Adam Tooze has a cult following among economists and historians alike.
The renowned English economic historian, once praised by New York Magazine as “impeccably recognized, implausibly charming” is in Australia to speak at Sydney’s Festival of Dangerous Ideas.
The US Federal Reserve’s decision to raise its key interest rate by another 75 basis points this week, and its plans for further hikes, have heightened the specter of a global economic slowdown.
Overnight, the Bank of England raised its key rate by 0.5%, in line with Indonesia and the Philippines, while the Swiss National Bank and South Africa opted for a 0.75 percentage point increase.
Tooze, a history professor at Columbia University in New York and a frequent contributor to The Guardian, has detailed the mounting economic headwinds and analyzed the key areas of the current financial turmoil for Guardian Australia.
‘Extremely serious’ recession risk
The chances of a global recession were now “extremely high” as central banks in many parts of the world raise interest rates to curb inflation.
“It’s the most dramatic simultaneous monetary policy tightening ever,” Tooze said.
The withdrawal of Covid support packages by governments as the pandemic tide recedes has also meant tapping the fiscal brakes.
“U.S. fiscal policy is in a huge contraction right now,” Tooze said. “It’s a negative resistance of 4.5% of GDP.”
Textbook moment of ‘failed technocracy’
Tooze predicted that the current policies of central banks and governments would be marked in future textbooks as a “classic moment of failed technocracy”.
The US Fed Reserve raised its target cash rate range by 75 bps to 3% to 3.25% on Wednesday, US time. It also said it expects a rise of as much as 125 basis points this year, even as Fed Chair Jerome Powell warned of a potential recession.
Tooze said other central banks will be under pressure to follow suit. Australian Reserve Bank governor Philip Lowe said last week that the bank would likely raise its cash interest rate by 25 bps or 50 bps on Oct. 4, making it a record six hikes in as many months.
The lives of hundreds of millions of people and their employment prospects would be marked by a recession, Tooze said: “This will mark the lives of those people for the rest of their lives.”
Private economists are forecasting a 20% drop in Australian property prices, the sharpest drop since the 1980s when rates soared.
Tooze said Australia and Canada had two of the “most overheated” real estate markets in the world, and he predicted “huge effects” from higher borrowing costs.
A source of support for the market may also be less present in the future.
The surge of Chinese students as well as buying real estate in Australia, the US and elsewhere was partly a “capital flight story,” he says. Buying a flat to accommodate while studying was one way to get money from China.
There have been recent signs of a renewed effort by Chinese to move money abroad ahead of a major Chinese Communist Party meeting in Beijing next month that will formally extend President Xi Jinping’s leadership.
To counter that capital flight, authorities are making it more difficult for people “outside certain networks” to access passports, Tooze said. “It is now really very difficult for the Chinese to leave discreetly.”
China is concerned
RBA Vice Governor Michele Bullock described the global economy as “on the cutting edge” on Wednesday.
One of the reasons was the fragile state of the Chinese economy. Her Covid-zero policy disrupted supply chains and a plummeting real estate market had “still not materialized,” she said. Demand for Australian iron ore in particular depended on the success of government efforts to support real estate.
“China’s real estate bubble isn’t just another real estate bubble — it’s the largest single phase of wealth accumulation in economic history,” said Tooze, noting that the number of private property owners had risen from nearly zero to 300 in a few decades. million.
“They poured more concrete in three years [in the early 2010s] than the United States throughout the 20th century,” he said.
The Chinese government may still be able to stabilize the market.
“The amazing thing is that big money in the West is taking a huge gamble on the ability of an authoritarian regime unfettered by the rule of law to conduct the largest single exercise in macroprudential, macrofinancial stabilization the world has ever seen,” said Tooze.
Assuming they can, BHP, Rio Tinto and Fortescue – and much of the Australian economy – are “all fine”.
A reason for optimism
Tooze said the “extraordinary progress” in lowering the cost of solar and wind was a “real cause for optimism,” at least as far as measures to limit global warming are concerned.
“The disappointment is that we could be even further down that cost curve” had the US and Europe and elsewhere matched China’s investment. Improving battery technology would be “fundamental” to advancing decarbonization efforts due to the intermittent presence of renewables.
He cited International Energy Agency data on total government-funded energy research ($23 billion ($A35 billion) in 2021) as evidence that we can do more.
“If we were serious about the energy transition,” he said. “You would think that collectively we would spend more than what Americans spend [each year] only on treats and food for their dogs and cats”.