To the editors:

Statistical data about the American economy, including the details of changes in growth and productivity rates, have been compiled since the late nineteenth century. The same cannot be said of European economies. In most countries, GDP has only been reliably calculated since the 1930s, and statistics from periods of stagnation and growth are only available over shorter timescales. This is also the case for productivity ratios.

The Origins of the Crisis

The Second World War had a profound effect on the economy of Western Europe. Economic activity decreased drastically during the war years, but rebounded vigorously afterward. The post-war recovery was due, at least in part, to the Marshall Plan and transfers of equipment and know-how from American businesses. As a result, European industry became more productive than ever before and the continent enjoyed an unexpected period of prosperity.¹ In France, the period between 1945 and 1975 is known as les Trente Glorieuses—the thirty glorious years.²

Sustained by the war effort, the US economy recovered from the Great Depression much more quickly than its European counterparts. Overall productivity grew throughout Europe in the years after 1948. At the same time, productivity and growth began slowly receding in the US. The American economy then slowed significantly after 1973. This progressively reduced the competitive advantage that had been held by the US in many markets.

With this history in mind, it makes sense that secular stagnation has been much less of a concern in Europe than it has in America—that is, until the Global Recession. In 2007, the subprime bubble popped in US. The implications for the US dollar, big business, financial institutions, and government regulators were enormous. Leading economists, notably Lawrence Summers and Paul Krugman, who have long been involved in the formulation of US economic and financial policies, had good reason to seek remedies for the crisis and safeguards to ensure it did not occur again in the future.

In the American context, there are connections between the unusual measures adopted in response to this most recent crisis and the policy debates that occurred during the 1930s. As it turned out, the 2007 recession quickly spread beyond the US. In Europe, the seriousness of the crisis was intensified by the exposure of its financial institutions to the US subprime market. Credit Suisse and UBS, Switzerland’s two largest banks, were among the most vulnerable.

Lepage, Summers, and the BIS

In his essay, Henri Lepage summarizes the secular stagnation hypothesis advanced by Summers and others. He correctly observes that the efforts of the central banks to manage inflation and the money supply using quantitative easing (QE) and other unconventional measures did not really work. Lepage also casts doubt on strategies derived from the New Deal. Such approaches, he notes, cannot possibility revitalize a twenty-first-century economy with a global reach. Referring to the recent papers circulated by the Bank for International Settlements (BIS) in Basel, Lepage notes that:

• Enhanced models developed at the BIS do not offer support for the neutrality of money hypothesis. Instead, their work suggests that the Great Recession was triggered by financial imbalances.³
• Recent BIS research has disproved the existence of a natural rate of interest, a notion that is widely used in the development of most monetary policies.
• BIS empirical studies have indicated that deflation may not be as detrimental as classical economists have always supposed.⁴

Quoting from a presentation delivered by the Head of the Monetary and Economic Department at the BIS, Claudio Borio, in January 2018, Lepage stresses that standard macroeconomic models do not reflect the true importance of multinational firms.⁵ Since the late 1990s, the financial management of multinationals has been reliant upon the global wholesale money market.⁶

A cluster of global banks, many of which are American, generate most of the short-term assets that support the transborder trade in raw materials, manufactured goods, and services.⁷ The consolidation of economic influence within this group of global banks is a paradigm shift that has disrupted economic life around the world. Underpinned by technological developments and innovations, this process has re-shaped transborder flows and impacted upon most industries and markets. Financial innovations have also helped support this shift by covering risks and diversifying credit.⁸

Money, Productivity, and GDP

In addition to the changes that have transformed the financial system, Lepage observes that some traditional macroeconomic indices—GDP, productivity, and the money supply—are under stress. He might also have added that macroeconomic estimates are confounded by finance, trade, and industry on a global scale.

M1, M2, and M3 estimates no longer reliably account for global monetary assets such as eurodollars. There is a need for new indices—such as M4, developed by the Center for Financial Stability⁹—or other means to assess the amount of quasi-money that has been created worldwide. This task does not fit within the current remit of the central banks.

Many authors have offered their thoughts on the productivity slowdown. In 1987, Robert Solow remarked that, “You can see the computer age everywhere but in the productivity statistics!”¹⁰ Productivity statistics for the US economy have recorded regular cycles of ups and downs over many decades. The recent slowdown is, in fact, less exceptional than assumed in most literature. From an analysis of long-term empirical evidence, Daniel Sichel has suggested that “a sizable boost to [US] productivity growth” is at hand.¹¹ I share his views. I also see indications that, sooner rather than later, disruption arising from the digital revolution will deeply diversify the financial sector.

As it is currently computed, GDP provides an unbalanced view of the economy, overemphasizing the relative contribution of industrial manufacturing. Substantial adjustments should be made for three reasons. First, a growing share of GDP can be attributed to services that are difficult to aggregate with manufacturing output or primary production. Second, traditional statistics tend to neglect the increasing variation in quality, pricing, and delivery conditions for products such as airline tickets, cars, or home devices. Third, the constantly changing transborder arrangements in manufacturing, retail, and services markets make it difficult to statistically account for each country’s share of a global production process. Trade balances between countries must be revised to match real trade and manufacturing schemes. These are only visible in the accounts of global firms and cannot be derived from national statistics.

Central Banks and Digital Currencies

In his comments about BIS research on monetary policy, Lepage raises questions about interest rates, central banks, governments, national and multilateral economic policies, and other issues.

For the time being, at least, the two most visible and important central banks are the US Federal Reserve and the European Central Bank (ECB). Both the Fed and the ECB initiated QE in response to the crisis of 2007. A range of unexpected consequences have emerged as a result of such policies.¹² According to their statutes, the Fed and the ECB are supposed to manage their respective currencies according to the levels of inflation, interest rates, general employment, and foreign exchange rates. Generally speaking, their policies in relation to QE have rarely delivered the expected results. For example, it was hoped that driving down interest rates would stimulate the economy. On the contrary, low rates combined with a sense that the central banks would enter bond markets to reinforce their own collateral holdings helped create a situation in which both states and big businesses were incentivized to increase their debts.

This failure was magnified by two additional mishaps. In line with longstanding theories about reserve banking, bankers were asked to increase their deposits at the central banks. As a result, part of the money supply was frozen in the vaults of the central banks. Constrained by a number of complementary regulatory demands, the banking regime, in effect, perpetuated the economic standstill. Creative minds in the technology section nonetheless found ways to take advantage of these conditions. In 2009, the very first decentralized digital currency, Bitcoin, was launched.¹³ It was followed by hundreds of similar attempts to establish transborder cryptocurrencies. Among these initiatives, a dozen or two have taken off, while the majority have failed.

Despite the low success rate among newly formed cryptocurrencies, it should come as no surprise that many bankers, politicians, and even some economists are keen to downplay the prospects for digital currency initiatives. It is not a stretch to suggest that these groups have a vested interest in postponing any disruption of the existing monetary system.

• Officers of the central banks have no interest in any form of disruption. Like any monopolist, they are minded to argue in favor of preserving the status quo.¹⁴
• Governments and politicians frequently claim that cryptocurrencies are used to sustain the black-market economy, launder the proceeds of organized crime, and promote gambling, gaming, and tax evasion. These claims are greatly exaggerated. Organized crime syndicates are already familiar with the global banking system and are not about to dispense with paper money. Furthermore, a majority of the 3,000+ cryptocurrencies startups maintain a publicly accessible record of all accepted transactions.¹⁵
• Some analysts have argued that cryptocurrencies cannot be scaled up to match the volume of transactions performed by existing electronic transfer systems. This is not a valid defense of the existing monetary system, nor do the technological issues appear to be insurmountable.¹⁶ It remains to be seen which digital currency will eventually supplant some of the existing uses for money. Nonetheless, the notion that this might even be possible is clearly troubling for a variety of stakeholders.¹⁷

It is disappointing to observe banks and governments attempting to stifle innovations that could meet the needs of their constituencies. On a more positive note, it should be kept in mind that such narrow views are not universally held. Beyond the G7, smaller-scale developments in Singapore or the Swiss Cantons may be better indicators of the future prospects for monetary systems. Some of these innovations may also embody a fairer view of what people want from their financial institutions.

Jean-Pierre Chamoux

Henri Lepage replies:

I have little to add to comments by Jean-Pierre Chamoux and Yves Montenay. I thank both for adding their own experience to the debate on data methodology and measurement, which I did not develop very far.

I would like to express a slight disagreement with Chamoux’s account of the events that led to the Great Financial Crisis and the Great Recession. In his letter, Chamoux endorses the widely held view that the crisis was caused by the US subprime bubble. According to this narrative, the crisis originated in the US and was then exported to Europe. I think this is wrong. Subprimes played a subordinate role in the process; they were not the main cause. The first victims were not failing American banks or corporations, but European and mainly German Sparkassen, or public banks. From the beginning, the locus of the crisis was not specific to the United States. On August 9, 2007, BNP Paribas made the announcement that activated the cumulative process of liquidity attrition on the global wholesale money market. The inner mechanics of this market suddenly broke down for unexpected technical reasons that had little to do with a bubble popping in America.