If, after four years of printing money, the system isn’t working, what next?

Could oil prices go to $4 a barrel? It seems way off-beam, but last weekend at Kilkenomics, Nassim Taleb, he of The Black Swan fame, suggested in a fascinating discussion about the economics of the Middle East that oil prices are heading downwards. This is no wildcard estimate. This comes from a man who has made a fortune understanding risk and why the rest of us don’t understand it.

Whether he is right or not, this suggestion – and his further prophecy that Saudi Arabia will go bust because, far from being strong, it is the most fragile state in the region – got me thinking about conventional wisdom and mainstream assumptions about what is possible and what is impossible.

If Saudi Arabia could go bust, what else might happen – or, more significantly, what attendant events that we are not even thinking about could come to pass in the next few years?

This idea of thinking the unthinkable is one of the joys of Kilkenomics, where all sorts of thinkers from all over the world, who are not restricted in what they allow themselves to entertain, meet up.

In the Set Theatre at Langton’s in Kilkenny, Martin Wolf of the Financial Times speculated on Brexit and what might happen to Northern Ireland if Britain leaves the EU, and Scotland then leaves Britain. He thought a truncated union of England, Wales and Northern Ireland had a faintly ludicrous air to it, particularly as English nationalists in power in England mightn’t be that enamoured with the annual bill for a bit of Ireland. It’s an interesting angle. Have you thought about this?

Wolf believed that the British population would pull back from the brink in the referendum – but, that said, he conceded that the chances of Brexit are now very real. He explained that his background, as a son of Jewish refugees from Europe – whose entire families on both sides perished in the Holocaust – informed his economic views and the value he put on economic stability. He argued that whatever the unintended consequences, the most crucial element after a crisis is to make sure that the crisis doesn’t turn into a full-scale depression or doesn’t allow extremist politicians to emerge. As a European Jew, you can understand profoundly Wolf’s sensibility.

We talked about the response to the crisis by central banks and whether quantitative easing (QE) is working. He made the point that if a second Great Depression was avoided in 2008-2010, then central banks are to be lauded for what they have achieved. However, as to what’s next, he, like so many others, wasn’t sure. One thing is clear: that, while a Great Depression might have been averted in 2008-2010, the global economy doesn’t feel right.

In Europe, Britain and Japan, deflation is on the horizon. Prices – measured by traditional inflation measurements – are falling. Central banks everywhere, with the exception of the US, are still trying to stimulate the economies – to no real end. Interest rates are at zero everywhere, and in Europe, deposit rates have even turned negative – but demand is still nowhere.

Much of the rich world is characterised by a post-boom, post-debt neurosis, where the people don’t want to borrow and the banks don’t want to lend to the right people at the right rate. Now, with this in mind, let’s go back to Nassim Taleb and his view of the possible collapse of the oil price, because although his view of oil seems a bit extreme – maybe it is not. Think about the global economy right now and its inability to grow even with zero per cent interest rates; strange things happen.

Ten years ago, had you predicted interest rates would be at zero for a prolonged period, people would have thought you mad – but that is exactly what has happened. The thing about the world when it is at a tipping point is that what appeared radical before the crisis becomes mainstream, and what was mainstream becomes redundant.

The fact that central bankers have thrown the kitchen sink at the economy and the recovery is still so weak is explained by four extraordinary turns of events. The first is the depth and extent of the downturn that followed the global financial crisis; the second is the legacy of the debt crisis, whereby too much debt makes you terrified to spend, even if your income is going up a bit. Three: this fear knocks the stuffing out of business and consumer confidence; and four, and most worrying, is the evidence that the crisis and its aftermath has revealed deeper and more enduring structural problems – such as the fact that the West is getting old, manufacturing has moved to the East and productivity is falling, as investment falls too.

The net result of these four corrosive forces has been a fragile recovery and persistently high unemployment in Europe. This high level of unemployment has meant weak demand and uncomfortably low levels of inflation, which makes paying back debts more difficult. All this leaves us with the strange situation that, after years of austerity, debts in many countries are actually higher, not lower, than they were before austerity. Remember, austerity was introduced to decrease, not increase, indebtedness.

If, after four years of printing money, the system isn’t working, what next?

This is where another two Kilkenomics guests, Richard Murphy (adviser to Jeremy Corbyn) and Stephanie Kelton (American economic guru for democratic candidate Bernie Sanders), offered some new insights. They both thought that it was only a matter of time before central banks, rather than give money to the banks, might actually deposit money in people’s bank accounts. This would make people spend and, hey presto, demand would recover and off we go.

Traditionalists at this stage will guffaw and declare this could never happen. Surely such profligacy would lead to inflation, or worse?

While there is little doubt that this policy sounds radical now, allow yourself to think the unthinkable for a moment. In economic terms, the ground has shifted. It may shift again.

And after all, it was Nassim Taleb who warned of Black Swans – improbable events that have enormous consequences. Don’t rule them out.

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