Adam Tooze has a cult following among economists and historians.
The famous English economic historian, once hailed by New York Magazine as “impeccably educated, incredibly charming” is to Australia to speak at the Festival of Dangerous Ideas in Sydney.
The US Federal Reserve’s decision to raise its key interest rate an additional 75 basis points this week and its plans for further increases have raised the specter of a global economic slowdown.
Overnight, the Bank of England raised its key rate by 0.5%, as did Indonesia and the Philippines, while the Swiss National Bank and South Africa opted for a hike by 0.75 percentage points.
Tooze, a history professor at Columbia University in New York and a frequent contributor to The Guardian, detailed the economic headwinds and analyzed key areas of the current financial turmoil for Guardian Australia.
Risk of “extremely serious” recession
The risks of a global recession were now “extremely serious” as central banks in many parts of the world are raising interest rates to curb inflation.
“This is the most dramatic simultaneous monetary policy tightening ever,” Tooze said.
The withdrawal of Covid support programs by governments as the pandemic tide recedes also meant that fiscal brakes were being exploited.
“US fiscal policy is currently massively restrictive,” Tooze said. “It’s a negative drag of 4.5% of GDP.”
School moment of “failed technocracy”
Tooze predicted that current central bank and government policies would be marked in future textbooks as a “classic moment of failed technocracy.”
The US Federal Reserve raised its cash rate target range by 75 bps to 3% to 3.25% on Wednesday US time. He also said he expected increases of up to 125bps more this year, even as Fed Chairman Jerome Powell warned of a possible recession.
Tooze said other central banks would be under pressure to follow. Reserve Bank of Australia Governor Philip Lowe said last week that the bank would likely raise its key rate by 25bp or 50bp on October 4, making it a record six increases in as many months.
The lives of hundreds of millions of people and their job prospects would be marked by a recession, said Tooze: “It will mark the lives of these people for the rest of their lives.”
Private economists predict a fall in Australian house prices of up to 20%, the biggest drop since the 1980s as rates rise.
Tooze said Australia and Canada had two of the “most overheated” property markets in the world, and he predicted “huge effects” from higher borrowing costs.
A source of market support may also be less available in the future.
The rise in Chinese student numbers and property purchases in Australia, the United States and elsewhere has been partly a “story of capital flight,” he says. Buying an apartment to live in while studying was a way to get money out of China.
Signs have recently multiplied of a renewed effort by the Chinese to move money overseas ahead of a major Chinese Communist Party meeting in Beijing next month that will officially extend President Xi Jinping’s rule.
To counter this capital flight, authorities are making it harder for people to access passports “beyond certain networks”, Tooze said. “It’s really quite difficult now for the Chinese to sneak out.”
China is worried
RBA Deputy Governor Michele Bullock on Wednesday described the global economy as being “a little on the edge.”
One of the reasons was the fragile state of the Chinese economy. Its Covid-zero policy has disrupted supply chains and a plummeting property market “still hasn’t worked”, she said. Demand for Australian iron ore, in particular, depended on the success of government efforts to support real estate.
“China’s housing bubble is not just any housing bubble – it’s the biggest phase of wealth accumulation in economic history,” Tooze said, noting that the number of private homeowners had risen from nearly from zero to 300 million in a few decades.
“They poured more concrete in three years [in the early 2010s] than the United States throughout the 20th century,” he said.
The Chinese government could further stabilize the market.
“What is astonishing is that Western big money is taking a huge gamble on the ability of an authoritarian regime unfettered by the rule of law to achieve the greatest exercise in macro-prudential and macro-financial stabilization that the world has ever seen,” Tooze said.
Assuming they can, BHP, Rio Tinto and Fortescue – and much of the Australian economy – are “all doing well”.
A cause for optimism
Tooze said the “extraordinary progress” in reducing the cost of solar and wind energy was a “real case of optimism”, at least when it comes to measures to limit global warming.
“The disappointment is that we could have been even lower on those cost curves” if the United States, Europe and elsewhere had matched China’s investment. Improved battery technology would be “fundamental” to advancing decarbonization efforts due to the intermittency of renewables.
He cited International Energy Agency data on total publicly funded energy research – totaling US$23 billion (A$35 billion) in 2021 – as evidence that we can do more. .
“If we were serious about the energy transition,” he said, “you would think we would collectively be spending more than Americans are spending [each year] just on treats and food for their dogs and cats”.