The Real Causes of the Recent Economic Crisis and Current Economic Turmoil

Howard Nicholas
International Institute of Social Studies, Erasmus University Rotterdam

CREA lecture 2 !une 2"#$

The -lo*al Economic /ro*lems

Severe economic and financial crises in %eriod 2""&'( Renewed weakness in the )lo*al economy from mid'2"#" onwards
+ + +

,allin) -./ and industrial %roduction )rowth Continuin) hi)h unem%loyment 0oss of confidence in countries with e1cessive de*ts + the Euro2one crisis Considera*le volatility in )lo*al financial mar3ets

4ea3enin) industrial %roduction and real -./ )rowth in advanced countries, 2""5 6!an7 + %resent 68ar 2"#$7

(Data Source: Economist, Calculated by author)

4ea3enin) industrial %roduction and real -./ )rowth in develo%in) countries, 2""5 6!an7 + %resent 68ar 2"#$7

(Data Source: Economist, Calculated by the author)

Unem%loyment still hi)h in advanced countries, 2""5 6!an7 + %resent 68ar 2"#$7

(Data Source: Economist, Calculated by the author)

-overnment de*t, 2"#2

8a9or %olicy res%onses to 2""&' ( crisis

In9ections of liquidity in system alon) with lower short'term interest rates Budget deficits Bail-outs of banks 6#7
+ + +

/urchase of :to1ic assets; Nationalisations and ca%ital infusions -uarantees of de%osits

8a9or %olicy res%onses to current turmoil

Reductions in *ud)et deficits in advanced countries *ecause of fear of de*t 0oose monetary %olicies in advanced countries 6#7 Continuin) *ailouts of *an3s 627 8ore financial mar3et re)ulation 6$7 Ti)ht monetary %olicies in develo%in) countries to curtail inflation Ca%ital controls and currency interventions in a num*er of countries

Standard e1%lanations for the )lo*al economic %ro*lems

-overnment monetary and fiscal irres%onsi*ility in the advanced countries cou%led with e1chan)e mani%ulation *y the Chinese< S%eculative e1cesses *y the financial sector in the advanced countries cou%led with mercantilist %olicies of the Chinese and other Asian economies<

THE REAL REASONS OR THE !R"S"S AN# THE !ONT"N$"N% T$R&O"L

Real causes

Shift in balance of global econo'ic (ower away from the U<S< and towards Euro%e and .evelo%in) countries< 4or3in)s of cycles, es%ecially the long cycle + end of %hase in which financial sector *ecomes too *i) ,all or sta)nation in real wage levels in the U<S< 6and other advanced countries7 hidden *y an e1cessive e1%ansion of credit 6#7 &isguided (olicies and data mani%ulation in the advanced countries have a))ravated %ro*lems<

THE SH" T "N %LOBAL E!ONO&"! )O*ER

Shift in )lo*al %roduction from Advanced to .evelo%in) countries, #(("'2"##

(Source: World Bank)

Shift in )lo*al investment 6= of Total7 + #((", 2""", 2"#"

+,,.evelo%ed US !a%an EC @ther @EC. E88 South East Asia China South Asia India 0atin America Ara2il Africa Russia Eastern Euro%e 5><5 2 <$ 2 <# $ <5 #><5 #$<2 2(<$ # <& # <> #2< 2#<? #?<2 <# .--5?<2 $?<" 2#<" 2&<# #><5 # <5 ?#<& #< #$<& ##<" 2#<# ##<" 2<> .-+>"<? 2><5 # <2 $2<? 2><? $(<? >#< ?$<? ##<$ #"<# #$<> 5<2 #<5

2$<> < >< (Source: World Bank, Calculated by author) #<2 "<5 #<2

.ecline of the US relative to the 4orld economy, #(>"'2"##

(Source: World Bank, Calculated by author)

The rise of China

:8any analysts are %redictin) a %ower shift in the financial arena Buite soon, since accordin) to International 8onetary ,und %ro9ections, China could lea%fro) the United States to *ecome the worldCs lar)est economy *y 2"#>;
(Source: RT, ! "u# $! )

.evelo%in) country researves )rowin) ra%idly

-lo*al de*t

THE B$S"NESS !/!LE

A Ty%ical Cycle
Output growth up Inflation up Interest rates up

Output growth down Inflation down Interest rates down

Ty%es of Cycles
Cycle %&Wa'e ,u#lar Duration (!&)! yrs -& yrs Source *a+or inno'ations .i/ed ca0ital in'estments

%itchin

1&2 yrs

3n'entory ca0ital chan#es

0on) 4aves

2$

0on) Cycle /hases

u(swing Long cycle phases

8a9or tech, innovations lead to rise in %rofits, investment and out%ut /rices rise towards end of %hase 6technolo)ical and %roduction ca%acity limits are reached7 Economic %olicy is e1%ansionary /rofits, investment and out%ut )rowth fall $ne'(loy'ent rises and real wa)es and %rices fall ,iscal %olicy *ecomes contactionary and 'onetary (olicy e0(ansionary

downswin g

0on) Cycle .atin)

Trough -5! 626 651 Peak 6 2 6-$ 5 Trough 626 651 52! Duration Hegemonic Technology Power (6 2( 2Britain Britain Britain Canals Rail8ays, Steam (steam en#ine) Steel, Combustion en#ine, Electricity, Chemicals, Tele0hone

52!

5-(

$!!!9

)!

:nited States :nited States

Electronics, ;lastics, "eros0ace, <uclear ener#y Com0uters, Biotechnolo#y, Robotics

$!!!

$!1!

$!(!

(!

(Source: 4oldstein 566 (modi7ied))

0on) Cycle Interest Rates, US 2" yr *onds, #(? + 2"#2

= 56-&5$ data is estimate

(Data Source: :S .ederal Reser'e St>?ouis)

@vere1%ansion of the financial sector in the US

Cyclical movement of US de*t

!u)lar .atin) ' Trou)hs

#(?5 #(&" #(&? 6oil shoc37 #(5" #((# 2""# 2""5 2"# D

)OL"!/ &"STA1ES

@rthodo1y 8ar3 #

)rinting does not cause inflation + it leads to asset *u**les in the current conte1t #ebt is not the source of the sta)nant )rowth in advanced countries it is a conseBuence of it

!utting e0(enditure 6to su*sidi2e the financial sector7 only worsen %ro*lems

!2inese currency is not undervalued

US and !a%anese %rintin) holdin) u% the mar3ets

Inflation of advanced economies, 2""" 6!an7 + %resent 6A%r 2"#$7

(Source: Economists, chart by author)

,allin) US unem%loymentD

@rthodo1y 8ar3 2

Budget deficits per se not the answer Raising wages in the advanced countries will worsen matters and Buite %ossi*ly lead to %rotection 8ercantilist %olicies in !2ina are not to *lame<

#ATA &AN")$LAT"ON

@fficial vs un'official US -./ data

$T$RE )ROS)E!TS

Short'term

Su*sidin) of the euro'crisis Recessionary forces )atherin) + should *e another recession in US too *y 2"# at the latest 0ower )lo*al inflation Continuin) ti)htenin) of fiscal %olicies in advanced countries and easin) in develo%in) countries Continuin) easy monetary %olicies in the advanced countries and )reater easin) in develo%in) countries

$3S3 "'(orts4 growt2 rate +,,5 6 A(ril .-+5

(Source: ECR3, 1rd ,une $! 1)

US industrial %roduction and e1%ort )rowth, 2""" 6!an7 + %resent 6A%r 2"#$7

(Source: :>S> .ederal Reser'e St> ?ouis, chart by author)

U<S< )overnment 2"year *ond real interest rate, 2""# + %resent 68ay 2"#$7

(Source: :>S> .ederal Reser'e St> ?ouis, chart by author)

Household de*t

(Source: Economist, st ,une $! 1)

0on)er'term

Sta)nation in the advanced countries 6#7

+ + + +

4ea3enin) of the financial sector Continuin) hi)h unem%loyment Continuin) hi)h )overnment de*t and *ud)et deficits .eflation %ro*lems

8ore ra%id )rowth in the develo%in) countries 627

+ +

Rise of 0atin America and Africa Continuin) )rowth of Asia + %ossi*le formation of a monetary union

Shift in )lo*al wealth + 2""", 2"#", 2"$"

(Source: @ECD ;ers0ecti'es o7 4lobal De'elo0ment $! !, Shi7tin# Wealth)