LYNN FRIES: For The Real News, I'm Lynn Fries in Geneva with a report on the state of the
global economy and finance based on a shoot that I did at the United Nations Geneva on
"Playing with Fire," a new book by South Centre Chief Economist Yilmaz Akyüz. This segment
features comments on "Playing With Fire" by Peter Dittus, who was Secretary General of
the BIS, the Bank for International Settlements, from January 2005 through December 2016.
We open with an introduction by a prominent figure from the Global South, Dr. Y.V. Reddy,
former Governor of the Reserve Bank of India. Y. V. REDDY: The first question we should
ask ourselves: Is there such a divide about the opinion, our opinion, and the opinion
in G7 countries about what's happening? Is there? I'm afraid, there's not that much of
a difference in some ways. And I'll read out something, a few paragraphs, and then you
should guess where it is from. First: "The global financial system remains
fragile. The world economy struggles to recover. Climate change accelerates. Digitalization
and globalization depress wages. Income inequality is on the rise. Geopolitical turbulences are
spreading. Lies are present as truths. Truth remains unspoken. And people are angry. Karl
Marx thought that capitalism was sowing the seeds of its own destruction eventually leading
to a revolution. We believe that rather than anonymous forces, it is the policies of the
G7 counties that are now undermining the foundations of the market economy. The G7 policies in
the domains of monetary policy, fiscal and macro-economic policy, prudential policy,
defense and climate change policy have a common feature: They are lax, reckless, and irresponsible."
Next: "Not only G7 central banks have no lasting impact on potential growth but their unconventional
monetary policies may actually lead to resource misallocation in favor of low productivity
sectors." Then it says, this book: "A monster has been
created which is still not under control. Increasingly it seems as if the 2008 great
financial crisis may only have been a dress rehearsal for a worse crisis which lies ahead.
It will come as the result of the excessive use of the monetary printing press, the build-up
of asset price bubbles, the debt accumulation created by low and negative interest rates."
It is from the book written by Peter. The title of the book is, "Revolution Required:
The ticking time bombs of the G7 model." So you have two books here. One is called "Revolution
Required" and the other is called "Playing With Fire." So you have to read them together.
And this one, again it says: "Deepened Financial Integration and Changing Vulnerabilities of
the Global South." There's the difference. This says vulnerability of the South. This
says vulnerability of all. LYNN FRIES: We turn now to a commentary on
"Playing with Fire" by Peter Dittus. PETER DITTUS: It's extremely timely, before,
because it analyzes some of the fragilities that will make the next crisis as it's building
up very, very difficult. But, it says so before the crisis is coming. And I think that's a
huge value. I look at the book, I think it has, if you read all the chapters, it has
a very compelling logic. And the logic, in my mind ... I mean, everyone reads with his
own mind, if you read a novel or a piece. So with my mind, the logic in the book is
first, it describes and analyzes in a lot of detail and richness, the integration and
the financial integration, in particular, between emerging and developing countries
and advanced economies. What is very strong and most of — I don't know how many are
economists — most people sort of look at these issues with a little bit of a sort of
superficial view. And most of them look at what's the net asset position and, well yes,
we are too highly indebted. And the great strength of the book is, in
my view, is that it looks at cross-positions. Because behind every position, everything
may net out to zero, but the cross positions will be huge. And the cross-positions don't
net out between the same people. There are different actors, different types of instruments,
different residencies, different countries, different exchange rates, different base currencies
behind. And even if on the basis of a net analysis you come to the conclusion: This
country is fine. There's no reason to worry. If you look at the cross-figures and what
is behind, then you may very quickly get worried even if the net figures are zero.
Now, what does that lead to? Now, if you look at this detailed analysis, it leads to a situation
where actually the vulnerabilities of emerging economies have actually increased. Despite
the fact that, yes, you have floating exchange rates. You have a reserve accumulation to
try to cover yourself. You have much better fiscal positions than we have had in the past.
But the bottom line is due to this — huge cross-assets both on liability and the asset
side — the fragility and the potential exposure to crisis in the world has actually increased
and the policy options to deal with it have decreased. And I think that's a very strong
message in this book. And if you boil it down, in the current situation it's basically, it's
not the governments, it is the private and corporate debt that has increased tremendously
and where we understand very little about the structure and the developments of that
part because much of it is even inter-enterprise. So that it doesn't appear in any of the usual
statistics. Now, so far this has been rather for the good.
It's like someone, there's someone...It reminds me of the joke – someone is sort of in a
high-rise building looking out of the window at a guy who is flying, falling down. And
he asks him, "How is it going?" And the guy says, "Well, so far so good." And I think
a little bit this is what's happening. So far this has been pretty much to the good.
I mean, everything looks good. It's a sunny, sunny day. It's a sunny season. It's wonderful,
but why has it been so wonderful? And this is I think where we come to the darker
part of the picture. Well, it has been ... this is what is described in the initial part of
the book, chapters one and two. The reason why it has been so sunny, despite all these
built up vulnerabilities, is that in the advanced economies, and in particular the U.S., the
Eurozone and Japan, the monetary policy has been extremely loose. Lots of actually financial
instruments are traded at negative rates. So people who want to make some money, they
don't find possibilities to make money. So the funds are chasing yield. And that means
that there are tremendous financial flows to emerging economies and the risk appetite
has increased tremendously. How is that going to develop further? Well,
we don't really know. But sort of the book has a big question mark and a big caution
for us. And if we look at where this all comes from, it's not so encouraging. So let me just
spend a few minutes on where this has all come from.
Well there’s a saying that the road to hell is paved with good intentions. And I think
that's actually how it started. Because when we had the big financial crisis of 2008, basically
central banks all over the world, they pulled out the stops and said: Well, let's not have
a Great Depression as we had in 1929/30 but let's prevent this. We have learned from history.
Well, they learned from history, that's great. And they rolled out quantitative easing programs
and said: Well, and once it has stabilized and the confidence has rebuilt we are going
to, of course, to normalize the policies. Now, why are we still in 2017 in a situation
where we have huge QE programs and negative rates? Well, I think there are two reasons.
One is as you mentioned already, that the central banks, rather than matching financial
analysts trying to figure out what the central banks are doing, central banks are trying
to figure out what financial markets are doing. And as soon as you try to normalize policies
you have a temper tantrum. Or you can see it currently in the UK where Marconi tries
to raise the rates — inflation is running at 3 percent — all the financial markets
come out saying: It's not the time. Times are difficult. The economy is not so strong.
Brexit. Let's wait another bit. And it's always, let's wait. So and the central banks have
become, I would say, in some countries, hostage to financial markets.
But they have also become hostage to governments. Because behind the scenes, what has happened
during all this low interest rate period is that there has not been a lot of consolidation
and debt reduction. And this is also described very aptly in the book. What has happened
is that debt has been built up. And it has been built up to levels in the advanced countries
that are quite unprecedented for peacetime. During wars, you have seen these levels of
debt, in peacetime, not. And for example, in the Eurozone, the government indebtedness
from 2008 to now has risen from 72 percent of GDP to 109 percent of GDP. So that's not
a small figure. What has happened at the same time is that asset prices have risen. Now
you can look across the spectrum of asset prices. Let me just quote one figure. That
is if you look at the price-earnings ratio [P/E ratio]— sort of normalized to take
out fluctuations so the Schiller Price-Earnings Ratio— in the States, this is now higher
than it was before the Great Depression in 1929. And it has never been higher before,
with one exception, and that was in 2000-2001.
And, finally, another element of this is because one of the reasons why we have these policies
is, of course, well, at least the economy is doing well. And this is also described
very well in the book. The economy is not doing so well. This has not led to a big investment
boom. Investment is actually very low. What is big is investment in share buybacks and
financial engineering. But in real investment, it's very low. Productivity is very low. I
don't have the time…if you don't want to go into this in greater detail, I guess, right
now here. But basically, we have huge debt, high asset prices, low investment in the real
activity. And at some point, this is going to blow up. Now, we don't know how it's going
to blow up and when. And it may be much, much longer than we actually think.
I think coming back to reading the book, I think is very helpful because basically the
book looks also at some of the mitigating factors. When the crisis hits, what could
one do? And it says: Well, don't trust that someone else is going to do it for you. Because,
it says, the international mechanisms that one could think of to deal with them — whether
it's in the IMF or multilateral organizations — the international mechanisms are totally
inadequate to deal with a major crisis and the fallout on your country. And it doesn't
matter which country, just any country. It says: Well, prepare for the crisis because
you can look in the statistics and you can see you are hugely exposed. And on a sort
of deeper note perhaps let me just finish, it also says: Well, think about how you manage
this integration before going out and saying, well, it's great. Money is flowing in. Think
about more deeply, what do you really want out of integration? And integration, it's
not ... I mean, financial flow is not a natural phenomenon like airflows. You decide in the
policy space: What do you want to get out of it? And you set the rules. And I think
one shouldn't be afraid of actually doing that and setting the rules. So one gets a
benefit out of these flows and is not a kind of hostage to these flows. Thank you.
LYNN FRIES: On that note, we round things off with a further quote from the book co-authored
by Peter Dittus. "People sense something is wrong with the
way political and economic elites in the G7 countries are discharging their responsibilities.
The current trajectory of economic policies in the G7 countries, we believe, is leading
to a systemic crisis that will call into question many of the beliefs that the capitalist system
is built on. No one can know when this tectonic shift will occur, nor what will emerge from
it. We believe it will be a major turning point. The trigger for this revolution will
be the loss of confidence in the Alice in Wonderland world, when suddenly people will
realize that the accumulated debt in G7 countries cannot be serviced and that asset values were
artificially boosted by monetary policies that cannot continue."
This concludes Part 1 of our report. We'll be back with another segment featuring Yilmaz
Akyüz as an author's commentary on "Playing with Fire." Special thanks to the South Centre
as organizer and moderator of this event. And to UNCTAD as host at the United Nations,
Geneva. And thank you for joining us on The Real News Network.