Ben Hunt, of FUND STRATEGY, posed eight poignant questions to me concerning the continuing Global Crisis and touching upon various themes from my Global Minotaur. Here is a taste of the soon to be published interview:
1. What is your understanding of what has been driving the growth in the world economy (the “engine of growth” if you like) since the recovery after 09 – it is that the economy has been on “government life support” in that the fiscal stimulus of China, US etc has been driving growth?
Since the Crash of 2008, we have had a tale of two worlds: the North Atlantic Recession and the considerable growth in China, India, Latin America and, poignantly, Africa. Nevertheless, all the sources of growth mentioned in the previous sentence are reducible to one country: China. Without Chinese growth, not only would China be destabilized to a horrifying degree but, arguably, there would be no growth in South America (since its growth is predicated upon exports to China) or in Africa (for which Chinese direct investment is the major boon). While India’s growth is not reliant on China, it is also the case that it is too anaemic and inward looking to count as a source of world demand.
2. Related, what is new about say this year and this summer with an acceleration in the slowdown? Do you understand it as a combination of factors – i.e. stimulus has wore off, deepening recession in Europe, cooling meaures to fight inflation in China, deleveraging in the US? Or do you tend to see one factor as being decisive – i.e. the deepening of austerity in Europe, hitting demand from Europe which then affects China, US, etc?
The Crisis is global, and so are the reasons for its global acceleration.
Europe is, of course, the sick man of the planet, exporting its austerity-driven recessionary effects worldwide. And it is not just austerity that turns Europe into the globe’s nemesis. It is the combination of the Eurozone’s laughable architecture with the administered austerity-medicine (or, more aptly, poison) that is responsible.
However, beside Europe, we have a number of recessionary forces at work. In the United States, the falling out between Congress and the administration on fiscal policy has muddied the waters, has caused a spike in uncertainty (the debacle of debt ceilings being the tip of the iceberg), and has left Mr Bernanke of the Federal Reserve too much to do with the single lever (quantitative easing) in his reach. Alas, when aggregate demand is so deficient, and the labour force is shrinking as a result of the so-calle ‘discouraged worker effect’, however much the Fed boosts the supply of money, its success in boosting economic activity is heavily circumscribed. As Keynes once put it, it is like trying to push a hanging string from below, as opposed to pulling it from above.
Meanwhile, while China is far more responsible in its deployment of both monetary and fiscal policy, and has been boosting investment handsomely, the Chinese economy is not geared to create demand for other parts of the world through stimulus. All that fiscal stimulus does is to increase the investment ratio of GDP to an astounding 70%, pushing the consumption ratio of Chinese people to a ridiculous 25% - a certain recipe for negative expectations of aggregate demand and growth. Coupled with relatively loose monetary policy, the result is a lethal combination of asset bubbles (in the real estate sector, in particular) and of falling consumption. To be fair with Beijing, they have no other choice. It is only the ‘profligate’ West that can generate the demand necessary to re-balance the global economy. China can simply not do it on its own. Tragically, the West has lost its penchant for a designing a globally sustainable economic macro-economy.
3. In terms of China in recent years, would you agree that it has not really been an “engine of growth” as such for the world economy (although confusingly, people talking about China contributing up to a quarter of world growth etc)? I.e. China may have driven the fortunes of commodity producers but with low consumption it is nowhere near acting in the same role that the US did as the consumer of last resort for the world economy? And going forward, presumably you are not expecting it to play this role for a long time?
4. On the issue of the breakdown in credit, and monetary stimulus, which you have talked about. In very simple summary terms, a lot of the aggregate demand of recent years was predicated on the continual extension of credit/debt to the consumer in the deficit/debtor nations – but that all came to an end in 2008. With unemployment, existing debt levels, and so on, consumers don’t have the same appetite to borrow, are deleveraging in the US, banks that lent in the various contexts, i.e. mortgages, to sovereigns, etc, are still reeling in many cases. My first question is about the monetary stimulus. Presumably your analysis is that the LTROs, waves of QE etc have simply plugged the holes in terms of bad loans, i.e. repaired balance sheets, but have not fed through to any productive lending and investment in the real economy? Second point. What I do not really understand (and could do with some enlightening!) is that, I can see that a breakdown in credit is hugely important in a country like Greece which is dominated by small firms dependent on credit in the first place. But what about say more “corporate economies” like the UK, where the impression left by the government is that restoring credit to SMEs is of central importance? Here I find the credit issue confusing because I don’t know the relative importance of say SME investment in the economy versus corporate investment (the latter not reliant on credit and of course having huge cash piles that they could invest and are not). Perhaps the issue of corporations not investing is the central one which then affects SME suppliers and the rest of the economy, rather than lending to SMEs per se?
To begin with, the rumour of a fiscal stimulus in the United States is a gross exaggeration. If you take into account the precipitous drop in State and Municipal expenditure, you will find that there was no such thing as a stimulus. What there was was a significant amount of quantitative easing by the Fed, in conjunction with the preposterous Geithner-Summers plan whose purpose was simply to pull the wool over Congress, enabling legislators to pretend that they ‘thought’ that a market for defunct and unloved (toxic) derivatives was being created (when, in reality, the taxpayer was footing the bill of bad private sector bets).
As for QE, there was never any possibility that the Fed could create sufficient aggregate demand through purchasing from banks paper titles of dubious value. In fact, the Fed had real difficulty even boosting the money supply (as banks refused to lend even when ludicrous overdraft facilities, at almost zero interest, were offered them by the Fed).
So, to cut a long story short, there was precious little fiscal stimulus in the United States, none in Europe, and the monetary operations on both sides of the Atlantic failed to deal with the banks’ insolvency, while keeping them liquid – doing precisely what we used to admonish the Japanese monetary authorities of doing back in the 1990s. The two QEs in the United States and the two LTROs in Europe only allowed for the ‘proper’ zombification of banks, a process that deepened the Crisis’ potential for causing long term recessionary damage on all of us.
5. Onto the themes of your book a bit more…I have a question first of all. Generally I buy your overall analysis – which by the way I think is excellent and raises some profound questions. Capitalism needs a GSRM, a way of reinvesting trade surpluses, and profits, to coordinate production and consumption at the international level and to ensure that trade imbalances don’t take on crisis proportions over time. Now as I understand it, the flaw with the Global Minotaur GSRM was that the surpluses/profits were not reinvested productively in the US - they went via Wall Street and were recycled into speculation and consumption rather than productive investment which would have rebuilt US industry, bolstered US production and therefore rebalanced trade more? You then got a problem – a slowdown in productive investment and growth while at the same time, a financialisation process (bubbles, debt, etc) which then got out of balance with the real economy. Debt rises too fast to incomes; the financial sector grows too big in relation to the real economy, and so on. Seen at another level, the “exorbitant privilege” backfires, in the sense that the US gets further and further into debt, with the dollar as reserve currency, on the different levels but its economy weakens at the same time, creating a dangerous divergence which is now the “low growth, high debt trap” that we see today. So first question, have I understood that this is the way you see it?
Yes, I think you did!
6. If so, my second question is, why was the new credit created, plus others’ profits, not reinvested back into industry and production in the US? What explains the twin process of financialisation and deindustrialisation? I wonder if the simple answer is that profits grew to be bigger in finance than industry since the early 1980s (partly perhaps due to deregulation of finance, i.e. deregulation of interest rates) - which I think you discuss briefly in your book? Corporations began to reinvest more capital in finance (i.e. GE Capital), did more share buy backs (perhaps the influence of shareholder value), while bank lending grew more to finance and real estate than industry. Do you understand this to be the key factor – or do you think there are other factors at work? For example, corporate investment in the real economy has been on a secular decline (since the early 70s?) Some would say, i.e. Robert Brenner – this is about the failure to restore the rate of profit to post-war levels. Others, i.e. Michael Hudson – that finance has taken a greater proportion of workers’ incomes and has diverted purchasing away from goods and services, hitting aggregate demand and therefore undermining the rationale for corporate investment. Would be very interested in any thoughts on this.
All this is correct. But it begs a question: Why did finance have to grow so much at the expense of industry? My answer is quite simple: Because capital accumulation never fails to follow the path of least resistance. Given the size of the capital flows into the United States, and the anxiety that they may one day recede, it was imperative that the conditions for maintaining the capital influx (into the United States) are maintained. Once prerequisite for that was the median real wage of American workers stays low and US inflation is lower than that in Europe and Japan. Subcontracting to Asia, adopting the Wal-Mart model (for squeezing both American labour, American small scale producers and foreign suppliers) became essential for maintaining the Global Minotaur’s rude health and dynamism. Thus, de-industrialisation in the United States, and the effective conversion of part of America into a form of Third World society were crucial features of the global recycling mechanism that grew up in the 1970s and crashed and burned in 2008 – what I refer to as the Global Minotaur.
7. Another question that leads on from this, regarding the role of corporations. You have talked about the general problem of business confidence and related, dearth of aggregate demand that has arisen in the last few years. Businesses are not investing, are hoarding cash and so on. But if investment has been on a secular decline in the US and UK at least (and indeed, cash hoarding really began a upward curve a decade ago), are we seeing a combination of a supply-side issue (i.e. long-term failure to invest) which is then exacerbated by a hit to demand coming from the last years with the drying up of credit to households, small businesses, etc? Is that the way you would understand it?
Very much so. But this is not surprising. Every capital ‘c’ Crisis entails the co-existence of two ‘mountains’: a mountain of debts and banking losses on the one hand, and a mountain of idle savings too scared to channel ‘themselves’ into productive investment. The state we find ourselves in after 2008 is a typical case of this situation.
8. Finally, as you mention in your book we have seen a lot of talk about global imbalances of late, from academics, institutions such as the IMF, G20 etc. Do you see this discussion as deficient in key ways? Do you see any evidence that policymakers will grasp the importance of addressing them seriously, i.e. by having a new GSRM, and any evidence in the world of your two scenarios happening (the West having an epiphany and realising a new Bretton Woods style agreement is needed), or BRICs coordinating new productive investment etc?
I wish I could share good news with you. But I cannot. The G2O rose to their historical challenge once, after Lehmans’ caved in in 2008. Since then, the powers-that-be have demonstrated spectacularly a singular ability to fail in their task of coordinating on a global strategy for arresting the Crisis. With Europe at the forefront of organised idiocy, the global economy is experiencing the Great Recession We Did Not Have To Have. Even if we had a degree of appreciation by authorities of the need to plan for surplus recycling (a necessary condition, though not necessarily sufficient, for exiting the Crisis), our analysis would only become usefully complete if it involved an appreciation of the natural tendencies of the labour and money markets to fail. None of that is in the air. No epiphany seems in sight. No latter day FDR seems to be emerging. I truly hope that I am wrong or just blind enough to not see the rays of light in the distance. But I very much fear that they are just not there.