The Coming Crisis

1
The Coming Crisis

• the role of the Finance Sector and parallels with
  the 1920s

2
Key Parallels

• Then post 1918 global financial liberalisation
  and de-regulation based on the Gold Standard
• Today post 1970s removal of capital controls and
  financial de-regulation with inflation
  targetting

3
Then

• Financial volatility de-stabilised trade
• Increased protectionism Smoot-Hawley and other
  duties

4
Now

• International financial volatility and exchange
  rate instability leads to demands for higher
  subsidies and protection..especially in the
  EU/US/Japan
• Increase in bilateral agreements
• Failure of Cancun

5
Then

• Reckless credit creation, esp. in the US and
  Germany
• .

6
Now

• Reckless credit creation soaring mortgage
  lending the re-fi boom in the US easy
  money fiscal profligacy and foreign deficits
  most notably the USs huge foreign deficit.

7
Now

• US and UK have moved from being major exporters,
  to major importers of capital
• Since 2000 the developing world has been a net
  exporter of capital to the advanced economies
• World Bank, Global Development Finance
  Harnessing cyclical gains for development 2004,
  page 7.

8
Now

• The largest international flow of fixed-income
  debt today takes the form of borrowing by the
  worlds richest nations at (probably) negative
  real interest rates from countries with very
  large numbers of poor.
• Larry Summers Business Week 09 March, 2004.

9
Then

• High real interest rates for corporations

10
Today

• High real interest rates for individuals
  (overdrafts, credit cards, mortgages),
  corporations and governments rates which exceed
  returns on investment (3-5 on average).

11
Then

• High levels of investment leading to
  over-capacity resulting in booms and busts

12
Now

• Booms and Bubbles Telecoms/DotCom/Stocks/Property
  /Dollar)
• And Busts Telecoms/DotComs/Dollar - Property/and
  stock market still to come?

13
IMF

• The recent boom and bust in equity markets once
  again underscores the potential cost of asset
  price shocks in modern economies..
• These costs are large over the past 3 decades,
  equity price busts have resulted in a cumulative
  loss of GDP of about 4, housing busts have been
  twice as severe (WEO April 04 p.22)

14
Then

• High Levels of Unemployment

15
Now

• High levels of Unemployment and rising - 2003
  levels (IMF WEO)
• US 6.0
• Euro Area 8.8
• Hong Kong 7.9
• South Africa 30 (official)
• Dar es Salaam 46 (official)

16
Unemployment
17
Then

• Exchange rate chaos absence of credible and
  co-operative strategy

18
Now

• Competitive devaluations US dollar and Chinese
  Yuan
• Rise in Euro as funds flow out of the dollar into
  the Euro
• Rise in the Rand/Real
• Euros value fixed by ECB and so-called growth
  and stability pact no room for manoeuvre

19
Now

• Exchange rate chaos and absence of what the IMF
  calls
• the need for a credible and cooperative strategy
  that both facilitates the necessary medium-term
  rebalancing of demand across countries and
  regions and supports global growth (WEO April,
  2004, p. 15)

20
Then

• Absence of inflation in fact widespread
  deflation

21
Now

• Absence of inflation

22
Inflation
23
Effects of deflation on debt

• Amplifies cost of debt, and makes it impossible
  to erode debts except by major contraction..

24
Then high consumer spending

• Apart from the nationwide speculation in shares
  which even the most famous banks had encouraged
  by easy loans, a vast system of purchase by
  instalment of houses, furniture, cars and
  numberless kinds of household conveniences and
  indulgences had grown up Churchill.

25
High consumer spending financed by credit and
wealth effect

• In US consumer spending 60 of GDP
• Between 1999-2003 consumer spending grew by 10
• GDP grew by only 6 (in real terms)
• Govt. spending and Corporate spending cut

26
In UK

• In UK (1999-2003) consumer spending increased at
  an annualised rate of 4.5
• GDP growth only 2.5

27
What will trigger crisis?

• Higher interest rates?
• Collapse in consumer spending?
• Further decline of dollar as twin deficits rise?
• One or other, exacerbated by oil price hikes?

28
Consumer Confidence
29
The way forward

• Restore policy autonomy to elected, democratic
  governments by
• Restoring control over capital movements and
• Control over interest rates

30
Chase the moneylenders from the temple

• Impose restraints on the growth of credit,
  through increased regulation by Central Banks and
  governments

31
Control over the price of money

• Keep interest rates low
• Allow Central Banks to use bank money as a means
  of controlling and fixing a range of (low) prices
  for money - just as in WWII.

32
An end to the looting

• Of developing countries, through
• the forced transfer of savings (the holding of
  dollar denominated debt as reserves)
• the transfer of skilled labour and
• the extraction of mineral and other assets

33
A new way of paying

• the establishment of an International Clearing
  Agency as first proposed by Keynes - for
  managing international payments, and global
  exchange rates using a basket of currencies.

34
Upsize the state

• give control over money to the guardians of the
  nations finances not markets.
• Restore pensions, education, health,
  broadcasting, art etc. to democratically elected,
  and accountable politicians not unaccountable
  markets

35
A just resolution to debt crises

• 100 debt cancellation under an open,
  accountable sovereign insolvency framework for
  countries that are effectively insolvent, and
  will not reach the MDGs without.

36
A new alliance

• Between
• Labour and Industry
• to challenge
• - Finance