We keep forgetting that every Crisis, like a coin, has two faces. One is the mountain of debt and losses that is crushing states, people and banks. The other is an equally imposing mountain of accumulated savings that are to ‘frightened’ to fund investment, thus remaining idle and frittering away. Keynes famously invoked the Paradox of Thrift in order to explain this unhappy co-existence of intolerable debts and idle savings; a symbiosis fuelling the Depression. Rob Johnson, in a recent book chapter, adds another dimension to this situation; one that is new and just as scary: The Paradox of Risk Aversion. (Here is the full chapter entitled Paradox of Risk Aversion: Structural uncertainty and a dysfunctional international monetary system)
Rob Johnson’s main point is that, following the Crash of 2008, our world is in a state of structural disequlibrium (which is pretty much what I have been arguing in my Global Minotaur). In this disequilibrium state, there is a global excess demand for ‘safe assets’. And since we cannot ALL own safe assets at once (just like not all nations can have, simultaneously, a trade surplus), unless investors find the courage to invest in less than perfectly safe assets, then no assets will be safe, all assets will wither, and a new Global Depression will be upon us. Moreover, given the oligopolisation of savings, due to the concentration of global savings in a small number of sovereign wealth funds, the risk aversion of the sovereign wealth fund managers is threatening to undermine any chance of the global rebalancing which is, whether we like it or not, a prerequisite for a Global Recovery.
Here is Rob’ conclusion of what is needed if the global economy is to have a chance of rediscovering its poise:
“What is needed is not bubbles or austerity but a policy constellation directly targeted on investment spending, human capital investment, modernisation of the supply side, and a focus on productivity growth to inspire confidence that the sovereign-debt-to-GDP ratios can be managed sustainably and be consistent with ecological concerns.”
And how will this be achieved? Rob’s answer is predicated upon the thought that sovereign wealth funds must play a major role in effecting such investment spending. I think he is right. And this is precisely why Stuart Holland and I have been insisting over the past two years that, at least in Europe, we desperately need a combined effort by the European Investment Bank and the European Central Bank (utilising EIB-issued and ECB-issued bonds) to harness the capacity of the sovereign wealth funds and mobilise idle (risk averse) savings in the context of a Social-Green Investment-led Recovery Program – a New Deal for Europe. Rob Johnson’s point is that we need something like of the sort not only in Europe but also in the United States. He is spot on.