The dangers of a politics of denial

Jan Dehn, head of Research at Ashmore, suggests that political leaders in developed economies are in denial about the price to be paid for the developed market crisis of 2008/2009, and are using a two-pronged strategy of postponement and scapegoating to avoid confronting it. If left unchecked, Dehn suggests we could find ourselves in a similar position as we did in the 1930’s after the great depression.

A politics of denial now governs decision-making in developed economies. They do not say so explicitly, but political leaders in developed economies understand only too well that there is an enormous price to be paid to fix their economies from the excesses that led to the developed market crisis (DMC) of 2008/2009 and its aftermath.

Developed countries face significant debt overhangs, unfunded pension deficits and the growing future health liabilities of ageing populations, while their productivity is declining. The reforms to fix all this would extract an almost insurmountable political cost. The politics of denial is designed deliberately to avoid this political cost for as long as possible.

To this end, politicians are employing a two-pronged strategy of postponement and scapegoating.

Postponement is most clearly evident in the extreme imbalance between stimulus and reforms in developed economies. Since the DMC was first and foremost a debt crisis, the rational policy response should have emphasised aggressive deleveraging, better regulation and productivity enhancing reforms – with monetary policy only playing a supportive role during tough reforms.

In reality, however, monetary policy easing has been elevated to the be-all and end-all, while practically nothing has been done to raise productivity and cut the debt overhang. Regulation has been recruited into the service of financial repression rather than used to improve asset allocation.

Scapegoating is now becoming far more visible and important within the politics of denial. As successive acts of postponement become ever less effective without actually curing any of the underlying economic problems, voters are increasingly experiencing stagnation. They are getting angrier.

Their discontent is made worse by the excessive reliance on asset purchases by central banks, which skews income distributions even more. Scapegoating is rising in importance, because it helps to divert the rising voter anger towards less powerful groups, while giving the impression of action and helping to obfuscate the real underlying problems.

Left and Right only differ in their choices of preferred scapegoats. The Left likes to victimise the wealthy, business owners and entrepreneurs, while the Right prefer to targets benefit recipients, unions and foreigners.

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