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The world economy post-2008 – Interviewed by the Institute of Regulation & Risk

14/01/2015

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Since the demise of Lehman Brothers in September 2008 and ensuing great financial crisis (GFC), it would seem rather obscenely that central bankers and monetary policy has been obsessed with “deflation”, rather than remedying the actual causes of the crisis itself. Is this a fair analysis? 

Central bankers and policy makers were obsessed not so much with deflation but with transferring the losses of financial institutions onto the shoulders of citizens. When this transfer produced deflationary forces only then did they enter into QE territory in an attempt to stem them. Since then they have been trying to contain deflation without doing anything that might restore a modicum of bargaining power to labour or income to the dispossessed.

Given collapsing oil prices, an emerging car loan subprime crisis brewing in the USA, slow down in China, continued economic woes in Japan and fears over Greece igniting another round of sovereign debt crisis in the EU, is it fair to say we may be entering a perfect storm again and a repeat of events similar to those in the GFC?

Whether the next phase of the global crisis will take the form of a major ‘discontinuity’ or a slow burning, ever increasing loss of socio-economic potential is not something that we can predict. What is clear is that, under the current policy mix, the world is facing either what Summers described as secular stagnation or another Lehman moment. Not a great set of options…

Turning to the EU and euro zone itself, would it be prudent for the European Commission and ECB to countenance the rapid introduction of a two-tier Euro, specifically a “hard” Euro zone with Federal Germany at its helm, and a “soft” Euro Zone with France at its helm?

If Europe continues the way it is now going, there will be no soft and hard euro. The euro will disintegrate, the result being a Deutsch mark zone east of the Rhine and north of the Alps and an assortment of national currencies everywhere else. The former zone will be gripped by deflation and the latter by stagflation.

With reference to the second question, together with your reply, is it correct, as many allude, that the economic and social ramifications of the 2008 GFC are greater in many G20 nations today than conditions during the Great Depression in the 1930’s?

It is not useful to make such comparisons. While it is true that the crisis transmission mechanisms are more poignant now than then, let us not forget that 1929 set in train the process leading to the carnage of the 2nd World War: hardly a minor repercussion.

Back to Europe and the development of a nascent banking union within the EU members states. Do you believe it wise of political and economic policymakers to concentrate on a “banking union” when centrifugal forces within the EU are growing, rather than dissipating presently? 

A banking union would be a godsend. It would break up the death embrace between insolvent banks and insolvent states. Alas, we created a banking union in name so as to ensure it never happens in practice. And so the said death embrace continues.

The recent US unemployment figures (December 2014) and third quarter 2014 GDP growth figure of 5% seems a little unbelievable, particularly given most statistical analysis that demonstrates all gains and more since the “supposed” US recovery have accumulated within the top 5% at the expense of the average Joe on Main Street?

If you look at the US labour market closely you find that the number of Americans wanting a full time job and not having it has remained more or less constant over the last few years. Employment growth has not kept up with labour supply which, in the United States, rises faster than in Europe. As for income growth, it is no great wonder that, courtesy of low investment and QE, asset price increases and share buybacks boost the top 1%’s income further while wages are languishing on a filthy floor. And so macrodata prosper while most people suffer.

Since late 2014, and continuing during the first weeks of 2015, we have Cassandra’s warning about a Greek exit from the Euro Zone should left of centre political parties gain power in January’s election. Is this view overstated and fear mongering no less?

It is pure fear mongering for the purposes of dissuading Greek voters from voting for SYRIZA. It is that cynical. The powers that be know that Grexit would unleash destructive powers that they cannot control. So they are bluffing, hoping that Greeks will fall for this piece of terror a second time – after 2012. It looks as if they cannot fool the Greek voters twice.

An economically prosperous EU would seem essential for the wellbeing of the global economy, given this assumption, what exactly are EU policymakers and the constituent member national governments thinking about by hailing austerity as a panacea, rather than a massive fiscal expansion similar in impact to Marshal Aid nearly 70 years ago?

You are making the wrong assumption that EU officials are in the business of promoting shared prosperity. I wish that were true. No, they are in business for perpetuating their bureaucratic authority within an institution that was designed as a democracy-free zone and as a mediator between various powerful, oligopolistic vested interests for whom austerity is a golden opportunity to maximize their social power over the rest of society. And if gigantic unemployment and a humanitarian crisis is the result, so be it…

A new Bretton Woods agreement and re-imposition of capital controls would seem more beneficial, rather than all the supposed “free trade” malarkey we keep hearing about from both sides of the Atlantic. Would you agree?

Capital controls have even been adopted, of recent, by the IMF as essential shock absorbers and stabilisers. A new Bretton Woods would need to configure what I call a global surplus recycling mechanism that prevents bubble-creating financial flows during the ‘good’ times and limits the extent to which the burden of adjustment falls on the shoulders of weaker nations and citizens during the ‘bad’ times. Politically, the trouble is that, unlike in 1944, today there exists no equivalent to the United States then to convene such a conference and underpin the resulting agreement. Only the G20 can do this collectively. But with Europe in a state of comic idiocy and with the United States ungovernable, the prospects are dim.

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