America is on the mend. Or is it? The world’s largest economy is certainly generating some upbeat headlines. The US housing market is at its most buoyant for seven years, with real estate prices up 10.9pc in March. That’s helped drive consumer sentiment to a five-year high. Unemployment, too, is now 7.3pc – still painful, but its lowest level since December 2008.
Having said all that, official data last week showed America’s GDP expanding by 2.4pc in the first quarter of 2013. While strong compared to a moribund Western Europe, this was a downgrade on previous government estimates and still well below the pre-Lehman trend.
What’s more, the OECD has just forecast global growth of 3.1pc in 2013, lower than its 3.4pc estimate of six months ago. The highly influential Paris-based think-tank lowered its 2013 US growth projection, also, to 1.9pc. So, yes, the American economy is no longer flirting with recession but with the Eurozone still stuck in the doldrums, and growth slowing even in the emerging giants of the East, the world economy, with the States still very much at its heart, has yet to stage a convincing recovery.
Peer deeper into the US data and there are actually some alarming patterns. For me, apart from the Federal Reserve still cranking the QE handle to the tune of $85,000m per month, having more than tripled base money over the last five years, the most worrying concern is debt issuance. For it’s pretty clear, if you’re willing to look, that this recent US recovery derives not from more economic activity but from the issuance of sovereign debt.
No? Well, consider the data. America’s nominal GDP grew $140bn during the first three months of 2013. Over the same period, the US Treasury issued $340bn of new debt. Had that not happened, America’s national income would have shrunk $200bn over the first quarter.
It was the same story between October and December last year, to an even greater extent. American GDP increased by around $50bn during the final quarter of 2012, while the Treasury issued $370bn of new debt. In 7 of the last 8 quarters, in fact, the rate at which the US government has churned out IOUs, receiving money in return that’s then immediately spent, so feeding directly into nominal GDP, has exceeded the rise in nominal GDP for the economy as a whole.
For most of the last two years, then, and the whole of the last six months, American “growth” has been dependent on higher national debt. Without that debt issuance, the US economy would still be shrinking. No wonder global markets are so confused, continuing “to trade good news as bad” on very thin volumes, as investors worry that signs of a genuine US recovery could cause Ben Bernanke to stop administering “the medicine”.
The US will need to start “tapering” QE soon, as the OECD says. The think-tank is mindful, though, that scaling back the extraordinary measures could cause equity markets to spasm, quashing America’s feel good factor and crushing the broader recovery.
And, of course, the UK, the Eurozone and Japan are probably in a worse position than America when it comes to quitting the class-A monetary drugs. So let’s not kid ourselves that the Western world is now on the sunlit economic uplands. I wish that were true but it’s not.
I, anyway, wanted to address a separate subject this weekend. For many years, Economic Agenda has banged the drum for the US in particular, but also the UK and Western Europe, to re-impose a decisive split between commercial banks (that take deposits and lend to ordinary firms and households) and investment banks (which take big risks).
Why? Because since this divide was incrementally removed in the UK and US during the late 1980s and 90s, financial markets have lurched from crisis to crisis. No other single act did more to cause “sub-prime” and transform it from a banking crisis into a broader fiscal and economic crisis.
Once the depression-era Glass-Steagall legislation was repealed in America in 1999, Wall Street investment banks systematically used taxpayer-backed deposits to take ultra-risky bets, knowing they’d be rescued if their bets backfired. In so doing, they were competing with their City brethren, the UK having ended its “informal” banking split during the 1986 “big bang”.
Separation would prevent investment banks from gambling with ordinary deposits, exposing them to the full force of the market. At a stroke, our banking system would be far safer and the “too big to fail” issue resolved. That’s anathema, of course, the banking giants who rely on government cash for survival and from whom politicians receive campaign donations and cushy jobs once their political careers expire. Yet our lack of genuine banking reform is sowing the seeds of the next collapse – with all the economic dislocation, human pain and further bail-outs that would bring.
Those of us who called for a new Glass-Steagall back in the immediate aftermath of the sub-prime crisis were often derided. Yet numerous very serious people have emerged as strong supporters of this view. Out-going Bank of England Governor, Sir Mervyn King, backs re-imposing a genuine divide. So does former Federal Reserve boss Paul Volcker and Former UK Chancellor Lord Lawson. Even John Reed and Sandy Weill, the two Wall Street plutocrats who made vast fortunes off the back of the Clinton-era repeal, now admit that dismantling Glass-Steagall was wrong.
Draft legislation to restore Glass-Steagall has just been introduced in the US Senate. This is a companion bill to a measure in the House of Representatives that now has 63 sponsors. Over in America, the Glass-Steagall debate is live.
Sick of market instability, America’s mighty farming lobby last week called for a new Glass-Steagall. “Congress must learn from the past in order to prevent future financial crises,” said Roger Johnson, President of the US National Farmer’s Union. We’ve also lately had a courageous set of statements from an economist called Jeff Sachs.
A Professor at Columbia University, Sachs is a hugely authoritative figure. He was formerly at Harvard, where he received tenure aged just 28, the youngest economics professor in the university’s illustrious history. No stranger to the real world, Sachs is also Special Advisor to the United Nations Secretary General Ban Ki-Moon, having carried out the same role for his predecessor Kofi Annan.
In truly astonishing public testimony to the Federal Reserve, Sachs recently lacerated Wall Street and its links to America’s political class, pointing repeatedly to “massive fraud” in the US financial services industry.
Referring to “pathologically criminal behavior”, Sachs accused the big investment banks of “gaming the system to a remarkable extent … they have a docile president, a docile White House and a docile regulatory system that absolutely can’t find its voice. It’s terrified of these companies”.
Sachs then called for the “recreation of a mechanism where liquidity is separated from large-scale financial gambling”. Looking the financial lobby square in the eye, the most influential US economist of his generation said: “This I would do for sure”.
So, in the US, the debate on Glass-Steagall is now shifting. Here in the UK, our “Vickers reforms” – which introduce only Chinese walls between investment and commercial banking and have anyway been delayed to 2019 – are a deeply inadequate response to our current predicament.
While some UK authority figures have spoken out, I know for a fact that there are many, many more. They need to find their voice – and soon.