Martin Wolf on Global Shocks

Some notes from the recent BBC analysis programme on the global crisis presented by Martin Wolf in which spoke to a number of

* We are not yet close to the end of a single long-running crisis / trauma of excessive private and public sector debt

* Excessive debt is not the only danger - there are many systemic issues facing the world economy

* Imbalances in the world economy - trade imbalances persist, and deep imbalances in growth rates going forward that are helping to fast-forward changes in the balance of economic power in the world economy

* Combination of sovereign debt problem (generates weak confidence) but a banking sector that continues to de-leverage (cut their loan books) which hampers private sector growth. The developed world is battered and weak and vulnerable to further macro shocks. There is a generalised slowdown and no country is immune to it.

Policy mistakes

1/ Financial deregulation encouraged reckless and high-risk lending

2/ Belief that sovereign debt was risk-less - inevitably led to too much of it being issued

3/ European monetary union - created with 17 disparate countries and without appropriate fiscal disciplines being enforced - there was a decade of lax lending and spending and worsening competitiveness for many countries in the south.

Financialization - a long-term failure of the capitalist system

Ever-rising borrowing became the only way to finance rising consumption in a decade when real wages were falling - borrowing was the demand-engine but this engine has now badly mis-fired and new sources of growth need to be found.

Productivity gains did not find their way into higher real wages for many millions of people at or around median wages, growth looked strong on the surface but was accompanied by a trend rise in inequality and growing social unrest.

Fallacies of composition

i) All countries should save more - the paradox of thrift

ii) All countries should seek to export more - one country’s BoP surplus is another’s deficit

iii) All countries should seek to reduce their debt - the risk of another global downturn / slump

It is incredibly hard to deal with de-leveraging of the banking system once we have allowed excessive leverage to happen in the boom. De-leveraging constrains the growth of private sector demand - from small businesses who cannot get loans to home-owners finding it tough to get a mortgage. This de-leveraging can take many years to unwind.

Main tool now lies in the hands of developed-country central banks who still have scope for expanding their own balance sheets through quantitative easing as a way of tackling weak growth of money and credit.

Or can we persuade fast-growing emerging countries to provide a further impetus to global economic demand - a new engine of growth that might help lift debt-ridden rich nations to achieve firmer recovery and attack debt in ways other than yet more austerity?

The autonomous capacity of developing countries to grow has increased but will they be willing to provide sufficient help perhaps through the International Monetary Fund? Does the IMF itself need to be able to act as a bank in it’s own right by creating new money - effectively the creation of a new global central bank.