The State of the Global Economy under the heavy burden of twelve lost years – Keynote (audio + text)

21/01/2022 by

A keynote summing up my view that, since 2009, the world has wasted enormous resources in a bid to re-float finance and at the expense of our capacity to look after each other, and the planet, at a time humanity is facing existential threats – from climate catastrophe to war and toxic politics. My discussants included: Stephanie Flanders (Bloomberg), Sir Vince Cable (Former Business Minister, UK), Lord Karan Bilimoria (CBI), Mark Tucker (HSBC)

After financialisation met its Waterloo in 2008, the G20 responded with an impressive coordinated monetary response that refloated finance. Its pinnacle, the April 2009 G20 London meeting convened by Gordon Brown.

At the same time, the EU, the UK and, yes, the US practised substantial, coordinated, austerity (despite all the talk of an Obama stimulus that ended up austerian, if one takes into account the sharp austerity at state level). This is what became known as expansionary contraction, though I prefer to call it Socialism for Financiers Austerity for Everyone Else (i.e., the combination of massive expansionary monetary policy, including the money printing known as Quantitative Easing). This led to a unique phenomenon in the annals of capitalism: the non-existence of a general equilibrium rate of interest – i.e., a single rate of interest that can equilibrate, at the same time, (a) the real economy (i.e., bring investment in capital goods close to the level of available savings-liquidity) and (b) the financial sector.

In other words, since 2009, the prevailing rate of interest would: Either be high enough to stabilise the banking system, but yield investment that fell woefully below savings-liquidity. Or be low enough to close the savings-investment gap but, at the same time, destroy finance. The reason why the period since 2009 has been unique in the history of capitalism is that, for the first time, it was not just hard for central banks to home in on a general equilibrium rate of interest but, rather, it was impossible – since a general equilibrium rate of interest no longer existed. [Nb. This is equations to a system of two equations in one unknown for which no real value of the unknown solves both equations]

The result of the disappearance of the general equilibrium rate of interest, following the Crash of 2008 and the policy of expansionary contraction, were the LOST YEARS: 12 years of massive savings-investment imbalance and a historic failure to press money sloshing around the circuits of finance into the service of humanity’s real needs (from health and education to, crucially, the green transition)

Global coordination of money printing (QE) that was not accompanied by a global investment drive caused this. By 2020 the global economy was limping along with this permanent investment-savings albatross hanging over its neck. Then the pandemic came to turbocharge the situation. Come to think of it, what exactly was the response of our states to the pandemic? Much more of the same (QE) along with a major replacement of lost incomes with public debt. Yes, that was a gigantic fiscal boost. Nonetheless, this fiscal splurge was not Keynesian at all as it did nothing to rebalance the pre-existing savings-investment imbalance.

And then inflation arrived. For reasons that had precisely nothing to do with the abundance of liquidity in the circuits of finance – not even with the governments’ splurge. Inflation reared its ugly head because of the major disruption in global supply chains that, under post-1991 globalisation, relied in just-in-time deliveries of everything, from fruit and vegetables to microchips. However, the preceding 12 LOST YEARS (during which we lost the opportunity to invest in green energy) have now turned what should have been a transitory inflation into something far more permanent – as the world pays the price of struggling to move to green energy unprepared and hurriedly.

While we are not facing a 1970s’ inflationary dynamic (something that the evisceration of the working class’ collective bargaining power guarantees), the major central banks are in a conundrum. After 12 years of financing the financiers, and extending-and-pretending unpayable debts of corporations and states, they are damned if they tighten monetary policy and they are damned if the don’t. In more abstract terms, the disappearing act of a general equilibrium interest rate central banks are unable to keep the show on the road in the way they have been since 2009. Toxic politics, racism, post-democracy and geopolitical tensions are the natural repercussion.

Those who agree that climate change is a clear and present danger must, in view of the above, also agree that four things need to be done:

  • Hard constraints on, say, coal mining that multinational corporations, along with governments they influence, resist tooth and nail

  • Massive investment that the markets will not generate alone – due to a combination of a tragedy of the commons and standard coordination failure

  • A global carbon tax that is re-distributed in its entirety to the victims of the mind-numbing inequality exacerbated by 12 LOST YEARS

  • A total rethink of central banking, now that digital fiat money makes it possible to end the commercial banks’ exclusive right to have accounts with central banks – a common protocol of digital fiat money would be a good start.

However, for these four things to stand a chance of being implemented, we need a Global Agreement, a New Global Plan, involving the US, the EU and China. That would be Progressive Internationalism establishment-type.

But it is not happening. Some would say it is pie in the sky. Why? It is not just vested interests. It is also broken politics due to the ultra-long reign of vested interests. Put succinctly, the much needed Global Plan is not happening because:

  • The United States is ungovernable

  • The European Union has no government and continues to play ostrich: ready to change everything in order to prevent making the one change that would make a difference (a proper fiscal union and a common investment policy)

  • A New Cold War is being waged by the United States, and many of its European dependents, against China but on behalf of Big Tech, Wall Street and the military-industrial complex.

That’s why the only chance for Progressive Internationalism comes not from the Establishment but from the radical, anti-Establishment Progressive International.

You can also listen part of the discussion that ensued:

How did Quantitative Easing boost inequality? Click here

What about the Eurozone? Click here


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