richard duncan
A NEW GLOBAL DEPRESSION?
Interview
You were one of the very few analysts to
predict the full enormity of the financial crisis, writing as early as
2003 of a coming credit crunch that would have ramifications throughout
the asset-backed securities sector, necessitating giant bail-outs for
Fannie Mae, Freddie Mac and financial-insurance companies, and a
possible meltdown in the multi-trillion-dollar derivatives market. This
prescience was in stark contrast to the complacency of most mainstream
economists. Could you describe how you came to write The Dollar Crisis—what
was the course of your intellectual development and what did you learn
from your experience as a Far East securities analyst?
I
grew up in Kentucky and went to Vanderbilt University. My plan was to
go to law school, but I didn’t get in. Plan B was to go to France for a
year, picking grapes. I got a job as a chauffeur in Paris, driving rich
Americans, and made enough money to backpack around the world for a
year, in 1983 and 84. So I was lucky enough to see the world when I was
very young. I spent a couple of months in Thailand, Malaysia and
Singapore—and even a couple of months there was long enough to realize:
go east, young man.
Go east, because?
Economic opportunity. It was obviously
booming—there were big skyscrapers going up, and people couldn’t read
maps of their own street. So I went back to business school in Boston,
at a time when there was of course very little economic growth in the
United States. When I finished business school, going to Asia seemed the
obvious thing to do. I found a job in Hong Kong, as a securities
analyst with a local, Hong Kong–Chinese stock-broking company. This was
1986. In the first twelve months I was there, the Hong Kong stock market
doubled—then I woke up one morning and learned that Wall Street had
fallen 23 per cent overnight, and Hong Kong immediately fell back to
where it had started. By 1990 I had joined James Capel, the oldest and
largest uk stock-broking company at that
time, and they sent me to Thailand to manage their research department
there. We had ten analysts watching all the companies on the Bangkok
stock market. At first, there really was something of a Thai miracle—the
growth was solid and fundamental. But very quickly, by 1994, it was
obviously a bubble and I started being bearish on the market. I wasn’t
saying it was going to collapse, but the growth was going to slow down.
But it just kept accelerating, and the bubble turned into a balloon.
When it did finally pop, in 1997, Thailand’s gdp contracted by 10 per cent and the stock market fell 95 per cent in dollar terms, top to bottom.
So
I witnessed at close quarters a very big boom-and-bust cycle, over a
very short period of time. And while I was wrong for several years, I
had plenty of time to think about why I was wrong. I started reading a lot of macro-economics: Keynes, Schumpeter, Milton Friedman’s monetary history of the us,
the classic works. There was also a sort of lightning-flash moment,
around 1994. Five years earlier I had taken a group of fund managers on a
trip around the Pearl River Delta, from Hong Kong up to Canton, and
back down the other side to Macao. What we saw, all along this vast
delta, were miles and miles of factories, as far as the eye could see,
full of nineteen-year-old girls earning $3 a day. It was in 1994 that
the meaning of this really became clear to me: globalization was not
going to work. The us would have a bigger
and bigger trade deficit, and the American economy would continue to be
hollowed out. It was unsustainable—the demographics made it impossible
for this system to work. The Dollar Crisis, which came out in
2003, examined the way those global imbalances were blowing bubbles in
the trade-surplus economies, and how the money boomeranged back into the
us. I came to see that the unlimited
credit expansion enabled by the post-gold, post-Bretton Woods
international monetary system was where it all began.
Yet you’re not advocating a return to gold?
No. That is, I think that if the us
had remained on the gold standard, it wouldn’t now be teetering on the
edge of collapse. The global economy would be much smaller than it is;
China would look nothing like it does. There would have been much less
growth, but it would have been more stable. But now that we’re here,
there’s no going back. If the us was to
go back, the sort of deflation that would be required to take us there
would be absolutely unbearable—like 1926 in Britain. But it’s important
to understand what the effects have been of abandoning the automatic
adjustment mechanisms inherent in the gold-linked Bretton Woods system
and the classical, pre-1914 gold standard—they automatically served to
correct large-scale trade imbalances and government deficits.
Officially, the international monetary system that emerged after 1973
and the breakdown of Bretton Woods still doesn’t have a name. In the
book I called it the ‘dollar standard’, because the us dollar became the medium for the world’s reserve assets, in place of gold. The Dollar Crisis focused
on how this system had enabled worldwide credit bubbles to be created.
Total international reserves, the best measure of global money supply,
soared by almost 2,000 per cent between 1969 and 2000 (Figure 1), with
the central banks creating paper money on an unprecedented scale.
The quantity of us dollars in circulation soared (Figure 2). One of the main features of the dollar standard is that it allows the us
to incur a huge current-account deficit, as it pays for its imports in
dollars—of which the Federal Reserve can print as many as it needs,
without having to back them with gold—and then gets these dollars back
from its trading partners when they invest them in dollar-denominated
assets—Treasury bonds, corporate bonds, equity, mortgage instruments—as
they must do, if they are to earn any interest on them. The French
economist Jacques Rueff once compared this process to a game of marbles
in which, after each round, the winners give their marbles to the
losers. The larger the us current-account deficit has become, the larger the amount of dollars that wash back into the us through its equally vast financial-account surplus (Figure 3). The other option for America’s trading partners—the one us
pundits are always calling for—would be to exchange the dollars they’re
earning for their own currency, which would drive up its value and
thereby make their exports too expensive for the us market, knocking them out of the game.
The post-Bretton Woods era had been plagued by financial crises
long before 2008—Latin America in the 1980s, Japan in 1990, Scandinavia
in 1992, the Asian Crisis of 1997, Russia, Argentina, Brazil, the
dot.com bust. What is your explanation for this?
The Austrian economists were basically right in
their understanding of the role credit plays. As long as it is
expanding, credit will create an artificial boom, driving an upward
spiral of economic growth and inflating asset prices, which create
further collateral for yet more credit expansion. But the day always
comes when ever-faster economic overheating and rising asset prices
outstrip the growth of wages and incomes, to such an extent that these
can no longer service the interest on the credit. Bubbles always pop and
when that happens, it all begins to spiral into reverse: falling
consumption, falling asset prices, bankruptcies, business failures,
rising unemployment and a financial sector left in tatters. The
depression begins—which, according to the Austrians, is the period in
which the economy returns to some sort of pre-credit equilibrium.
Nothing drops forever; at some point the asset price comes more closely
in line with the income of the public, and the economy stabilizes. What
changed under the ‘dollar standard’ was the advent of vastly greater
quantities of credit, creating harder and faster boom-and-bust cycles.
In fact the first boom-and-bust crisis of the post-Bretton Woods era was
sparked off in the 1970s, when the New York banks recycled
petro-dollars from the opec states as
loans to South American and African countries, flooding their economies
with credit. When the ‘miracle’ booms deflated into busts, this created
the Third World debt crisis of the 1980s.
But destabilizing credit creation really took off once the us
started to run current-account deficits of over $100 billion, from the
early 1980s; a few years later it began running large government budget
deficits, too, which it could fund through the resulting
financial-account inflows. It could run the deficits because it could
print all the dollars it needed. As these dollars entered the banking
systems of countries with a current-account surplus against the us,
they acted as ‘high-powered money’—that is, the original amount could
be lent and re-lent by the banks, many times over—setting off an
explosion of credit creation that would generate economic overheating
and soaring asset prices, first in Japan in the 1980s, then in the
‘Asian Tiger’ economies in the 90s. In countries like Thailand, in
particular, inflows of ‘hot’ capital attracted by the initial growth
served to blow the credit bubble even bigger. Eventually,
over-investment produced over-capacity and over-supply, followed by a
downward spiral of falling profits, bankruptcies and stock-market
crashes, leaving their banks laden with non-performing loans and their
governments deep in debt. After the 1997 Asian Crisis, a surge of
capital inflows washed back into the us, creating the ‘new economy’ stock-market bubble and credit boom there.
Now,
there’s no doubt that Japan, for instance, derived tangible economic
benefits from its export-led growth. Without the purchasing power that
came from its trade surpluses with the us,
its economy would have grown at a much slower rate through the 60s and
70s. But what’s less appreciated is the expansionary impact those
surpluses had on domestic credit, once they entered Japan’s banking
system. It was this that helped inflate the great Japanese bubble
economy—the ratio of domestic credit to gdp
rose from 135 per cent in 1970 to a massive 265 per cent in 1989. Japan
actually tried to export large amounts of capital in the mid-80s, to
avoid its economy overheating: after 1985, faced with the sharp
appreciation of the yen, there was a big relocation of Japanese
manufacturing capacity to other East Asian economies, setting off the
growth of the ‘Asian tigers’, Thailand, Indonesia, South Korea, Malaysia
(Figure 4). But after so many years of trade surpluses, rising
international reserves and swelling money supply, it was impossible to
stop a further surge causing drastic overheating in the late 80s. After
the Japanese bubble popped in 1990, property prices fell by more than 50
per cent and the stock market by 75 per cent; twenty-two years later,
its banks are still laden with bad loans and government debt is the
highest in the world—230 per cent of gdp.
What was your assessment of the
imf
’s handling of the Asian Crisis?
I’d left Thailand before the bubble popped in
1997, but after six years studying the market there I felt I had a good
understanding of what was happening, so I started calling up the imf, the World Bank and the us Treasury Department, and harassed them until the imf hired me as a consultant in May 1998. I flew over to Bangkok with them—there was a group of about thirty people from the imf
and the World Bank, and we all stayed at the very nice Oriental Hotel
on the river. For three weeks I got to spend a little time with them,
and got a glimpse into how they worked and what their thinking processes
were. I have to say I was shocked at how little they seemed to know
about Thailand’s economy and the nature of the crisis there. Maybe I’m
being a bit unfair, because I’d had so much intensive experience there,
but I had assumed that the imf would be
at least as knowledgeable as I was. They were a lot of very intelligent
people, who had a great deal of experience in many economies around the
world, but they didn’t seem to know much about what was happening in
Thailand. At one meeting they decided—without any particularly good
reasons that I could determine—to project a 3 per cent contraction for
the Thai economy that year. I spent the next week writing reports
explaining why I thought the economy would shrink by 9 per cent in 1998
and 9 per cent the following year, if it continued with the same imf-imposed
policies that were being pursued at that time. In the end, the economy
did contract by about 10 per cent in 98, but then it rebounded the
following year. By that time, they’d reversed many of the initial
policies the imf had demanded in the
early days of the crisis. What really made the difference was a massive
devaluation of the currency—from 25 baht to the dollar to 50 baht, at
one point—which was very helpful in allowing Thailand to grow its way
out of the crisis, by exporting into the still relatively booming global
economy.
After that, I got a full-time job with
the World Bank in Washington for two years, starting in October 98, and
that was also very interesting. Both these Bretton Woods institutions
had been created to replicate the automatic stabilizers of the gold
standard, to help countries to re-establish an overall
balance-of-payments equilibrium when they ran out of cash. The end of
Bretton Woods and the expansion of global trade imbalances transformed
the situation; but at the time of the East Asian crisis, I don’t think
the imf and World Bank quite understood
how destabilizing the larger and larger cross-border capital flows had
become. They didn’t understand how the capital inflows that had washed
into Thailand during the 80s and 90s had completely changed and
distorted the economy and blown it into a bubble—and when all the
money washed back out, the economy really deflated. It would have
destroyed all the banks and all the Thais’ savings, had they carried out
the harsh policies that might have been appropriate in the 1950s or
60s.
To go back for a moment to the growing us
trade deficit, which you see as at the root of the explosion of credit
creation: the deficit had begun to widen in the early 80s, but by 1985
in fact the us was pushing for a
sharply lower dollar, as agreed with Germany and Japan in the ‘Plaza
Accord’, and this did succeed in boosting American manufacturing and
narrowing the deficit. By 1995, though, that policy had gone into
reverse. Why do you think the us did not continue to push for a lower dollar over the longer run, and what would the effects have been had it done so?
I’m not sure I know a complete answer to that question. By 1985, the us trade deficit was something like 3.5 per cent of gdp and this was very alarming, not only to us
policy-makers but around the world, because the economies of the
surplus countries, primarily Japan and Germany, were getting
over-heated. The agreement at the Plaza Hotel in 1985 was that the
dollar would be devalued against the yen and the mark, and over the next
two years the dollar fell by roughly 50 per cent. That was enough to
bring the us trade deficit more or less
back into balance by around 1990. But by that point, Japan and Germany
were no longer the problem. It was the Asian Tigers that were
increasingly becoming large exporters to the us,
with growing trade surpluses, followed by China. Once China really got
going, its trade surplus became larger and larger. But the us
didn’t have the same sort of control over China’s currency as it did
over Japanese and German policies. In fact in 1994, China had a massive
devaluation of its currency, which made the situation much worse in
terms of the us trade deficit.
So the rise of China came athwart the us low-dollar export policy?
It’s
a very complicated subject, but I think that, as time went by, American
industry gave up on American manufacturing, and realized that they
could make a profit by manufacturing outside the us
in ultra-low-wage countries. And so it began. Eventually, more and more
corporations realized that they could do very well by outsourcing. A
tipping point came in the early 90s, when it was actually in the
interest of major sectors of American society to have a strong dollar
and a weak Chinese currency, or weak currencies in all the other
countries from which American firms were exporting goods back to the us.
The issue with Germany and Japan in the 80s had been different, because
the workforces of those countries already had relatively high wages
compared to the us. It was really only
after the rise of the Asian Tigers, and above all when they were joined
by China in the 90s, that American industry realized that it could make a
lot more money just by making everything offshore. From 1997, the us deficit widened dramatically (Figure 3, above).
More generally, how has the ‘dollar standard’ affected the
us
economy itself?
Once the constraint was removed of the us
needing to have 25 per cent gold backing for every dollar that it
issued, it also lifted any constraint on how much credit could be
created. It had been easy for the us to
maintain gold backing in the first post-war decades, because it owned
most of the world’s gold. But with multinationals relocating industry
abroad and growing government spending, it finally came up against that
binding constraint in 1968. So Congress simply changed the law, at
Johnson’s request, removing any requirement for a gold link. But with no
restraint on credit, either, credit growth exploded. Of course, credit
and debt are simply two sides of the same coin. In the us,
total debt—government, household, corporate and financial-sector debt,
combined—expanded from $1 trillion in 1964 to over $50 trillion by 2007
(Figure 5). Credit growth on this scale has been taken for granted as
natural; but in fact it is something entirely new under the sun—only
made possible because the us broke the
link between dollars and gold. This explosion of credit created today’s
world. It made Americans much more materially prosperous than we would
have been otherwise. It financed Asia’s strategy of export-led growth
and it ushered in the age of globalization. Not only did it make the
global economy much bigger than it would have been otherwise, it changed
the nature of the economic system itself. I would argue that American
capitalism has evolved into something different—in my latest book, The New Depression, I call it ‘creditism’.
How would you define the chief features of ‘creditism’?
First, an expanded role for the state. The us government now spends 24 per cent of gdp—one out of every four dollars. All the major industries are state subsidized, one way or another, and half the us
population gets some sort of government support. Now, one can argue
that capitalism was a 19th-century phenomenon that’s been dead since
World War One; but clearly, this is not how capitalism’s supposed to
function. Secondly, the central bank now creates the money and
manipulates its value. Thirdly, and more interestingly, perhaps, the
growth dynamic is entirely different now. Under capitalism, businessmen
would invest, some would make a profit, which they’d save, in other
words accumulate capital, and repeat: investment, saving, investment,
saving. It was slow and difficult, but that was how economic growth
worked. But for decades, the growth dynamic of the American economy, and
hence increasingly the world economy as a whole, has been driven by
credit creation and consumption. Total reserve assets had already
swelled by almost 2,000 per cent between the end of Bretton Woods and
the late 1990s (see Figure 1, above). Since then, they’ve quintupled
(Figure 6).
The problem is that ‘creditism’ can no longer create more growth because the us
private sector can’t sustain any more debt. The ratio of household debt
to disposable personal income was around 70 per cent, from the mid-60s
to the mid-80s; since then, it soared to reach nearly 140 per cent in
2007, on the eve of the crisis (Figure 7). At the same time, median us
income is declining and the level of owners’ equity as a percentage of
household real estate has plunged to a record low (Figure 8). In 2010,
American households owed $13.4 trillion—92 per cent of usgdp (Table 1).
May we press you a bit on this concept of creditism, as a successor
to capitalism. Firstly, of course, agencies of credit—banks, factors,
money lenders—existed in the 19th century, on quite a large scale.
Secondly, capitalism itself has developed through a series of historical
phases, but arguably it has never been entirely ‘pure’ and free from
state support; it has always been ‘mixed’ to some degree and there have
been times when capital was a good deal more constrained than it is
today. Nineteenth-century American capitalism was protected by high
tariff walls and aided by
us
military expansionism, conquering territory and resources—iconically, the
us
Cavalry massacring the indigenous Americans, to clear the way for
the railroads. Unprofitable sectors of American industry may be heavily
subsidized today, but isn’t it precisely capitalism in general—however
wrecked in parts—that Federal funds are supporting? There seems to be an
argument for retaining the classical concept, which has been a trusty
tool of analysis for both left and right, as long as the broad relations
of private capitalist ownership and wage labour still persist.
‘Creditism’ may be a corruption of capitalism, but isn’t capitalism
still there, underneath?
Yes and no. In the us,
at the biggest level, it’s not, because every major industry is
subsidized one way or another, by the government—all the manufacturing
that’s still there, much of it related to military spending. All the
hospitals and pharmaceutical companies benefit from Medicare and
Medicaid. The universities also get subsidies from the government in the
medical and military industry. Farmers get subsidies from the
government. Price levels are still generally determined by market
forces, but government spending directs those market forces—at the
bottom, they allow the price system to work, but at the top level it’s
all directed and supported by government spending. I think that the
biggest impediment to fixing this crisis is the misconception that we have
a capitalist economy. Fox News watchers in America all think, red,
white and blue, we’re a capitalist economy, the government is evil and
there’s nothing it can do that would help the situation.
They
don’t understand what a large role the government plays—and that if
government spending is reduced, the economy immediately collapses. I
think it would help if they understood that we don’t have capitalism to
begin with, we have a different kind of economy now. This is not a
crisis of capitalism, it’s a crisis of creditism, and we have to work
with the system that we have. And while it would be nice to rein in the
bankers, if you rein them in too hard it’s going to blow up the whole
system—the banks are so worthless that the losses would be enormous, if
they were actually exposed; all the savings in the world would be
destroyed as the banking sector failed. Creditism as a system requires
credit growth to survive, and only the government can provide the credit
growth now—the private sector can’t bear any more debt.
So there’s a polemical character to the concept of creditism, in the sense that it’s targeted at a policy level?
Right. And I would like to persuade not only
policy-makers, but the general public as well. It’s not impossible to
swing public opinion away from where it is now, which is stuck in a very
boring debate between austerity and Keynesianism, neither of which, as
it’s presented, makes any sense whatsoever.
Another term that’s been applied to this latest stage is
‘financialization’, or financialized capitalism, and it would be
interesting to know how you’d compare that to creditism. It’s been
suggested that, as the momentum of the American economy began to falter,
the government stepped in in the 1990s with a form of privatized
Keynesianism, or asset-price Keynesianism: that credit was used, in
other words, to maintain the level of demand when it threatened to flag,
rather than the big public programmes of classical Keynesianism.
I think that’s probably true, if you look at the
way Alan Greenspan encouraged the expansion of credit and the way they
all denied there was any kind of bubble: that benefited the bankers and
the policy-makers, but it also benefited the people, as long as
everything was expanding, because this was against the background of
increasing globalization, which put strong downward pressure on us
wages. The way to buy off the voting public, who were losing their jobs
and not seeing any wage increases, was to make their asset prices go
up—their houses increased in value, so they could spend more even if
their wages didn’t go up. This worked very nicely for ten or fifteen
years, and the authorities seem to have wanted to keep it going even
longer—but bubbles always have to pop, in the end. So yes, I think
that’s probably right, though it’s hard to know whether this was
actually what was planned or whether it just evolved that way, as it
could have done, because that was the easiest way to go.
But it’s worth emphasizing that the credit expansion in the us
from the 1990s on couldn’t have taken place without the disinflationary
impact of manufactured imports from extremely low-wage economies: low
inflation permitted low interest rates. The scale of the income gap is
enormous: Mexican gdp per capita is around 20 per cent of the us rate; Chinese gdp
per capita is only 11 per cent. But another effect of globalization was
that the expansion of credit was beginning to produce diminishing
returns in economic growth in the us, well before the 2008 crisis. In The New Depression I show how total credit growth has correlated with economic growth in the us since the 1950s (Figure 9). Whenever total credit expanded by less than 2 per cent, the us
economy fell into recession—or nearly did, in 1970. But from the early
1980s, the difference between the two growth rates became much more
pronounced: total credit soared, but economic growth continued to
weaken, cycle by cycle, apart from a slight increase during the late 90s
‘new economy’ boom. Part of the explanation for this must be that while
credit growth did stimulate demand, that demand was largely met by
imports, so there was little of the multiplier effect that us production would have achieved.
On top of this,
the excess productive capacity created by years of credit expansion and
capital misallocation has been a further disinflationary factor. It’s
easy to increase aggregate supply in an economy: simply increase the
flow of credit to the manufacturing sector—this is what happened with
the ‘new economy’ boom in the United States (Figure 10). But once
industrial capacity is put in place, it doesn’t go away again just
because demand for its products doesn’t keep up; instead, excess
capacity puts a downward pressure on the price of goods, even as
capacity utilization slackens. It’s much more difficult to increase
aggregate demand, which is ultimately linked to the public’s purchasing
power. Over the past thirty years, the expansion of credit has produced a
vast expansion in global industrial productive capacity—witness the
Pearl River Delta—but the purchasing power of the world’s population has
not risen at anything like the same pace. So we’re facing a glut of
industrial capacity on a world scale.
In The Dollar Crisis you suggested a radical solution to the problem of aggregate global demand…
One
of the cures I suggested was a global minimum wage, starting with
raising the wages of Chinese workers in foreign-owned factories by a
dollar a day, every year—it wouldn’t break Apple or Foxconn. To be
diplomatic, I suggested that the poor developing countries could form a
labour cartel, the way that opec has
formed an oil cartel; but in reality that wouldn’t work—everyone would
cheat. The most effective way to make it happen would be for the us Treasury Secretary to go on tv
and announce to the world: if you cannot prove to us that you pay your
workers six dollars a day, instead of five, then we’re going to put a 20
per cent tariff on your imports. And we’re going to ask the workers to
report on whether it’s really being paid. That was written ten years
ago, and if it had been implemented, by now the minimum wage would have
tripled, from five dollars to fifteen, and that would have created much
more aggregate demand to absorb all of this excess capacity.
So
yes, it’s crucial to find a way to increase purchasing power at the
bottom of the pyramid—otherwise the world economy will be heading back
to what it was like at the beginning of the industrial revolution, when
workers only earned subsistence wages and couldn’t afford to buy what
they were making. In a sense, that’s the world economy in the age of
globalization. As new manufacturing countries enter the world market,
especially China, the ability to produce has skyrocketed; but wages
don’t go up anymore. They’re going down in the West, and demographic
trends, the sheer numbers of young people looking for jobs, don’t let
them go up quickly enough in developing countries. That’s at the core of
the global crisis. For a good fifteen or twenty years, that gap was
filled by inflating us asset prices,
which allowed the Americans to withdraw equity and spend it, consume
with it, to import and to fill the gap that couldn’t be filled with
normal wage income. But now that game seems to be over. Americans can’t
sustain any more debt; home prices have dropped 34 per cent, on average,
across the us. The only thing that’s filling the gap is government spending—that’s all that’s preventing the us from spiralling into depression.
What have been the
us
government’s aims in handling the crisis? How would you assess its policies to date?
The aim of us
government policy has been to perpetuate the credit expansion, to
prevent a collapse. So far it’s more or less been able to sustain the
level of total credit market debt (Figure 11). It’s done so by racking
up around $5 trillion in budget deficits, which it probably wouldn’t
have been able to finance if the Federal Reserve had not printed $2
trillion dollars and injected that into the economy. Initially, in 2007
and 2008, the financial sector bail-out and the $787 billion stimulus
for the economy were funded by selling government bonds. But that
initial round of support for the financial sector already cost around $1
trillion—some $544 billion in loans to us banks, $118 billion to Bear Stearns and aig,
$333 billion to the Commercial Paper Funding Facility and more. So the
Fed began its policy of quantitative easing in November 2008. Of course,
qe is a euphemism for fiat money
creation: the ‘quantity’ refers to the amount of money in existence, and
‘easing’ means creating more—‘easing’ liquidity conditions. The first
round, qe1, was mostly used to relieve
the banks and other institutions of mortgage-backed securities. It was
expanded in March 2009, from a $600 billion to a $1.75 trillion
money-printing programme, through to March 2010. As soon as it stopped,
the us economy entered its ‘soft patch’, in summer 2010. By August 2010 Bernanke was hinting at another round, and qe2
was formally announced that November, to run till June 2011. This time
the Fed printed $600 billion, which it mostly used to buy government
bonds, to fund the budget deficit. With some differences, the same
course has pretty much been followed by the ecb and the Bank of England, on a smaller scale.
Given the nature of the debate around the budget deficit in the us,
it’s important to stress what the alternative would have been if
governments had not jumped in. Total credit would have begun contracting
in 2008, when the private sector could no longer cover the interest
payments on its debt, and the sort of debt–deflation spiral that Irving
Fisher described would have taken hold. The us
economy would have already collapsed into a new Great Depression, and
with it, the rest of the world. The size of the American economy in gdp is about $16 trillion, and the us
budget deficit is $1.3 trillion. So if the government had balanced the
budget in 2009—if there had been a balanced-budget constitutional
amendment, for example—it would have shrunk to being a $14.7 trillion
economy. There would have been an immediate contraction of 13.5 per
cent, but with a large multiplier effect, because unemployment would
skyrocket, consumption would drop, business profits would plummet and
the economy would go into a sharp downward spiral. Now, the argument
against huge budget deficits under Bretton Woods or on the gold standard
was that government borrowing on such a scale meant pushing up interest
rates and crowding out the private sector. But that’s not the case any
more. In today’s world, there’s no limit to the amount of money that
governments can create—or so it seems. Even though the us has trillion-dollar budget deficits, interest rates are at a historic low; the ten-year bond yield in the us is 1.5 per cent. Never lower. Today, if the us
government cuts its spending, there’s no offsetting benefit of lower
interest rates—however much government spending is cut by, the economy
simply contracts by that amount.
What’s been the impact of quantitative easing on the economy as a whole?
The most important short-term effect has been to
allow government spending to support the economy while keeping interest
rates low. Another aspect, with qe1 in
particular, was that the government bought up toxic assets, like the
debt issued by Fannie Mae and Freddie Mac. That allowed the financial
sector to deleverage by $1.75 trillion, as it swapped mortgage-backed
securities for cash. It didn’t work that way in Britain, because the
Bank of England didn’t buy assets like that from the banking system, it
only bought government bonds. So the British financial sector is still
very highly leveraged, whereas in the us
it is much less leveraged than it was. Thirdly, every round of
quantitative easing drives up the stock market and commodity prices
(Figure 12). To some extent higher stock prices create a positive wealth
effect, which supports the economy; some sectors will benefit from
higher food prices—Mid-West agribusiness, for example—but it’s bad for
American consumers; the same goes for the rising price of oil.
Since around 2011, I’d say the costs of qe
have been starting to overtake its benefits, which are subject to
diminishing returns. Quantitative easing has created food-price
inflation that is very harmful for the two billion people who live on
less than $2 a day. I’ve read that global food prices went up 60 per
cent during qe2, and this was one of the factors that sparked off the Arab Spring. The oil-price spike has been very negative for the us economy; the 2011 slowdown in us
consumption was due to higher food and oil prices. It comes back to the
old quantity theory of money: if you increase the quantity of money,
prices go up. So far, this has barely affected manufactured goods
because of the huge deflationary impact of globalization and the 95 per
cent drop in the marginal cost of labour that it’s brought. So we don’t
see any cpi inflation, because of this
offsetting deflationary force. But food prices have gone up everywhere.
If the dollar price of food goes up—if rice prices go up in dollars—then
rice prices go up everywhere in the world, because otherwise they’d
just sell into the dollar market. So if us
rice prices go up, Thai rice prices go up. And when the Fed prints
dollars, food prices go up. That’s the main drawback, the one real big
problem of qe—otherwise it’d be a great
thing: print money, make the stock market go up, everybody’s rich and
happy. But it has this impact of creating food-price inflation.
What effect has it had on profits and investment? us business profits have been hitting 15 per cent this year, according to the Economist, but corporations seem to be sitting on cash mountains that aren’t being used.
Yes, profits are very high, first of all because labour is getting a lower and lower share. Also, as a percentage of gdp, us
corporate tax last year was the lowest it has been since the 1950s. In
total, the tax revenue for the country as a whole was under 15 per cent
of gdp, which is, again, the lowest since
the 1950s. So, yes, corporate profits have been exceptionally good,
although this quarter, suddenly everyone’s concerned that they may be
dropping. But there’s a fundamental problem: there are no viable
investment opportunities. So much credit has been expended and so much
capacity built that we already have too much of everything relative to
the amount of income, as it’s currently distributed, to absorb it. If
you invest more, you’re going to lose your money; if you take your
corporate cash-flow every year and buy government bonds, you can
preserve your money for a better day—but that helps push down bond
yields to these historic low levels. That’s why, even in Japan, after
two decades of massive fiscal deficits, the ten-year government bond
yield is only 0.8 per cent; in Germany, it’s 1.2 per cent; us, 1.5 per cent; uk,
around 1.6 per cent. They’ve never been lower, and this is part of the
reason. When bubbles pop, there’s no place to invest the money
profitably, so it’s better to put it in government bonds.
What are the options, over the longer term?
I think there are three ways forward for the us
economy—three paths policy makers could take. Option one is what the
libertarians and Tea Party people want: balance the budget. That would
result in immediate depression and collapse, the worst possible
scenario. The second option is what I call the Japan model. When Japan’s
great economic bubble popped twenty-two years ago, the Japanese
government started running very large budget deficits, and have done
that now for twenty-two years. The total amount of government debt to gdp has increased from 60 per cent to 240 per cent of gdp. That’s effectively what the us
and British governments are doing now: running massive budget deficits
to keep the economy from collapsing. They can carry on doing this for
another five years with very little difficulty, and maybe even for ten
years. The us government debt is only 100 per cent of gdp,
so they could carry on for another five years and still not hit 150 per
cent. But though it’s not clear how high it can go, it can’t go on
forever. Sooner or later—say, ten or fifteen years from now—the us
government will be just as bankrupt as Greece, and the American economy
will collapse into a new Great Depression. So, that’s option two. It’s
better than option one, because it’s better to die ten years from now
than to die now; but it’s not ideal.
Option number three is for the us
government to keep borrowing and spending aggressively, as they’re
doing now, but to change the way they spend. Rather than spending it on
too much consumption, and on war, for instance—the us
government has so far spent $1.4 trillion invading Iraq and
Afghanistan—they should invest it; not just in patching up the roads and
the bridges, but invest it very aggressively in transformative
21st-century technologies like renewable energy, genetic engineering,
biotechnology and nanotechnology, on a huge scale. The us
government could put a trillion dollars into each of these industries
over the next ten years—have a plan to develop these new sectors. A
trillion dollars, let’s say, in solar energy over the next ten years:
I’m not talking about building solar panels for sale in the market; I’m
talking about carpeting the Nevada desert with solar panels, building a
grid coast-to-coast to transmit it; converting the automobile industry
to electricity, replacing all the gas stations with electric charging
stations, and developing new technology to make electric cars run at 70
miles an hour. Then, ten years from now, the us will have free, limitless energy. Trade will come back into balance, because we won’t have to import any foreign oil, and the us will be able to spend $100 billion less a year on the military, because it won’t have to defend Gulf oil. The us
government could tax the domestically generated electricity, and help
bring down the budget deficit; and the cost of energy to the private
sector would probably fall by 75 per cent—that in itself could set off a
wave of private-sector innovation that would generate new prosperity.
If the us
government invested a trillion dollars in genetic engineering, it’s
probable they could create medical miracles: a cancer cure, or ways to
slow the metabolic processes of ageing. We need to think in terms of
peace-time Manhattan Projects: bring together all the best brains, the
best technology, set them targets; use ‘creditism’ to produce results.
We can all now see the flaws in creditism—they’re obvious. But as a
society, I think the us is overlooking
the opportunities that exist within this new economic system—the
opportunity for the government to borrow massive amounts of money at 1.5
per cent interest and invest it aggressively in transformative
technologies that restructure the us
economy, so that it can get off its debilitating dependence on the
financial sector, which has developed into a giant Ponzi scheme, before
it all collapses. If not, then the us economy is likely to go down sooner or later into a lethal debt–deflation spiral.
Presumably this ‘creditist’ strategy could only apply to the
us
economy, though?
Not necessarily. For example, the Bank of England
has printed so much money to buy up government bonds that it now owns
more than a third of Britain’s entire debt. Now, it didn’t cost the Bank
a single penny to buy all those bonds—it didn’t even have to buy any
paper or ink to print the money; it’s all electronic now. So why not
just cancel them? It wouldn’t cost anybody a thing; even if somehow it
bankrupted the Bank of England, it could just print more money to
recapitalize itself. Overnight, Britain would have a third less
outstanding government debt and its credit rating would improve
enormously. The government would announce that it was going to take
advantage of this historic opportunity to increase government spending
and invest it in new industries, so that Britain can finally wean itself
off its debilitating dependence on Ponzi finance and develop
manufacturing industries again. For example: throw $100 billion at
Cambridge to invest in genetic engineering over the next three years, to
become the dominant genetic-technology force on earth. Meanwhile create
jobs and fix the infrastructure, at the same time.
But wouldn’t these new industries be subject to the same relative lack of aggregate demand?
Well, there would be no lack of demand for a
molecular therapy that slows down ageing or cures a killer disease. The
point would be to aim for technological breakthroughs that are
completely transformative, like the agricultural technological
revolution in the 1960s that changed the nature of global food
production. In some respects this is an unprecedented opportunity
because of the amount of money that governments could invest now, when
interest rates are at such low levels. If they directed them into
transformative technologies, they could create markets for products that
just don’t exist at all now, where there would be demand. If we could
actually shift the us economy from oil to
solar, that would free up a lot of money that could be spent on other
things. Polemically, if you like, the point is to stress that we can’t
just wait for an old-fashioned cyclical recovery—it’s not going to come.
We have a new kind of economic system, and either we master this system
and take ultimate advantage of its opportunities to borrow and invest,
or else it collapses into a severe depression, unwinding a $50 trillion
expansion of credit. It’s going to be at least as bad as the 1930s.
In 2003 you called the Chinese economy a bubble waiting to pop. How do you see it today?
An even bigger bubble waiting to pop. When I wrote The Dollar Crisis, China’s trade surplus with the us was $80 billion a year; now it’s $300 billion a year, but the us
can’t keep expanding its trade deficits, and that means China’s trade
surplus is going to flatten out, creating a much more difficult
environment there. In 2009, when the trade surplus corrected quite
significantly, the headline was: 20 million factory workers lose their
jobs and head back home to the countryside to grow rice. That almost
popped the whole bubble then and there. The Chinese government’s policy
response was to let Chinese banks increase total system bank loans by 60
per cent over the next two years. As a result of this massive stimulus,
everybody borrowed money and property prices soared. But now, three or
four years on, no one can repay the money, the banking system must be on
the verge of collapse—although officially, non-performing loans are
reported to be extremely low—and will have to be bailed out by the
government. The whole China model is in serious trouble: they’ve been
expanding industrial production by 20 per cent a year for decades, and
now there’s massive excess capacity in every sector. The Americans can’t
buy any more of it, and 80 per cent of the Chinese earn less than $10 a
day, so they can’t buy what they’re making in their own factories. If
they continue expanding their industrial production, the problem is only
going to get worse. I think they’re going to have to follow the Japan
model as well, and have very big government budget deficits to keep the
economy from collapsing into a depression; if they do that aggressively,
in a best-case scenario China can perhaps achieve 3 per cent growth a
year on average for the next ten years.
Nevertheless, there is a potential market for first-generation
purchases of cars and washing machines that’s still to be realized, on a
massive scale—hundreds of millions of people. Isn’t that still ahead?
Not necessarily, unless Chinese wages go
up—because people who earn $10 a day can’t afford a washing machine;
even if they could, their flat wouldn’t be big enough to fit a washing
machine. And the challenge is, if Chinese wages ever went to the
astronomical level of $15 a day, then there are 500 million people in
India who will work for $5 a day, and the jobs will move there. So
there’s a real danger of a race to the bottom, unless we can agree on a
global minimum wage.
How do you see the current state of the us banking sector? In August this year the New York Times
was sounding the alarm about the fact that the cartel of the big banks
was the sole regulator for the $700 trillion derivatives market,
although it seems to have fallen silent again now.
One
way of approaching this is, whoever creates the wealth has the
political power. Under feudalism, power lay with the landed aristocracy.
Under industrial capitalism, the captains of industry controlled
political power. But in the last few decades, wealth in the us
has come from credit creation. As bankers created more and more wealth,
they became increasingly influential, politically; by the late 1990s
they were unstoppable. First they repealed Glass–Steagall and then, the
following year, they passed something called the Commodity Futures
Modernization Act, which removed the regulations from the derivatives
market and allowed them to trade over the counter with almost no
regulation whatsoever. Since 1990, the total amount of derivatives
contracts has increased from $10 trillion, which was already a very big
number, to $700 trillion—the equivalent of $100,000 per person on earth,
or global gdp for the last twenty years
combined. There is nothing in the world you can hedge with that many
derivatives contracts; the system has become increasingly surreal. You
can imagine how much profit the banks make from $700 trillion—first from
creating the derivatives, then from trading them and using them for
structured finance.
Derivatives are basically
used as gambling vehicles: you can gamble on the direction of interest
rates or commodities, or anything else; if you actually want to hedge
something, you can take out insurance by hedging it that way. But most
of the trading is not between the real sectors of the economy; around
two-thirds of it is done between the banks themselves. Ninety per cent
of derivatives contracts trade over the counter, which means no
regulator can see what’s going on; but 10 per cent of them do trade
through exchanges, so we know something about them. The last time I
looked, the average daily turnover for that 10 per cent—the amount they
changed hands for, every day—was $4 trillion. Now, if the other 90 per
cent traded as much—and it could be more, it could be less, I don’t
know—that would be something like $40 trillion of turnover a day. If
there were even a very tiny tax on each of these derivatives
transactions, the government would have an enormous source of revenue, a
tax that other people wouldn’t have to pay. Most of the trading is done
in London and New York, so there’s no problem about relocation—the
threat that all this business will move to China; the Chinese don’t let
their banks do crazy things like this. Every major accounting scandal
for the past twenty years—Fannie Mae, Freddie Mac, General Electric—has
involved structured finance, with the culprits using derivatives to
manipulate their accounts to avoid paying taxes; the bankers make a big
fee on that. Given what we know about unregulated markets and the
incentive structure of the banking industry, it seems unlikely that in
this $700 trillion unregulated market there wouldn’t be every kind of
fraud and shenanigan taking place. If you were a major oil-producing
Gulf state, for example—not to name names—why would you not manipulate
the price of oil, with the help of one of the large us
investment banks and/or one of the major oil multinationals, when no
one can see what you’re doing? You write contracts that push up the oil
price, and the futures price pulls up the spot price. Most of the
commodities are probably being manipulated this way, oil being the most
obvious one.
Didn’t the Dodd–Frank law aim to put an end to over-the-counter derivatives trading?
Dodd–Frank required the banks to put all the
derivatives through exchanges by the middle of 2011—more than a year
ago. But it keeps getting pushed back to some unspecified date in the
future. Somewhere along the way, the regulators may have realized that,
if you actually put them all through exchanges, it would reveal such a
degree of fraud and corruption that the whole system would implode. The
actual net worth of the banks could turn out to be something like minus
$30 trillion—that’s why they don’t break them apart; they’re too big to
fail, because they’re too bankrupt for the government to take them on.
They should be made to trade through exchanges and also to have proper
margins on both sides, just like when people have an account with a
stock broker; it’s okay to borrow money, but you have to have a certain
degree of margin; and then, if anyone gets in trouble, they have enough
margin to cover their losses or cut their positions. As it is now,
there’s no exchange, so there’s no transparency—no one can see who’s
doing what or why—and there are no margins. The industry complains that
having to put up margins will be so expensive, it will damage their
business. It’s like saying, I have to pay health insurance and I have to
insure my house, that damages my business—but that’s the price of
insurance. You don’t have insurance for free, you have to pay for it.
But, of course, the industry is fighting this tooth and nail, because if
they can no longer create more credit, because the private sector can’t
take on more debt; and if they’re actually forced to stop proprietary
trading on their own accounts, as the Volcker Rule requires; and if they
are forced to put their derivatives through exchanges—then suddenly
they will not be the major source of wealth-creation anymore, and their
hold on political power will be greatly weakened. They are desperately
trying to maintain their wealth-creating abilities in a very difficult
environment. Creditism is much less stable, or sustainable, than
industrial capitalism—and it seems to be teetering on the edge of
collapse.
So there’s no hope that banking legislation will reform the sector?
You’d argue that the banking system has to be propped up, because it
would be such a global disaster if it was restructured?
I wouldn’t say I’m entirely hopeless about it,
but it’s very difficult, because they’d have to find a way to
restructure the banking system that doesn’t cause it to collapse
completely, and I’m not sure there is such a formula. I don’t know
what’s going to happen to the banking system. It’s not clear how they’re
going to make any profits if they can’t continue to increase credit and
can’t expand the unregulated portion of the derivatives market at an
exponential rate anymore. The problem is that if the banking system went
down, it would destroy so much credit that everything would collapse,
just as it collapsed when the money supply was destroyed in 1930 and 31.
Now it’s the credit supply that the policy-makers are determined not to
allow to contract, for the same reason. So I don’t think any of the
European banks are going to be allowed to fail. In November 2011 there
was a lot of talk about the French banks going under, but it was clear
that either the ecb or the imf
would bail them out. Or else, if no one else, the Fed would bail out
Société Générale (for instance)—because if Soc Gen falls, Deutsche
Bank’s going to fall, and then J. P. Morgan. They’re all going to fall
together. So you might as well just bail out Soc Gen—it’ll be a whole
lot cheaper than the Fed trying to bail out everybody. They have no
choice. Sure enough, the ecb did a
back-flip, printed a trillion new euros, and bailed everybody out.
That’s what they’re going to continue to do as long as they can do it,
because otherwise they know we’re going to collapse into the 1930s.
Working out positive and negative forms of creditism—this seems to
be the crux of what you’re saying. This is the system we’ve got, but
what we have to do is take control of it, and submit it to
debt-forgiveness programmes and rational investment strategies that have
a promise of being productive.
Exactly right. I think we can do better this time.
Πηγή: http://newleftreview.org/
Πηγή: http://newleftreview.org/
Δεν υπάρχουν σχόλια:
Δημοσίευση σχολίου