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The missing point in the global growth debate

Market Commentary

11 December 2019

Global growth is decelerating. Policy-makers in developed economies are gearing up for yet more fiscal spending. While fiscal spending may support growth for a short time, and for longer if very carefully applied, it will not change the growth outlook fundamentally. This is because the main reason for slower growth lies elsewhere, namely in gross misallocation of capital on a global scale.

A decade of hyper-easy monetary policies has pushed so much capital into developed markets that the marginal ‘growth effectiveness’ of another Dollar in these markets is at or even below zero. Meanwhile, too little capital is available in Emerging Markets (EM), which have room to absorb inflows and much greater growth potential due to binding financial constraints. The opportunity cost of shifting capital from developed markets to EM would be small due to the low marginal growth effectiveness of capital in the former.

The simplest way to encourage a re-allocation of capital and therefore faster global growth is to weaken the Dollar. Dollar weakness will eventually happen by itself, or, alternatively, the US government may choose to weaken the Dollar unilaterally as a matter of policy. Intriguingly, it is also entirely within the power of EM governments to weaken the Dollar if they wish to claw back their fair share of global capital. All it takes is a bit of coordination on the part of their central banks.


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