The great global recession started in the United States – and it has ended there. A week during the holidays spent in Washington DC has convinced me that 2014 will become the year when the US leads the developed world back to secure growth. The US has had some growth already, but it has been scrappy, uneven stuff that has failed to return employment to its previous peak. There have been winners, such as the oil and gas industry (did you know that the US is the world's largest producer again?), automobiles, and of course anyone who owns equities, for Wall Street had a stunning year. But this recovery has passed many people by. Socially this is deeply troubling, so the question is not whether there is going to be growth, but rather whether it will be sustained and broad enough to pull up the mass of society and not just the top 10 per cent.
It may seem a bit cavalier to assert that growth is secure, given that it has been artificially supported by huge public borrowing and ultra-loose monetary policy. But the lesson of the past year surely was that even quite a sharp tightening of fiscal policy does not necessarily destroy growth. Remember all those fears about the fiscal cliff? Well, the US went over it, tightening policy much more sharply than we did here, and yet it managed to keep going. The more cheerful financial markets got it right; the gloomy economic commentators got it wrong.
The challenge this year for the US, and indeed for the UK, will be to start to make the corresponding tightening to monetary policy without derailing the economy. The markets are optimistic, partly because the process – first the end to the monthly purchases of Treasury securities by the Federal Reserve, then the rise in short-term interest rates – is likely to be gradual. Actually the tightening has already begun because the markets have increased long-term rates. On Friday, 10-year treasuries were yielding 3 per cent, double the rate of 18 months ago, and it is quite plausible that they will go above 4 per cent this year. The effect is to pull up other long-term rates, including fixed-rate mortgages, which will create a drag on the US housing market. But just as fears about the fiscal cliff proved unfounded, so too, I suggest, will fears about the monetary cliff. Underlying growth will be too strong to be dislodged by what will, by historical standards, be a modest rise in rates.
If this is right, expect growth of around 3 per cent, maybe a bit more, for the next three years. That will enable the US to get its fiscal deficit down to 2 to 3 per cent of gross domestic product, maybe lower. There is a longer-term fiscal problem associated with demography – rising health care costs for the elderly, funding of public-sector pensions, etc – but crunch time for that is a decade away. The political fissure that led to last year's impasse remains. So the fiscal problem as patched, not fixed, but that's good enough, for now.
Whether monetary policy will be good enough is still unclear. There is in the US, as in the UK, a tacit assumption that ultra-loose money is a low-cost policy. That savers are not getting a decent return for their cash is seen as regrettable but an acceptable price to pay providing inflation stays low. You can see why. Sophisticated savers have done very well out of it. They have taken their money out of deposits and stuck it in equities. It is the unsophisticated savers who have been fleeced. So the Fed can indicate it will keep short-term rates low for a long time yet while inflation remains low.
Here, it is slightly different, for we have above-target inflation and a housing market that threatens to shoot into another boom if nothing is done to check it. The US has neither. But that does not mean that the Fed's policy, under chairman Ben Bernanke is cost-free. There, as here, ultra-loose money has benefited the rich. To oversimplify a bit, the difference is that the main winners there have been shareholders and the main winners here have been homeowners. Leave aside the economic arguments, of which the most powerful is that the policy has distorted markets and will result in misallocation of capital. There is a profound social case for more normal monetary policies. Indeed you cannot start reducing inequalities in the US without them.
What does all this mean for us? Well, for a start we should recognise and celebrate the fact that the world's largest economy (and Britain's largest single export market taking in service exports as well as merchandise ones) is on the move again. Next, we should acknowledge that our own housing- and consumption-led recovery, welcome though it is, needs to be transformed into something more durable. A world recovery, led by the US but with Europe pulling up a little, helps create the circumstances that make this possible. Expect that to happen.
But we should also be aware of a danger; that the US will make a policy error. If it tightens monetary policy too slowly, they (at some social cost) can get away with it, we can't. We are going to have to lead a global upward cycle and that will be tricky. My feeling is that the sooner we raise rates the less high they will have to go, but this is not the conventional view. But that is a problem for the summer, which seems a long way off.Reuse content