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Published Monday, October 19th, 2015

“We are in a new macroeconomic epoch where the risk of deflation is higher than that of inflation and we cannot rely on the self-restoring features of market economies”. So says ex-Treasury Secretary Lawrence Summers a leading protagonist of the secular stagnation school of thought. Mr Summers has been banging this particular drum for a long time and he is gaining adherents, although they would not openly admit to subscribing to the theory.

More accurately, they may not all be secular stagnationists, but there is a broad consensus developing that the global economy is in difficulty and facing severe headwinds that threaten to bring on another recession before the previous one has been dealt with, which in turn could morph into another financial crisis. The IMF, OECD, World Bank, Bank of International Settlements and Brookings Institution have all hoisted the red warning flag. Like all coalitions they disagree on details and solutions but they share a common worry that the global economy is in trouble, led by the turn down in emerging markets.

Globalisation does not discriminate between the good and the bad. It spreads both indiscriminately in its mission of creating interdependency. In the good times it directs capital from the developed to developing world creating a dependency. In the bad times the capital rushes out again leaving the original recipient in intensive care. The infamous comment about “a great vampire squid wrapped around the face of humanity” directed at one company can be directed at global capital in general. Global capital has no emotion and no loyalty. It goes where it sees the best return.

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Posted by David Hufton