “We’ve always assumed that the structural supply side enhancements such as technology and globalisation are so great that we could never overwhelm them with demand, but it still must be the case that you can overwhelm supply with demand and ultimately generate inflation,” she says. 

It is exactly this fear which is raising inflation rate expectations in the US and Europe at the moment. Alongside a recovery of energy prices to pre-Covid levels, there has been a shortage of microchips, wood products, many metals and even cheese. These have been the proximate causes of higher inflation, but financial markets worry that the ultimate cause has been the pandemic-related fiscal and monetary stimulus which has led to a much faster economic recovery in advanced economies than was thought possible at the end of 2020. 

With economic policy pressing harder on the accelerator than at any time in recent history, spending could exceed the capacity of economies to provide goods and services, especially if the coronavirus crisis and government support have left people less willing to work, creating labour shortages and significant pressure on companies to raise wages. 

Such is the potential imbalance between rampant demand and more constrained supply, especially in the US, some supporters of centre-left policy ideas say that warning lights are flashing. Larry Summers, Treasury secretary in the Clinton administration, thinks policy has become far too lax, repeatedly criticising the “dangerous complacency” over inflation of today’s policymakers in recent weeks. 

While the White House has hit back, saying “a strong economy depends on a solid foundation of public investment, and that investments in workers, families and communities can pay off for decades to come”, even Janet Yellen, current Treasury secretary, has acknowledged the possible need for interest rates to rise “to make sure that our economy doesn’t overheat”. 

The policy shift has come at a point when economists generally accept that some of the big global forces holding prices down are much weaker than they were. In the 1990s and 2000s, globalisation led to a huge transfer of the production of goods from high wage economies to China and eastern Europe, accelerating a decline in the power of workers in advanced economies to force their employers to pay them more, keeping prices low. 

But these forces are at a turning point, according to Charles Goodhart, former chief economist of the Bank of England, and an author of the book The Great Demographic Reversal. The long boom in the size of its workforce has ended and its population is on the verge of falling for the first time in decades. Goodhart says that fewer new workers becoming integrated into the global labour force at a time of shrinking workforces in advanced economies as populations age will raise the pressures on companies to push up wages, increasing underlying inflationary pressures. 

The change in demographic pressures have already been around for a decade and are intensifying, Goodhart says. He had been wary of putting a date on the coming inflation, saying that the world is likely so see rising inflationary pressure within five years and “we are fairly sure it would have happened by 2030”. 

That was before Covid struck. Now, he says the underlying pressures, alongside more stimulative policies and Covid-related restrictions in supply, have brought forward the moment. “We tend to think that because of supply constraints in particular, it’s going to be more inflationary in 2021 than central bankers originally thought and it will last longer in 2022 and 2023 because there will be a confluence of the build-up of large monetary balances . . . combined with large continued fiscal expansion.” 

Turning to specific examples of prices he expected to see rise, Goodhart notes how the added demand for holidays in the UK would push up the prices of holiday rentals, hotels and even ice cream this summer. “You’d have to be a saint not to raise your prices,” he says. 

Demographic pressures are not something that can be reversed quickly, nor he argues can the forces of globalisation, which have gone into retreat having become politically unpopular in many advanced economies. Again, this is most acute in the US where economists such as Adam Posen, president of the Peterson Institute for International Economics, urges Americans to “embrace economic change rather than nostalgia” in domestic production, especially in manufacturing, as a means to improving living standards and promoting non-inflationary growth. 

So far, however, although financial market expectations of inflation have risen sharply in 2021, mainstream policymakers are remaining calm. 

There is increasing chatter in the Fed that at some point the current members of the interest-rate setting committee need to think about scaling back the pace of money creation and purchases of government bonds. But the view is that inflation is recovering to more normal levels and the US central bank has pledged to keep policy ultra accommodative until it achieves a more inclusive recovery. 

This is the right approach, says Laurence Boone, chief economist of the OECD in Paris, a view which chimes with similar attitudes in central banks around the world. “It’s too early to ring the alarm bells about inflation,” she says. “That doesn’t mean one doesn’t have to watch what’s happening and we’re seeing frictions with the reopening of demand and supply after the crisis . . . but the right policy is to ease tensions on the supply side more than central bank action [to quell inflationary pressures].” 

In most economies, there remains significant slack in the labour market, she adds, and the big demographic pressures could be eased significantly with later retirement, while other parts of Asia and Africa would be delighted to integrate into the global economy as China did. 

Boone’s view still represents the consensus opinion among economists and there is considerable confidence in central banks that any rise in inflation this year will be temporary and easily tamed without having to tighten policy significantly. 

But, for the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan and something more difficult to control.

The challenge India faces

Stunted growth: the mystery of the UK’s productivity crisis

Duncan Weldon in The Guardian

Without it the future is bleak, but despite a bewildering array of theories for why this key economic driver has dropped there is no clear answer

 

Illustration: Robert G Fresson




Our economic future isn’t what it used to be. In March the Office for Budget Responsibility (OBR) revised down its growth estimates for each of the next five years. The chancellor was quick to blame a weakening world economy but the true driver lies closer to home. The problem isn’t a loud global economic crash but something much quieter: engine trouble. Productivity growth, the long-term motor of rising living standards, is slowing. The fact that this appears to be happening across the globe offers scant consolation.

What’s worse is that no one is entirely sure what is causing the problem or how to fix it. And it is coming at about the worst time imaginable: global demographics are changing, with the supply of new workers set to slow and the older share of the population rising. The future is of course inherently unknowable, but the reasons for longer-term pessimism on economic growth are starting to stack up.

Productivity – the amount of output produced for each hour worked – rose at a fairly steady annual rate of about 2.2% in the UK for decades before the recession. Since the crisis though, that annual growth rate has collapsed to under 0.5%. The OBR has decided to revise down its future assumption on productivity from that pre-crisis 2.2% to a lower 2%. That small revision was enough to give the chancellor a large fiscal headache in his latest budget, but it still assumes a big rebound in productivity growth from its current level. What if that rebound doesn’t come?

The near death of the British steel industry is a tragedy. But for all the political heat it has generated, its long-term consequences wouldn’t be as serious as the wider crisis. For while closing mills are highly visible, slipping productivity is not.

Looking at the global picture shows that while there are of course national nuances, the overall impression is grim and dates back to before the 2008 crash. Everywhere from the “dynamic” United States to “sclerotic” France, productivity growth has dropped considerably in recent years. The UK is an outlier with a bigger fall than many, but not by much.

Some of this could be explained by measurement issues. To use every economist’s favourite example, it is straightforward to measure the inputs, the outputs – and hence the productivity – of a widget factory, even if no one is really sure what a widget is. It is harder to do the same with an online widget brand manager. But the mismeasurement would have to be on an unprecedented scale to explain away the problem.

What we are left with is a bewildering array of theories as to what has driven the fall but no clear answer. We know the productivity slowdown is broad based and happening across most sectors of the economy. Lower corporate and public investment than in the past almost certainly explains some of the shortfall. Weaker labour bargaining power than in previous decades might also be playing a role. Low wages are allowing low-skill, low-productivity business models to expand and deincentivising corporate spending on new kit. Why spend on expensive labour-saving technology when labour itself is cheap?

But if you think you’ve found the full answer, you probably need to read more. There almost certainly isn’t a single explanation. It’s still perfectly possible to argue that productivity pessimism is overdone, that we are still suffering the lingering after-effects of the financial crisis that will eventually end. But with each passing year that becomes more difficult. A good strategy is to hope for the best but prepare for the worst. And the worst is pretty bad.

George Osborne at the Airbus factory in Filton, Bristol. Photograph: Andrew Matthews/PA

Productivity growth is more than just a financial concept, it’s a balm that can soothe class conflicts and take some of the sting out of distributional politics. If a worker’s output rises by 2% without an increase in their hours, then giving that worker a 2% pay rise is relatively straightforward. If their productivity is flat then a 2% pay rise results in either a fall in profits or a rise in prices. A world of lower productivity is a world of more intense fighting over the more meagre divisions of economic growth.

Productivity is one of two key factors determining the trend growth rate of an economy; the speed limit at which a country can expand without pushing up prices. The other is population. Falling birth rates across the advanced economies created a demographic “sweet spot” that lasted from the late 70s until fairly recently. Fewer children meant a rising share of the population was of working age. But fewer children in the past means fewer workers today and rising longevity means a rising share of the population who are retired. Across the west, the amount of workers for each retired person is heading in the wrong direction. Increasing the retirement age and more immigration are both theoretical fixes, but the scale of both required to fundamentally change the picture is almost certainly politically impossible.

Slowing population growth and weaker expected productivity growth have led the US Congressional Budget Office to revise down its estimate of US trend growth from north of 3% in the 1990s and 2000s to closer to 2%. In the UK, policymakers once thought trend growth was 2.75% and have now cut that to 2.2%. Without a productivity bounce that could fall to closer to 1-1.5% in the coming years.

UK's productivity plan is ‘vague collection of existing policies’


Japan is the usual cautionary tale of what happens when growth slows. A country that had a financial bust, made policy mistakes in the aftermath and then experienced an ageing society. But at least productivity growth didn’t collapse. Headline economic growth was weak and the government’s debt burden has soared, but real incomes and employment held up well. Japanese demographic transition at the same time as a productivity crunch is the worrying possibility facing the west.

So what are policymakers to do? They could accept lower growth and concentrate on distribution. Of course the politics of redistribution are much easier when resources are growing. Lower growth also means that the public and private debt piles built up across the west in anticipation of a brighter future would be much harder to deal with. The obvious answer is to increase public investment. This alone wouldn’t solve the productivity crisis but it could help, and certainly wouldn’t hurt. At a time when government borrowing costs are near historical lows this is about as close to a free lunch as economic policy ever gets.

Finding ways to boost corporate investment is trickier, as there isn’t much in the way of direct policy levers open to government. Reforming corporate governance to encourage more long-term decision-making could help. And while economists tend to assume that productivity growth leads to wage growth, there could be circumstances in which the relationship is inverted. The government’s new national living wage may act as a spur to improve productivity as businesses see their cost-base rise.

But if productivity remains low then difficult choices lie ahead. We’ll need either a substantially smaller state with less generous social security, or higher tax revenues as a share of the economy. That means raising the kind of taxes that bring in substantial sums – VAT, national insurance and income tax.

Neither a smaller state nor higher taxes are likely to prove popular. But governing in a lower-growth world was never going to be easy.

India on track to becoming a failed state

• BY:RAKESH AHUJA 
• From:The Australian 
• November 15, 2012 12:00AM

•  

INDIA ranks 78th in the Failed States Index 2012, which measures adversarial social, economic and political pressures faced by nations. Finland scores least risk at 177 and Somalia worst at 1.

India has fallen steeply from 110 in 2007.

Anecdotal evidence based on recent corruption and mal-governance-ridden domestic scams suggests it at 45-55 next year in company with the likes of Colombia, Angola and Kyrgyzstan.

India passes muster on just two of the 12 indicators that comprise the index -- intellectual capital and international behaviour.

It scores abysmally on other crucial indicators, including demographic pressures (malnutrition, water scarcity); group grievances (ethnic & communal tensions, powerlessness); state legitimacy (corruption, protests); public services (crime, social services); uneven economic development (income inequalities) and on political elite behaviour (factionalised and constantly in a gridlock over a quest for political power).

Is India on a slow track to a failing state? A pointer to what might be in store for India comes from the book by Daron Acemoglu and James Robinson, Why Nations Fail.

After a comprehensive survey of the rise and fall of nations from the Roman Empire to the Soviet Union to (new) African states, they contend that nation-states do not fail because of culture, weather, geography or ignorance of what policies are right. Nations collapse because "extractive" economic institutions fostered by local elites come to rule them.

Abetted by self-seeking functionaries, these institutions exist for the benefit of elites, who gain from extraction of valuable minerals, land, water, labour or from protected monopolies.

They conclude that the key to sustained progress is in "combining political centralisation with inclusive economic institutions". Absolutist states have strong centres, but power wielders fashion an economic framework to enrich themselves.

In democratic states, power rests with a plurality of groups and inclusive institutions arise.

But if there is no strong political centre to provide direction and to control or sanction, power accrues to the elite(s). Extractive institutions then arise. In both scenarios, internal contradictions pile up -- indicators for the Failed States Index provide a measure -- and the exploitative structure inevitably fails, bringing down the entire corrupt system with it.

The relevance of this analysis to India today is inescapable.

The centre is not holding. In the era of coalitions, power has been seeping from the Delhi sultanate to islands of political elites. And the relatively inclusive institutions midwifed by a superbly crafted constitution have been suborned by national and regional establishments into extractive tools for personal gain.

Indian legislatures are no longer forums for informed debate. Instead, under the guise of "seeking a consensus", they are now nodal points for crass political horse-trading. Or for obstructionist mobocracy.

Cutting across party affiliations, regional and social loyalties, the objective of the political class is to acquire power, not sound governance or advancing national interests. It has mauled the ideology of democracy into the sole objective of winning elections. Its parasitic behaviour is focused on extracting perks from public and private sectors; on status and symbols; competitive populism and casteism; dynasticitis; protecting each other from greater accountability; and on blatantly exercising discretion-based powers, which the Brits used for disbursing patronage to divide and rule, and which now serve as founts for extortion in cahoots with bureaucrats and crony capitalists.

Prime Minister Manmohan Singh's indecisive leadership relies largely on confetti of populist schemes for electoral advantage. His own personal integrity is unquestionable, but he's led the most corrupt federal government since independence, benignly neglecting massive sleaze in ministerial fiefdoms under his watch.

Meanwhile bureaucracy, the famed steel frame of yesteryears, is rusting. With officials appointed and removed at whims of elected kleptocrats, the anointed favourites' humiliating task is to extract swill from troughs of discretionary powers for political snouts to sip. As for the defence establishment, it is now mired in scandals from land grabbing, procurement frauds to generals expropriating a share of largesse meant for war widows.

Worse, the army chief dragging the government to the courts on a personal issue has opened a chink to armed forces' potential politicisation.

The Indian judiciary is doing its best to fill the vacuum in the wake of a somnolent executive and paralysed legislatures.

But this activism has a major downside.

Handing out pronouncements daily on relatively trivial subjects, its higher reaches are becoming part of the political process, compromising their role as chambers of dispassionate reflection on issues of constitutional significance. It is also tainted by corruption and dispensing too little justice, too late. The legal system can no longer cope with the demands of a litigious citizenry increasingly aware of its rights.

The concerted attempts by the three constitutional pillars to undermine the media's role as auditors of their accountability is another insidious trend. India is turning increasingly censorious on books, arts, cinema, the internet and reporting.

Freedom is lost in small steps. Calls for protests to the American government over an article critical of Singh in the Washington Post betrays a disturbing mindset; it implicitly assumes that a government should control media content.

The debilitating shenanigans of the unholy, well-knit trinity of politicians, bureaucrats and their private sector cronies are now eroding confidence at home.

The tarnished economy is treading towards a 4-5 per cent GDP growth rate.

This self-inflicted, reform-resistant decline is evident in India's ranking at 111 in the latest Economic Freedom of the World Index (2010 data). It gauges the extent to which the policies and institutions in a country support economic activity for poverty reduction, etc. India is closer to Burundi (144) than to Hong Kong (1). Notably, it was 76th in 2007. This BRIC "angel" can only fall further in 2012.

The international euphoria that lauded India's recent "rise" from stultified economic depths is fading. Pessimism about its capabilities on regional and geopolitical fronts is seeping. The fluffy souffle of arrogant pretensions to a superpower status has fallen flat. India is a half-baked power.

Arguably, India's very antecedents are partly responsible for the fast-diminishing political and administrative authority of the central government. Post-Independence India was always an artificial construct. Fashioning it from 550-odd distinct entities was a landmark achievement.

But, to paraphrase Mark Twain, it was only a bundle of countries. It began to unravel with linguistic divisions. Sixty-five years later, values and practices associated with a genuine democracy have still not coalesced into good governance for the common good in (purportedly) a one nation-state.

Instead, demands and counter-demands and protests on endless issues have accelerated. Impulses more in line with a confederation than with a federation are emerging.

Interestingly, the government's acknowledgement that some economic reforms need not apply nationwide because of local opposition suggests a subliminal acceptance of a co-federalist model.

And yet the Indian political class continues to smugly showcase the country as an example of "unity in diversity".

A million mutinies thus confront India today. But the cadaverous gerontocracy across its political board remains preoccupied with fiddling for power post-2014 elections, while relegating policies to meet the aspirations of an expanding cohort of new, upwardly mobile stakeholders to the back burner.

India has depreciated from a "functioning anarchy" to a dysfunctional democracy.

If the idea of India (secularism, democracy) is to survive, the good among the ugly will have to cross their political and social divides and forsake the "me" culture to renovate the constitution and abolish feudal powers of patronage before darkness falls at noon on one of the most misgoverned nations on the globe.

Rakesh Ahuja heads Axessindia Consultancy Group, Canberra, and was the former Australian Deputy High Commissioner to India.

Brics miracle over as world faces decade-long slump

US Conference Board fears Brics miracle over as world faces decade-long slump

The catch-up boom in China, India, Brazil is largely over and will be followed by a drastic slowdown over the next decade, according to a grim report by America’s top forecasting body.

Image 1 of 3

China’s double-digit expansion rates will soon face, fallng to 3.7pc from 2019-2025 as the aging crisis hits. 

By Ambrose Evans-Pritchard

7:37PM GMT 13 Nov 2012

377 Comments

Europe's prognosis is even worse, with France trapped in depression with near zero growth as far as 2025 and Britain struggling to raise its speed limit to 1pc over the next three Parliaments.

The US Conference Board’s global economic outlook calls into question the "BRICs" miracle (Brazil, Russia, India, China), arguing that the low-hanging fruit from cheap labour and imported technology has already been picked.

China’s double-digit expansion rates will soon be a romantic memory. Growth will fall to 6.9pc next year, then to 5.5pc from 2014-2018, and 3.7pc from 2019-2025 as the aging crisis hits and investment returns go into "rapid decline".

Growth in India - where the reform agenda has been "largely derailed" - will fall to 4.7pc to 2018, and then to 3.9pc. Brazil will slip to 3pc and then 2.7pc. Such growth rates will leave these countries stuck in the "middle income trap", dashing hopes for a quick jump into the affluent league.

"As China, India, Brazil, and others mature from rapid, investment-intensive ‘catch-up’ growth, the structural ‘speed limits’ of their economies are likely to decline," said the Board. 

The fizzling emerging market story is a key reason why the West has relapsed this year. The world is now facing a synchronized downturn all fronts, with little scope for fiscal and monetary stimulus.

^{France slumps to bottom of the class, with Britain close behind}

"Mature economies are still healing the scars of the 2008-2009 crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won’t do so in 2013," it said.

The Conference Board says Europe’s demographic crunch and poor productivity has reduced trend growth to near 1pc, though it could be worse if the region makes a hash of monetary policy and follows Japan into a "structural deflation trap". Large numbers of people may be shut out of the jobs market forever.

Germany will outperform Italy and France massively over the next five years, implying a bitter conflict within EMU over control of the policy levers. While the report does not analyze debt-dynamics, it is hard to see how the Club Med bloc could keep its head above water in such a grim scenario or stop political revolt coming to the boil.

Bert Colijn, the Board’s Europe economist, said France’s woes stem from low investment, as well as delayed austerity and reform. The reckoning will now come.

He thinks Spain will fare better since it has already taken its bitter medicine. It is expected to grow at 1.8pc for the next decade as "Schumpeterian" creative destruction clears away dead wood and unleashes fresh energy - a contentious point since labour economists argue that unemployment of 25.6pc is doing permanent damage to parts of the workforce, and therefore to economic potential.

America has a younger age profile and should eke out 2.5pc to 3pc growth until 2018, and 2pc thereafter. It has a big "output gap" of 6pc of GDP to close before it hits any speed limit, so part of this is just the effect of elastic snapping back.

^{Emerging markets deflate}

The Board said lack of demand lies behind the current global malaise, but the fading technology cycle may prove a greater threat over the long-term.

The thesis is based on work by professor Robert Gordon from Northwestern University, who argues that the great innovation burst of the last 250 years is a "unique episode in human history" and may be fading. His claims challenge the work of Nobel laureate Robert Solow - orthodoxy since the 1950s - that economic growth is a perpetual process once the right legal and market framework is in place.

The Conference Board’s forecast is starkly at odds with a report by the OECD last week predicting that China would keep growing at 6.6pc until 2030, and India at 6.7pc -- propelling the two rising powers to global dominance.

Apostles of the BRICS revolution are certain to dispute the claims. Yet there could be no clearer sign that the emerging market euphoria of the last decade has fully deflated.

Population decline is the elephant in the world's living room

The fifth horseman of the apocalypse
By Spengler

(The essay below appears as a preface to my book How Civilizations Die (and Why Islam is Dying, Too). [1]

Population decline is the elephant in the world's living room. As a matter of arithmetic, we know that the social life of most developed countries will break down within two generations. Two out of three Italians and three of four Japanese will be elderly dependents by 2050. [1] If present fertility rates hold, the number of Germans will fall by 98% over the next two centuries. No pension and health care system can support such an inverted population pyramid. Nor is the problem limited to the industrial nations. Fertility is falling at even faster rates - indeed, at rates never before registered anywhere - in the Muslim world. The world's population will fall by as much as a fifth between the middle and the end of the 21st century, by far the worst decline in human history.

The world faces a danger more terrible than the worst Green imaginings. The European environmentalist who wants to shrink the world's population to reduce carbon emissions will spend her declining years in misery, for there will not be enough Europeans alive a generation from now to pay for her pension and medical care. [2] For the first time in world history, the birth rate of the whole developed world is well below replacement, and a significant part of it has passed the demographic point of no return.

But Islamic society is even more fragile. As Muslim fertility shrinks at a rate demographers have never seen before, it is converging on Europe's catastrophically low fertility as if in time-lapse photography. The average 30-year-old Iranian woman comes from a family of six children, but she will bear only one or two children during her lifetime. Turkey and Algeria are just behind Iran on the way down, and most of the other Muslim countries are catching up quickly. By the middle of this century, the belt of Muslim countries from Morocco to Iran will become as gray as depopulating Europe. The Islamic world will have the same proportion of dependent elderly as the industrial countries - but one-tenth the productivity. A time bomb that cannot be defused is ticking in the Muslim world.

Imminent population collapse makes radical Islam more dangerous, not less so. For in their despair, radical Muslims who can already taste the ruin of their culture believe that they have nothing to lose.

Political science is at a loss in the face of demographic decline and its consequences. The wasting away of nations is an insoluble conundrum for modern political theory, which is based on the principle of rational self-interest. At the threshold of extinction, the political scientists' clever models break down. We "do not negotiate with terrorists". But a bank robber holding hostages is a terrorist of sorts, and the police negotiate with such miscreants as a matter of course. And what if the bank robber knows he will die of an incurable disease in a matter of weeks? That changes the negotiation. The simple truth - call it Spengler's Universal Law #1 - A man, or a nation, at the brink of death does not have a "rational self-interest".

Conventional geopolitical theory, which is dominated by material factors such as territory, natural resources, and command of technology, does not address how peoples will behave under existential threat. Geopolitical models fail to resemble the real world in which we live, where the crucial issue is the willingness or unwillingness of a people inhabiting a given territory to bring a new generation into the world.

Population decline, the decisive issue of the 21st century, will cause violent upheavals in the world order. Countries facing fertility dearth, such as Iran, are responding with aggression. Nations confronting their own mortality may choose to go down in a blaze of glory. Conflicts may be prolonged beyond the point at which there is any rational hope of achieving strategic aims - until all who wish to fight to the death have taken the opportunity to do so.
Analysis of national interests cannot explain why some nations go to war without hope of winning, or why other nations will not fight even to defend their vital interests. It cannot explain the historical fact that peoples fight harder, accepting a higher level of sacrifice in blood and treasure, when all hope of victory is past. Conventional geopolitical analysis cannot explain the causes of population collapse either, any more than its consequences - for example, under what circumstances strategic reverses (notably the two world wars of the past century) may crush the aspirations of the losers and result in apathy and demographic death.

Why do individuals, groups, and nations act irrationally, often at the risk of self-destruction? Part of the problem lies in our definition of rationality. Under normal circumstances we think it irrational for a middle-aged man to cash in his insurance policy and spend money as fast as possible. But if the person in question has a terminal illness and no heirs, we think it quite reasonable to spend it all quickly, like Otto Kringelein in Grand Hotel or his updated equivalent, Queen Latifah's character in The Last Holiday. And if we know that we shall presently die of rabies, what is to prevent us from biting everyone we dislike? Countries sometimes suffer the equivalent of terminal illness. What seems suicidal to Americans may appear rational to an existentially challenged people confronting its imminent mortality.

Self-immolation of endangered peoples is sadly common. Stone-age cultures often disintegrate upon contact with the outside world. Their culture breaks down, and suicides skyrocket. An Australian researcher writes about "suicide contagion or cluster deaths - the phenomenon of indigenous people, particularly men from the same community taking their own lives at an alarming rate". [3] Canada's Aboriginal Health Foundation reports, "The overall suicide rate among First Nation communities is about twice that of the total Canadian population; the rate among Inuit is still higher - 6 to 11 times higher than the general population." [4] Suicide is epidemic among Amazon tribes. The London Telegraph reported on November 19, 2000,

The largest tribe of Amazonian Indians, the 27,000-strong Guarani, are being devastated by a wave of suicides among their children, triggered by their coming into contact with the modern world. Once unheard of among Amazonian Indians, suicide is ravaging the Guarani, who live in the southwest of Brazil, an area that now has one of the highest suicide rates in the world. More than 280 Guarani have taken their own lives in the past 10 years, including 26 children under the age of 14 who have poisoned or hanged themselves. Alcoholism has become widespread, as has the desire to own radios, television sets and denim jeans, bringing an awareness of their poverty. Community structures and family unity have broken down and sacred rituals come to a halt.

Of the more than 6,000 languages now spoken on the planet, two become extinct each week, and by most estimates half will fall silent by the end of the century. [5] A United Nations report claims that nine-tenths of the languages now spoken will become extinct in the next hundred years. [6] Most endangered languages have a very small number of speakers. Perhaps a thousand distinct languages are spoken in Papua New Guinea, many by tribes of only a few hundred members. Several are disappearing tribal languages spoken in the Amazon rainforest, the Andes Mountains, or the Siberian taiga. Eighteen languages have only one surviving speaker. It is painful to imagine how the world must look to these individuals. They are orphaned in eternity, wiped clean of memory, their existence reduced to the exigency of the moment.

But are these dying remnants of primitive societies really so different from the rest of us? Mortality stalks most of the peoples of the world - not this year or next, but within the horizon of human reckoning. A good deal of the world seems to have lost the taste for life. Fertility has fallen so far in parts of the industrial world that languages such as Ukrainian and Estonian will be endangered within a century and German, Japanese, and Italian within two. The repudiation of life among advanced countries living in prosperity and peace has no historical precedent, except perhaps in the anomie of Greece in its post-Alexandrian decline and Rome during the first centuries of the Common Era. But Greece fell to Rome, and Rome to the barbarians. In the past, nations that foresaw their own demise fell to the Four Horsemen of the Apocalypse: War, Plague, Famine, and Death. Riding point for the old quartet in today's more civilized world is a Fifth Horseman: loss of faith. Today's cultures are dying of apathy, not by the swords of their enemies.

The Arab suicide bomber is the spiritual cousin of the despondent aboriginal of the Amazon rain forest. And European apathy is the opposite side of the coin of Islamic extremism. Both apathetic Europeans and radical Muslims have lost their connection to the past and their confidence in the future. There is not a great deal of daylight between European resignation to cultural extinction at the hundred-year horizon, and the Islamist boast, "You love life, and we love death." Which brings us to Spengler's Universal Law #2: When the nations of the world see their demise not as a distant prospect over the horizon, but as a foreseeable outcome, they perish of despair. Like the terminally ill patient cashing in his insurance money, a culture that anticipates its own extinction has a different standard of rationality than does conventional political science.

Game theorists have tried to make political strategy into a quantitative discipline. Players with a long-term interest think differently than players with a short-term interest. A swindler who has no expectation of encountering his victim again will take what he can and run; a merchant who wants repeat customers will act honestly as a matter of self-interest. By the same token, the game theorists contends, nations learn that it is in their interest to act as responsible members of the world community, for the long-run advantages of good behavior outweigh the passing benefits of predation.

But what if there isn't any long run - not, at least, for some of the "players" in the "game"? The trouble with applying game theory to the problem of existential war is that the players may not expect to be there for the nth iteration of the game. Entire peoples sometimes find themselves faced with probable extinction, so that no peaceful solution appears to be a solution for them.

Situations of this sort have arisen frequently in history, but never as frequently as today, when so many of the world's cultures are not expected to survive the next two centuries. A people facing cultural extinction may well choose war, if war offers even a slim chance of survival. That is just how radical Islamists view the predicament of traditional Muslim society in the face of modernity. The Islamists fear that if they fail, their religion and culture will disappear into the maelstrom of the modern world. Many of them rather would die fighting. 

Paradoxically it is possible for wars of annihilation to stem from rational choice, for the range of choices always must be bounded by the supposition that the chooser will continue to exist. Existential criteria, that is, trump the ordinary calculus of success and failure. If one or more of the parties knows that peace implies the end of its existence, it has no motive to return to peace. That is how the radical Islamists of Hamas view the future of Muslim society. A wealthy and successful Jewish state next to a poor and dysfunctional Palestinian state may imply the end of the moral authority of Islam, and some Palestinians would rather fight to the death than embrace such an outcome. Rather than consign their children to the Western milieu of personal freedom and sexual license, radical Muslims will fight to the death.

But why are Muslims - and Europeans, and Japanese - living under a societal death sentence? Why are populations collapsing in the modern world? Demographers have identified several different factors associated with population decline: urbanization, education and literacy, the modernization of traditional societies. Children in traditional society had an economic value, as agricultural labor and as providers for elderly parents; urbanization and pension systems turned children into a cost rather than a source of income. And female literacy is a powerful predictor of population decline among the world's countries. Mainly poor and illiterate women in Mali and Niger bear eight children in a lifetime, while literate and affluent women in the industrial world bear one or two.

But what determines whether it is one child or two? Children also have a spiritual value. That is why the degree of religious faith explains a great deal of the variation in population growth rates among the countries of the world. The industrial world's lowest fertility rates are encountered among the nations of Eastern Europe where atheism was the official ideology for generations. The highest fertility rates are found in countries with a high degree of religious faith, namely the United States and Israel. And demographers have identified religion as a crucial factor in the differences among populations within countries. When faith goes, fertility vanishes, too. The death-spiral of birth rates in most of the industrial world has forced demographers to think in terms of faith. Dozens of new studies document the link between religious belief and fertility.

But why do some religions seem to provide better protection against the sterilizing effects of modernity than others? The fastest demographic decline ever registered in recorded history is taking place today in Muslim countries; demographic winter is descending fastest in the fifth of the world where religion most appears to dominate. And even more puzzling: why does one religion (Christianity) seem to inoculate a people against demographic decline in one place (America) but not in another (Europe)? In many parts of the world, what once looked like an indestructible rock of faith has melted in the hot light of modernity. In others, modernity has only added compost for the growth of faith. Apparently some kinds of faith will survive in the modern world, and others will fail.

Strategic analysts and politicians are poorly equipped to understand these new and disturbing circumstances, with their overarching implications for political strategy and economics. To make sense of the world today we must do better than secular political science, which pigeon-holes faith as one more belief-structure among the other belief-structures in its collection of specimens.

Our political science is uniquely ill-equipped to make sense of a global crisis whose ultimate cause is spiritual. But was not always so. From the advent of Christianity to the seventeenth-century Enlightenment, the West saw politics through the lens of faith. St Augustine's fifth-century treatise The City of God looked through the state to the underlying civil society, and understood that civil society as a congregation - a body bound together by common loves, as opposed to Cicero's state founded only on common interests. (In the concluding chapter, we will consider Augustine's view as a lodestar for an American foreign policy that realistically addresses the threats created by the imminent demographic collapse of nations.)

We might call Augustine's view "theopolitics." A millennium later, Niccolo Machiavelli and Thomas Hobbes changed the subject, to the individual's desire for power, wealth, and personal survival. Hobbes, the 17th-century grandfather of modern political science, introduced a radically truncated anthropology, centered on the individual's struggle for survival. The state, he argued, was a compact among individuals who survival prospects were poor in a "state of nature"; thus they ceded their individual rights to a sovereign in return for protection. A century later Montesquieu added differences in climate, terrain, and resources to the mix. The modern view of atomized man motivated only by the pursuit of material advantage is loosely known as "geopolitics".

What prompted this revolution in political thinking that has left modern political theory without the tools to understand the causes and implications of the current demographic collapse? Undoubtedly, the terrible religious wars of the 16th and 17th centuries poisoned the idea of faith-based politics. Europe fought dynastic and political wars under the false flag of religion until the Thirty Years' War of 1618-1648 destroyed almost half the population of Central Europe. The Peace of Westphalia that ended this fearful war forever buried the political model that Christendom had advanced since Augustine: a universal Christian empire that would keep the peace and limit the arbitrary power of kings. Things are not as simple as they seem in the standard account of the violence that soured the West on theopolitics. For - as we shall see - the nation-states that opposed universal empire were founded on a contending kind of faith, a fanatical form of national self-worship whose internal logic was not played out until world war and genocide in the 20th century, and the collapse of faith and fertility in the 21st. But when Thomas Hobbes published his great book Leviathan three years after the end of the Thirty Years' War, it seemed credible that "the papacy is no other than the ghost of the deceased Roman Empire, sitting crowned upon the grave thereof".

One powerful attraction of the Hobbesian revolution in political thinking was the power it promised to intellectuals. If politics reduces to the individual and his material concerns, then it is possible to manipulate the individual through the alternation of his material circumstances. A clever elite could fix all the problems of the world. Immanuel Kant boasted in 1793 that he could write a constitution for a race of devils, "if only they be rational." Europe ignored him and proceeded to destroy itself in the Napoleonic Wars and the two world wars of the past century. Today, as in Kant's time, the great frustration in world affairs is the refusal of some players to act rationally. Something was gained, but much more was lost, in the 17th-century Hobbesian revolution in political thought. To view human beings as creatures concerned solely with power, wealth, and security is an impoverished anthropology. The missing tools - the ones Machiavelli and Hobbes removed from the toolbox - are exactly the ones we need to understand and cope with the dangers inherent in the wholesale collapse of cultures that faces us today.

Secularism in all its forms fails to address the most fundamental human need. Sociologist Eric Kaufmann, who himself bewails the fecundity of the religious and the infertility of the secular, puts it this way: "The weakest link in the secular account of human nature is that it fails to account for people's powerful desire to seek immortality for themselves and their loved ones." Traditional society had to confront infant mortality as well as death by hunger, disease, and war. That shouldn't be too troubling, however: "We may not be able to duck death completely, but it becomes so infrequent that we can easily forget about it."

Has death really become infrequent? Call it Spengler's Universal Law #3: Contrary to what you may have heard from the sociologists, the human mortality rate is still 100%.

We can stick our fingers in our ears and chant "I can't hear you!" only so long in the face of mortality. Religion offers the individual the means to transcend mortality, to survive the fragility of a mortal existence. Homo religiosus confronts death in order to triumph over it. But the world's major religions are distinguished by the different ways in which they confront mortality. We cannot make sense of the role of religion in demographic, economic, and political developments - and of the different roles of different religions in different places and times - without understanding the existential experience of the religious individual. It is challenging to recount this experience to a secular analyst; it is somewhat like describing being in love to someone who never has been in love. One doesn't have to be religious to understand religion, but it helps.

But without understanding humankind's confrontation of his own morality in religion, political science is confined to analysis on the basis of the survival instinct - which suddenly seems to be failing whole peoples - and rational self-interest - at a time when nations and peoples are not behaving in a conspicuously rational manner.

At the conclusion of a previous irruption of irrationality - the First World War - a young German soldier at a remote post in Macedonia jotted down his thoughts on army postcards in the final months of the First World War. A small, bespectacled man with a thin mustache, he had been groomed to be one of the mandarins of the German academy, a philosopher whose function was to reinforce the country's confidence in its culture. Just before the war began he had returned to Judaism, after a near conversion to Christianity. As the casualty lists rose in inverse proportion to the hope of victory, the consolations of philosophy seemed hollow. Philosophers, he wrote, were like small children who clapped their hands over their ears and shouted "I can't hear you!" before the fear of death. "From death - from the fear of death - comes all of our knowledge of the All," the soldier began. It was not the individual's fear of death that fascinated the young soldier, but the way entire nations respond to the fear of their collective death. He wrote:

Just as every individual must reckon with his eventual death, the peoples of the world foresee their eventual extinction, be it however distant in time. Indeed, the love of the peoples for their own nationhood is sweet and pregnant with the presentiment of death. Love is only surpassing sweet when it is directed towards a mortal object, and the secret of this ultimate sweetness only is defined by the bitterness of death. Thus the peoples of the world foresee a time when their land with its rivers and mountains still lies under heaven as it does today, but other people dwell there; when their language is entombed in books, and their laws and customers have lost their living power.

The soldier was Franz Rosenzweig, and the postcards would become his great book The Star of Redemption. Awareness of death defines the human condition, so that human beings cannot bear their own mortality without the hope of immortality. And our sense of immortality is social. The culture of a community is what unites the dead with those yet to be born.

The death of a culture is an uncanny event, for it erases not only the future but also the past, that is, the hopes and fears, the sweat and sacrifice of countless generations whose lives no longer can be remembered, for no living being will sing their songs or tell their stories.

The first surviving work of written literature, the Epic of Gilgamesh written perhaps 3,700 years ago, recounts the Sumerian king's quest for immortality. After a journey beset by hardship and peril, Gilgamesh is told: "The life that you are seeking you will never find. When the gods created man they allotted to him death, but life they retained in their own keeping."

In the pre-Christian world, Rosenzweig points out, the peoples of the world anticipated their eventual extinction. Every nation's love of itself is pregnant with the presentiment of death, for each tribe knows that its time on earth is limited. Some fight to the death. Others cease to breed. Some do both.

Christianity first taught them the Jewish promise of eternal life. To talk of "man's search for meaning" trivializes the problem. What humankind requires is meaning that transcends death. This need explains a great deal of human behavior that otherwise might seem irrational. One does not have to be religious to grasp this fundamental fact of the human condition, but religion helps, because faith makes explicit the human need to transcend morality. Secular rationalists have difficulty identifying with the motives of existentially challenged peoples - not so much because they lack faith, but because they entertain faith in rationality itself, and believe with the enthusiasm of the convert in the ability of reason to explain all of human experience.

But not only the religious need the hope of immortality. The most atheistic communist hopes that his memory will live on in the heart of a grateful proletariat. Even if we do not believe that our soul will have a place in heaven or that we shall be resurrected in the flesh, we nonetheless believe that something of ourselves will remain, in the form of progeny, memories, or consequences of actions, and that this something will persist as long as people who are like us continue to inhabit the Earth. Humanity perseveres in the consolation that some immortal part of us transcends our death. Sadly, our hope for immortality in the form of remembrance is a fragile and often a vain one. Immortality of this sort depends upon the survival of people who are like us - that is, upon the continuity of our culture. If you truly believe in a supernatural afterlife, to be sure, nothing can really disappoint you. But there is no consolation in being the last Mohican.

And that's because of Spengler's Universal Law #4: The history of the world is the history of humankind's search for immortality. When nations go willingly into that dark night, what should we conclude about human nature?

Human beings may not be the only animals who are sentient of death. (Elephants evidently grieve for their dead, and dogs mourn their dead masters.) But we are the only animals whose sense of continuity depends on culture as much as it does upon genes. Unlike men and women, healthy animals universally show an instinct for self-preservation and the propagation of their species. We do not observe cats deciding not to have kittens the better to pursue their careers as mousers.

I do not mean to suggest that humans beings of different cultures belong to different species. On the contrary, the child of a Kalahari Bushman will thrive if raised in the family of a Glaswegian ship's engineer. (As Jared Diamond, the author of Collapse: How Societies Choose to Fail or Succeed, observes it is easier to be stupid in a modern welfare state than in a hunter-gatherer tribe in New Guinea.)

But culture performs a role among human beings similar to the role species plays for animals. An adult Bushman would never fully adapt to industrial society, any more than a Glaswegian ship's engineer would last a fortnight in the Kalahari. Insofar as an animal can be said to experience an impulse toward the future beyond his own life, that impulse is fulfilled by the propagation of the species. But individual human existence looks forward to the continuation of the culture that nurtures, sustains, and transmits our contribution to future generations. Culture is the stuff out of which we weave the hope of immortality - not merely through genetic transmission but through inter-generational communication.

In the absence of religious faith, if our culture dies, our hope of transcending mere physical existence dies with it. Individuals trapped in a dying culture live in a twilight world. They embrace death through infertility, concupiscence, and war. A dog will crawl into a hole to die. The members of sick cultures do not do anything quite so dramatic, but they cease to have children, dull their senses with alcohol and drugs, become despondent, and too frequently do away with themselves. Or they may make war on the perceived source of their humiliation.

The truth is - to invoke Spengler's Universal Law #5 - Humankind cannot bear mortality without the hope of immortality. When men and women lose the sacred, they lose the desire to live. Despairing of immortality, we stand astonished before the one fact we know with certainty - that someday we must die. This is as true of modern homo sapiens sapiens as it was of our remotest ancestors. Even Neanderthal burial sites have been unearthed with grave gifts. "Man does not live by bread alone," Moses said on the east bank of the Jordan River. The affluent peoples of the world have all the bread they need, but have lost the appetite for life.

Americans are ill-equipped to empathize with the existential fears of other nations. America is the great exception to the demographic collapse sweeping the modern world. As an immigrant nation we regenerate ourselves. We bear no baggage from a tragic past. The glue that holds us together is a common concept of justice and opportunity. The United States is what John Courtney Murray called "a propositional nation". In our benevolence and optimism we assume that all peoples are like us, forgetting that we are or descend from people who chose to abandon the tragic fate of their own nations at the further shore and selected themselves into the American nation. But we have learned that our capacity to influence events in the rest of the world, even in the absence of a competing superpower, is limited, and that the dissipation of our resources can be deadly for us. Our strategic thinking suffers from a failure to take into account the existential problems of other nations. We think in the narrow categories of geopolitics, but we need to study theopolitics - the powerful impact of religious beliefs and aspirations on world events. Even we exceptional Americans must come to grips with the collapse of faith and fertility - especially in the rapidly and dangerously declining Muslim world - in order to prevail in a world in which tragic outcomes are more common than happy endings.

Notes
1. These ratios are based on the Elderly Dependency Ratio calculated by the model of the United Nations World Population Prospects 2010 revision, assuming constant fertility. The model is available at http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm 2. Jared Diamond’s 2005 book Collapse: How Societies Choose to Fail or Succeed blames exhaustion of resource and environmental damage. The extinct people of Easter Island and the pre-Columbian Mayans chopped down too many trees, Diamond observes, and thus he argues that environmental damage is the greatest threat to our civilization. (Never mind that America has expanded its forests by 20 million acres during the past quarter century: disaster stories of this sort resonate with a public fed on media reports of global warming and apocalyptic disaster movies.) Easter Island, though, is something of a rarity in world history. The cultures about which we know the most - and from which our own civilization descends - failed from a different cause. Classical Greece and Rome died for the same reason that Western Europe, Japan, and other parts of the modern world are dying today: they lost their motivation to bring children into the world. The infertile Greeks were conquered by Rome’s army and the inexhaustible manpower of the farms of the Italian peninsula; as the Romans later grew childless, they were overrun by a small force of barbarian invaders.