theREALnews.com, March 5, 2018
Former BIS chief, author of Revolution Required, praises the insights of Akyuz’s book, Playing with Fire, notably in uncovering the current state of financial fragility triggered by the G7, worsened by the absence of international mechanisms to recover from systemic debt fall-outs.
LYNN FRIES: For The Real News, I’m Lynn Fries in Geneva with a report on the state of the global economy and finance based on a shoot that I did at the United Nations Geneva on Playing with Fire, a new book by South Centre Chief Economist Yilmaz Akyüz. This segment features comments on Playing with Fire by Peter Dittus, who was Secretary General of the BIS, the Bank for International Settlements, from January 2005 through December 2016.
We open with an introduction by a prominent figure from the Global South, Dr. Y.V. Reddy, former Governor of the Reserve Bank of India.
Y.V. REDDY: The first question we should ask ourselves: Is there such a divide about the opinion, our opinion, and the opinion in G7 countries about what’s happening? Is there? I’m afraid, there’s not that much of a difference in some ways. And I’ll read out something, a few paragraphs, and then you should guess where it is from.
First: “The global financial system remains fragile. The world economy struggles to recover. Climate change accelerates. Digitalization and globalization depress wages. Income inequality is on the rise. Geopolitical turbulences are spreading. Lies are presented as truths. Truth remains unspoken. And people are angry. Karl Marx thought that capitalism was sowing the seeds of its own destruction eventually leading to a revolution. We believe that rather than anonymous forces, it is the policies of the G7 counties that are now undermining the foundations of the market economy. The G7 policies in the domains of monetary policy, fiscal and macro-economic policy, prudential policy, defense and climate change policy have a common feature: They are lax, reckless, and irresponsible.”
Next: “Not only G7 central banks have no lasting impact on potential growth but their unconventional monetary policies may actually lead to resource misallocation in favor of low productivity sectors.”
Then it says, this book: “A monster has been created which is still not under control. Increasingly it seems as if the 2008 great financial crisis may only have been a dress rehearsal for a worse crisis which lies ahead. It will come as the result of the excessive use of the monetary printing press, the build-up of asset price bubbles, the debt accumulation created by low and negative interest rates.”
It is from the book written by Peter. The title of the book is Revolution Required: The ticking time bombs of the G7 model. So you have two books here. One is called Revolution Required and the other is called Playing with Fire. So you have to read them together. And this one, again it says: “Deepened Financial Integration and Changing Vulnerabilities of the Global South.” There’s the difference. This says vulnerability of the South. This says vulnerability of all.
LYNN FRIES: We turn now to a commentary on Playing with Fire by Peter Dittus.
PETER DITTUS: It’s extremely timely, before, because it analyzes some of the fragilities that will make the next crisis as it’s building up very, very difficult. But, it says so before the crisis is coming. And I think that’s a huge value. I look at the book, I think it has, if you read all the chapters, it has a very compelling logic. And the logic, in my mind…. I mean, everyone reads with his own mind, if you read a novel or a piece. So with my mind, the logic in the book is first, it describes and analyzes in a lot of detail and richness, the integration and the financial integration, in particular, between emerging and developing countries and advanced economies. What is very strong and most of – I don’t know how many are economists – most people sort of look at these issues with a little bit of a sort of superficial view. And most of them look at what’s the net asset position and, well yes, we are too highly indebted.
And the great strength of the book is, in my view, is that it looks at cross-positions. Because behind every position, everything may net out to zero, but the cross positions will be huge. And the cross-positions don’t net out between the same people. There are different actors, different types of instruments, different residencies, different countries, different exchange rates, different base currencies behind. And even if on the basis of a net analysis you come to the conclusion: This country is fine. There’s no reason to worry. If you look at the cross-figures and what is behind, then you may very quickly get worried even if the net figures are zero.
Now, what does that lead to? Now, if you look at this detailed analysis, it leads to a situation where actually the vulnerabilities of emerging economies have actually increased. Despite the fact that, yes, you have floating exchange rates. You have a reserve accumulation to try to cover yourself. You have much better fiscal positions than we have had in the past. But the bottom line is due to this – huge cross-assets both on liability and the asset side – the fragility and the potential exposure to crisis in the world has actually increased and the policy options to deal with it have decreased. And I think that’s a very strong message in this book. And if you boil it down, in the current situation it’s basically, it’s not the governments, it is the private and corporate debt that has increased tremendously and where we understand very little about the structure and the developments of that part because much of it is even inter-enterprise. So that it doesn’t appear in any of the usual statistics.
Now, so far this has been rather for the good. It’s like someone, there’s someone…. It reminds me of the joke – someone is sort of in a high-rise building looking out of the window at a guy who is flying, falling down. And he asks him, “How is it going?” And the guy says, “Well, so far so good.” And I think a little bit this is what’s happening. So far this has been pretty much to the good. I mean, everything looks good. It’s a sunny, sunny day. It’s a sunny season. It’s wonderful, but why has it been so wonderful?
And this is I think where we come to the darker part of the picture. Well, it has been…this is what is described in the initial part of the book, chapters one and two. The reason why it has been so sunny, despite all these built up vulnerabilities, is that in the advanced economies, and in particular the US, the Eurozone and Japan, the monetary policy has been extremely loose. Lots of actually financial instruments are traded at negative rates. So people who want to make some money, they don’t find possibilities to make money. So the funds are chasing yield. And that means that there are tremendous financial flows to emerging economies and the risk appetite has increased tremendously.
How is that going to develop further? Well, we don’t really know. But sort of the book has a big question mark and a big caution for us. And if we look at where this all comes from, it’s not so encouraging. So let me just spend a few minutes on where this has all come from.
Well there’s a saying that the road to hell is paved with good intentions. And I think that’s actually how it started. Because when we had the big financial crisis of 2008, basically central banks all over the world, they pulled out the stops and said: Well, let’s not have a Great Depression as we had in 1929/30 but let’s prevent this. We have learned from history. Well, they learned from history, that’s great. And they rolled out quantitative easing programs and said: Well, and once it has stabilized and the confidence has rebuilt we are going to, of course, to normalize the policies.
Now, why are we still in 2017 in a situation where we have huge QE programs and negative rates? Well, I think there are two reasons. One is as you mentioned already, that the central banks, rather than matching financial analysts trying to figure out what the central banks are doing, central banks are trying to figure out what financial markets are doing. And as soon as you try to normalize policies you have a temper tantrum. Or you can see it currently in the UK where Marconi tries to raise the rates – inflation is running at 3 percent – all the financial markets come out saying: It’s not the time. Times are difficult. The economy is not so strong. Brexit. Let’s wait another bit. And it’s always, let’s wait. So and the central banks have become, I would say, in some countries, hostage to financial markets.
But they have also become hostage to governments. Because behind the scenes, what has happened during all this low interest rate period is that there has not been a lot of consolidation and debt reduction. And this is also described very aptly in the book. What has happened is that debt has been built up. And it has been built up to levels in the advanced countries that are quite unprecedented for peacetime. During wars, you have seen these levels of debt, in peacetime, not. And for example, in the Eurozone, the government indebtedness from 2008 to now has risen from 72 percent of GDP to 109 percent of GDP. So that’s not a small figure. What has happened at the same time is that asset prices have risen. Now you can look across the spectrum of asset prices. Let me just quote one figure. That is if you look at the price-earnings ratio [P/E ratio] – sort of normalized to take out fluctuations so the Schiller Price-Earnings Ratio – in the States, this is now higher than it was before the Great Depression in 1929. And it has never been higher before, with one exception, and that was in 2000-2001.
And, finally, another element of this is because one of the reasons why we have these policies is, of course, well, at least the economy is doing well. And this is also described very well in the book. The economy is not doing so well. This has not led to a big investment boom. Investment is actually very low. What is big is investment in share buybacks and financial engineering. But in real investment, it’s very low. Productivity is very low. I don’t have the time…if you don’t want to go into this in greater detail, I guess, right now here. But basically, we have huge debt, high asset prices, low investment in the real activity. And at some point, this is going to blow up. Now, we don’t know how it’s going to blow up and when. And it may be much, much longer than we actually think.
I think coming back to reading the book, I think is very helpful because basically the book looks also at some of the mitigating factors. When the crisis hits, what could one do? And it says: Well, don’t trust that someone else is going to do it for you. Because, it says, the international mechanisms that one could think of to deal with them – whether it’s in the IMF or multilateral organizations – the international mechanisms are totally inadequate to deal with a major crisis and the fallout on your country. And it doesn’t matter which country, just any country. It says: Well, prepare for the crisis because you can look in the statistics and you can see you are hugely exposed. And on a sort of deeper note perhaps let me just finish, it also says: Well, think about how you manage this integration before going out and saying, well, it’s great. Money is flowing in. Think about more deeply, what do you really want out of integration? And integration, it’s not…I mean, financial flow is not a natural phenomenon like airflows. You decide in the policy space: What do you want to get out of it? And you set the rules. And I think one shouldn’t be afraid of actually doing that and setting the rules. So one gets a benefit out of these flows and is not a kind of hostage to these flows. Thank you.
LYNN FRIES: On that note, we round things off with a further quote from the book co-authored by Peter Dittus.
“People sense something is wrong with the way political and economic elites in the G7 countries are discharging their responsibilities. The current trajectory of economic policies in the G7 countries, we believe, is leading to a systemic crisis that will call into question many of the beliefs that the capitalist system is built on. No one can know when this tectonic shift will occur, nor what will emerge from it. We believe it will be a major turning point. The trigger for this revolution will be the loss of confidence in the Alice in Wonderland world, when suddenly people will realize that the accumulated debt in G7 countries cannot be serviced and that asset values were artificially boosted by monetary policies that cannot continue.”
This concludes Part 1 of our report. We’ll be back with another segment featuring Yilmaz Akyüz as an author’s commentary on Playing with Fire. Special thanks to the South Centre as organizer and moderator of this event. And to UNCTAD as host at the United Nations, Geneva. And thank you for joining us on The Real News Network.
Yilmaz Akyuz is the Chief Economist of the South Centre. He was previously Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD) when he retired in August 2003. He was the principle author and head of the team preparing the Trade and Development Report, and UNCTAD coordinator of research support to developing countries (the Group-of-24) in the IMF and World Bank on International Monetary and Financial Issues. Dr. Akyuz has published extensively in macroeconomics, finance, growth and development. His most recent book is Playing With Fire, Deepening Financial Integration and Changing Vulnerabilities of the Global South.
Peter Dittus is the owner of arCandide consulting and currently working as a consultant to public organizations. Previously Dr. Dittus was Secretary General of the Bank for International Settlements from 2005 to 2016. He joined the BIS in 1992 as an economist and since 1995 had assumed increasingly senior responsibilities in the Bank. In 2000, he was appointed Deputy Secretary General and became a member of the Bank’s Executive Committee. Before joining the BIS, he worked as an economist at the World Bank and OECD.
Yaga Venugopal (Y.V.) Reddy was Governor of the Reserve Bank of India from 2003 to 2008. Dr. Reddy was Chairman of the Fourteenth Finance Commission in 2013-14. Previously, he worked in the Government of India as Secretary in the Ministry of Finance, and in the Government of Andhra Pradesh as Principal Secretary. Dr. Reddy is also a recipient of the Padma Vibhushan, India’s second highest civilian award. Currently, he is Honorary Professor at the Centre for Economic and Social Studies in Hyderabad. He is also a member of the Board of the South Centre.
What if the market economy is the problem? As Jack Rasmus argues in Central Bankers at the End of Their Rope? Monetary Policy and the Coming Depression, traditional economists are stuck on real-economy data, and don’t recognize that tools that worked there, are not a viable option in dealing with the globally financialised economy.
Quantitative easing flooded the finance sector with liquidity that went mostly into the same alchemy that brought the system down in 2007-8. That money led to the same sort of debt-driven finance orgy that traditionally ends another “bust,” because the real economy is meanwhile starved of the liquidity essential to production and employment that enable workers to pay their debts.
Peter Dittus’ advise is extremely timely. NOW is the time to educate ourselves to proposed alternatives – and they are out there! Future issues of the COMER Journal will carry articles dealing with the need for 21st century options.
Excellent resources, like the books referred to in this issue, are available through your local book store. But this challenge will require a cooperative approach. We need to find ways to share the task – reading groups, for example, whose members could be responsible for a chapter or two, and who could meet regularly to discuss the material. Attending seminars, and monitoring websites like The Real News Network are other good ways to clue in!
This is an investment we can all afford – one that none of us, in fact, can afford to neglect.