What more permanent shape will the global economy take after the lockdowns are fully relieved? How fast will the global economy grow when something like normality resumes? Additional output of just 1%-2% per annum would amount to secular stagnation. Some already argue that demand will have difficulty keeping up with even modest extra supplies of goods, services and labour, and that monetary policy has shot its bolt because interest rates cannot go much below zero.
We should dismiss such underconsumption theories. Monetary stimulus comes not only from lower interest rates but also in the form of increases in the supply of money itself, as is now being demonstrated by the central banks in the developed world that are creating extra money at a rate never tried before. This is having a demonstratively helpful effect on spending and asset prices. If there is to be economic stagnation it will be for a want of willingness to supply, not from any permanent lack of demand. Stimulating demand is the easy part.
The very low interest rates in the developed world, both short and long, mean the return on savings or investing them in real assets is expected to remain low for an extended period. The expected returns on capital formation by firms and governments must accordingly be equally low. Slow growth in output and low returns on investing in additional output go together.
But does this relative abundance of savings and lack of demand for them represent a permanent state of economic affairs? Is the monetisation of debt not a large part of the explanation for low interest rates? More fundamentally, is improved technology now something of the past rather than the future? Are higher taxes and more interfering regulations going to stop the inventors and innovators, the entrepreneurs who are the true source of economic progress, from getting more out of less?
Progress in science and its application in production and distribution is surely not stagnant. Perhaps growth itself has become less capital intensive. That is why we are getting more out of the machines than we used to, so reducing the real amount that has to be invested. Robotics and artificial intelligence still promise to eliminate the drudgery and danger in work. Given enough time all work may be done by robots, built, supervised and repaired by other robots, so providing their human owners with an abundance of goods and services that would make work, incentives to work, inequality, and so economic growth itself, superfluous. The economic problem of scarcity will then have been solved.
Realising eventual abundance means doing everything now to encourage the demand for and supply of capital, and innovation in the application of savings for capital formation. This would include every encouragement to risk-taking in science and knowledge, and in its application by enterprises of all kinds. Incentives that reveal inequalities of economic outcomes are still necessary to the economic purpose. For now, low interest rates are also part of the encouragement needed. Higher real interest rates would be welcome, to indicate that the demand for capital to be put to productive purposes had increased and that growth was picking up.
The low global cost of capital encourages a flow of capital to those parts of the world where interest rates are highest. That is because savings and capital are still scarce there, potential supplies of labour are relatively abundant, and accordingly where the standard of living and production per person employed compares poorly with the developed world. This is the case in SA, where secular stagnation has, alas, become a predicted reality. The global abundance of capital is our opportunity to attract it to our shores to improve the output of workers and their incomes, if only we could play by the well-recognised rules that encourage capital inflows. Adopting those rules with enthusiasm would avoid post-Covid-19 stagnation.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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