12 Mar 2022

David McWilliams: 'The global economy is like a tube of toothpaste'

From Saturday Morning, 9:07 am on 12 March 2022

The best thing we could do in the face of rising inflation and global economic woes is do nothing, a high-profile economist says.

When Irish economist David McWilliams spoke to RNZ in October 2020 - roughly six months into the pandemic - he said it was time for governments to spend and ignore warnings to the contrary. 

Eighteen months down the track, Covid-19 is still wreaking havoc and recent world events have thrown the economy into further turmoil. Inflation is on the march and the price of goods and services is now a major social concern.

McWilliams tells Saturday Morning there is a current obsession with intervention in economics, but sometimes letting the world recalibrate on its own is the best thing to do.

Based in Dublin, McWilliams is an economist, author, and broadcaster. He hosts a weekly podcast The David McWilliams Podcast and is the founder of the Kilkenomics economics and stand-up comedy festival.

David McWilliams

David McWilliams Photo: AFP / FILE

McWilliams says he stands by his advice made near the beginning of the pandemic that governments should spend on projects to pull the economy through a period of downturn.

“Three years ago, the right thing to do was to spend as much as possible, because what happens is when the private sector gets nervous and when you put your economy to sleep, people start to save and if everybody saved nobody is spending and if nobody is spending there isn’t any income,” he says.

Current rising interest rates wouldn't have mattered that much if that spending had been directed prudently, so that the debt-to-gross domestic product (GDP) ratio wouldn't have gone up dramatically, he argues.

“Government spending on debt, it really depends on what you’re spending on and what your alternative is."

The good news is interest rates may be rising, but these will go down fairly quickly, as the war in Ukraine and geo-political tension settles," he suggests.

“Interest rates are probably going to go down. They’ll probably go up for a while because there’s highly likely to be a slow down in the global economy as a result of the increases in prices. This idea that the Fed will just increase interest rates – there’s no point in raising interest rates if the reason prices are rising is a war.

“What is the point in increasing interest rates if the reason that inflation is rising is because Russia’s been sanctioned? That’s no relationship."

Rising prices have much more to do with "extraneous war factors," he says.

"I’d be very, very surprised if central banks raised interest rates as much as financial markets believe they are going to do.

"Not least because if you raise interest rates at a time when the rate of inflation is rising because oil and bread prices are rising because of shortages from Russia, then you just create more shortages.

“So, my advice would be and my worldview would hold that interest rates increase very, very gently from here.”

McWilliams says the economy needs time to rebalance.

“We have just come out of a two-year pandemic lockdown, we have massive supply chain issues, problems and disruptions all over the place. And the reason we have those disruptions is we haven’t been trading, he says.

“The global economy is almost like a tube of toothpaste that hasn’t been used for a while. When you go to use the toothpaste the rim is calcified and coagulated – that’s the supply chain. Then when you squeeze the toothpaste out – which is demand – it spurts out all over in every area, and that’s inflation in certain areas.

“We need to let the system rebalance itself, recalibrate itself and not to panic. We’ve had two years of the pandemic, it’s going to take us two years to get back to normal again. Anything we do now in haste, governed by perceptions that we’re in a normal economic cycle will be completely wrong."

There is an obsession with interventionist economics at the moment, he says.

"The last thing we need now is hysterical economists pulling levers, screaming about problems, which in two or three years’ time will be seen as unbelievably inconsequential.”

Russia's war 

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Photo: AFP

McWilliams says Russia's war in Ukraine has shocked everybody and the effects are far from inconsequential.

“Russia has lost 30 years of progress in 30 hours and that is most extraordinary. He [Putin] is now isolated, and there is now a new cold war," he says.

The West's sanctions against Russia, which amount to economic warfare, are hurting Russia. But in sanctioning Russia, the world will also feel economic effects.

The basic structure of Russia's economy make it vulnerable to sanctions, and the massive collapse in the value of the Russian currency will have a huge effect, he says.

“Russia is in economic terms a large petrol station, with quite a productive wheat farm stuck on to it, a gas pipeline going out and some nukes. It’s just not a very healthy or well-balanced economy.

“The first wave of sanctions have been financial and they’ve been very effective.”

Going after the oligarchs and confiscating their property will have an impact too. Understanding the situation of those oligarchs can help us understand the nature of the Russia's political economy too, McWilliams says.

“If you want to understand the Russian economy all you need to do is look at Chelsea football club. Chelsea Football Club is what happened to Russia. The first phase is the Soviet Union builds up infrastructure based largely on incredibly low wages paid to workers.

“So therefore, the gas and oil infrastructure becomes incredibly valuable because the wages going out would be very, very low in comparison let’s say to an Australian mining company…

“Then those assets, which are incredibly valuable, gets stolen in the voucher privatisation of the early 1990s, where the Russians decide to privatise everything by giving citizens little pieces of paper. Every single piece of paper represented a tiny fraction of these large industries.

"The vast majority of people with these papers didn’t know what to do with them, had never heard of capitalism before and the oligarchs, of which Abramovich was one, bought up all of these pieces of paper for a song and delivered these pieces of paper to the state and said ‘now we own everything’...

“The third thievery is Putin comes in and says ‘we’re going to steal these back off you unless you do a deal with us’. Abramovich does a deal with him to be a good boy and Putin says 'that’s okay'.

“And what Abramovich does is – and all the oligarchs do as quick as they can – is start buying up assets in the West to basically launder the money, and Chelsea is nothing more than a laundromat for Russian money. And now of course Abramovich is trying to put the thing up for sale because he knows eventually sanctions will come after him.”

McWilliams thinks Putin gambled on the West being too rich, too lazy, too fat to respond his attack on Ukraine. It amounts to the worst miscalculation in Europe by a political head of state in past 100 years, he says.

Putin cited the presence of neo-Nazis in Ukraine's government and armed forces, the failure to implement the Minsk Agreement to give the Russian-speaking Donetsk and Luhansk provinces autonomy and protection, and Ukraine's desire to join NATO, as reasons for his "military operation".

“His other gamble was his soldiers were going to be too strong for the Ukrainians and they would overwhelm them.

The army is bogged down and the West has agreed to pay the price so Russians will suffer the consequences," McWilliams says.

"He gambled the Ukrainians would roll over and they haven’t. He’s sitting in the Kremlin shell-shocked by what he has visited on his own people."

China and Russia have formed a closer alliance over the past number of years as the West continues to isolate Russia. China has refused to condemn the invasion, arguing NATO and the United States caused the confrontation by expanding east around Russia's borders and politically interfering in Ukraine.

McWilliams argues if Russia had been successful in disposing the Ukrainian government quickly, it could have emboldened China to try something similar in Taiwan.

Russia’s current problems will now make China think twice, fearing that will badly affect its trade position in the world.

McWilliams characterises the Russian invasion as part of a militaristic expansionist agenda. He argues China would be better off seeing Russia as a liability to its geo-political ambitions as the world's number one economic power.

“Becoming the number one country in the world is through the avenue of commerce and trade and also we know that with the exception of Tibet that the Chinese have not involved themselves in wars.

“The real politik of all this is at the start of the year the advantage was firmly in the court of the autocratic, militaristic expansionist bullies. I think that’s gone now.”

But McWilliams says if anyone had concerns that Russia could or would invade other eastern European countries, these can be put to bed, as issues like logistics woes and strategic miscalculations during its invasion demonstrate its army is ineffective.

“What we’ve seen now is that the Russian army is useless.”