Crisis and Risk of Global Recession: The Future Is Not in the Economy
Published in Il Fatto Quotidiano
(Italy) on 3 January 2016
by Giulietto Chiesa (link to original)
(Italy) on 3 January 2016
by Giulietto Chiesa (link to original)
Translated from
by Bora Mici.
Edited by Victoria Branca.
If we were to use the bankruptcy of Lehman Brothers as our date of reference, barely eight years have passed since the beginning of the global [economic] crisis. Since then, the majority of expert opinions have remained in the zone of traditional explanations — that is, it has examined the situation, which has been going on for a long time, as an effect of a “normal” alternation of recession and growth cycles. That is, we are actually in a recession, but — don’t worry — there will also be a growth.
But there are many voices that now say the global economy is encountering much more serious problems than just the cyclical ones. The classical cycle was similar to a rising spiral. This [current economy] looks like a vicious circle that turns upon itself. The problem is how to escape it. Conventional economic knowledge again puts forth a credit-based monetary policy. However, in these seven years, all attempts at putting the car back in gear through traditional systems have not worked.
The very low growth in all industrially developed nations also has an effect on countries that we define as “developing.” And this, in turn, depresses the general prospects for a development of global industrial production.
Under these conditions, the risk of a global recession is obvious. Is it possible to avoid it through some global financial maneuver? For example, through the reduction of interest rates to nearly zero, like Europe, Japan and – up to a few days ago – the U.S. were doing? The recent trend reversal, carried out by Washington to increase interest rates, seems more like a bet than a strategy — a bet to stimulate demand, a real black hole, but not accompanied by any structural reform of global finance. But it is probable that this decision will dramatically exacerbate a phenomenon that is already underway: the escape of capital from developing countries toward industrially advanced ones. The numbers show it. From 2002 to 2014, there was a net flow of money from developed countries to less developed ones registered as having gone from $240 billion to $1.1 trillion. A clear tendency that indicated how the finances of the “rich” were investing in the economy of the “poor,” obviously to extract additional wealth from them.
This trend was sharply reversed in 2015, moreover altering as a whole an enduring 30-year trend. In just one year, having left “poor” countries, more than $1 trillion was returned to “rich” countries. The Fed’s decision will exacerbate this phenomenon whose meaning is as clear as it is worrisome. In developing markets, capital does not find places and opportunities to increase. Now we just have to see if they will find the opportunity to do so within “rich” markets. But it does not look like it because demand does not increase in industrialized countries, either.
The predictions of the International Monetary Fund confirm this evaluation. Three years ago, there was more optimism. Now, calculations say that the GDP growth rate in 2020 for the U.S. will be 6 percent less than predicted. For Europe, it will be 3 percent less, for China 14 percent less, and for developing countries, 10 percent less. In sum, the global GDP growth will be 6 percent less than predicted in 2012.
These predictions go hand in hand with those about inflation. According to Larry Summers (in an opinion piece for the Washington Post in October 2015), in the 2020-2025 period, inflation in the most dynamic country, the U.S., will be around 1.5 percent, a lot lower than official predictions. None of the central banks think inflation will go below 2 percent. The difference between interest rates and inflation is “extraordinarily low.” Summers said, “The current prediction for the next 10 years, as far as industrially developed countries are concerned, says that the interest rate will be around zero.”*
It follows, according to Summers, that “with such low rates, the possibility of an economic surge will be very low.”** And the global economy will find itself, once again, under conditions of low growth, low inflation, rates equal to zero – those are the conditions of a full stagnation.
Summers’s diagnosis (and his public evaluation is obviously important because of his influence on U.S. markets) is dramatic. “The world’s largest markets are telling us with ever-increasing force that we are in a different world than we have been accustomed to,” Summers wrote. “Traditional approaches of focusing on sound government finance, increased supply potential and avoidance of inflation court disaster. Moreover, the world’s principal tool for dealing with contraction — monetary policy — is largely played out and will be less effective if contraction comes.”
But not even Summers manages to say what should be said. Maybe because he does not go outside of the financial scheme that is in his head and in the heads of all market [analysts]. And that is that there are events in real life that cannot be influenced by any credit-based financial policy. Global warming — the summit in Paris has just concluded and nothing came of it — shows exactly that the world of Summers is no longer the one he was used to. And all of us along with him. The “Map of Money” (I am using the title of an upcoming, extraordinary book by Luigi Sertorio) cannot lead us to growth without limits; that is “the island that does not exist.” The “limits of growth” are appearing on the horizon — that is the physical impossibility of reconciling the pure immense power of money (infinity) with the overwhelming power of nature (finite in turn).
It’s a level of contradiction that presents a complexity superior to the conceptual forces of markets, and therefore, cannot be resolved by them. The task of the future will be to organize the intellectual forces present in different societies and different disciplines that are capable of working at this level of complexity.
*Editor’s Note: This quote has been paraphrased. The original quote reads, “The prevailing expectation is of extraordinarily low real interest rates … and the average real rate in the industrialized world over the next 10 years is expected to be zero.”
**Editor’s Note: This quote has been paraphrased. The original quote reads, “In the presence of such low real rates, there can be little chance that economies would overheat.”
But there are many voices that now say the global economy is encountering much more serious problems than just the cyclical ones. The classical cycle was similar to a rising spiral. This [current economy] looks like a vicious circle that turns upon itself. The problem is how to escape it. Conventional economic knowledge again puts forth a credit-based monetary policy. However, in these seven years, all attempts at putting the car back in gear through traditional systems have not worked.
The very low growth in all industrially developed nations also has an effect on countries that we define as “developing.” And this, in turn, depresses the general prospects for a development of global industrial production.
Under these conditions, the risk of a global recession is obvious. Is it possible to avoid it through some global financial maneuver? For example, through the reduction of interest rates to nearly zero, like Europe, Japan and – up to a few days ago – the U.S. were doing? The recent trend reversal, carried out by Washington to increase interest rates, seems more like a bet than a strategy — a bet to stimulate demand, a real black hole, but not accompanied by any structural reform of global finance. But it is probable that this decision will dramatically exacerbate a phenomenon that is already underway: the escape of capital from developing countries toward industrially advanced ones. The numbers show it. From 2002 to 2014, there was a net flow of money from developed countries to less developed ones registered as having gone from $240 billion to $1.1 trillion. A clear tendency that indicated how the finances of the “rich” were investing in the economy of the “poor,” obviously to extract additional wealth from them.
This trend was sharply reversed in 2015, moreover altering as a whole an enduring 30-year trend. In just one year, having left “poor” countries, more than $1 trillion was returned to “rich” countries. The Fed’s decision will exacerbate this phenomenon whose meaning is as clear as it is worrisome. In developing markets, capital does not find places and opportunities to increase. Now we just have to see if they will find the opportunity to do so within “rich” markets. But it does not look like it because demand does not increase in industrialized countries, either.
The predictions of the International Monetary Fund confirm this evaluation. Three years ago, there was more optimism. Now, calculations say that the GDP growth rate in 2020 for the U.S. will be 6 percent less than predicted. For Europe, it will be 3 percent less, for China 14 percent less, and for developing countries, 10 percent less. In sum, the global GDP growth will be 6 percent less than predicted in 2012.
These predictions go hand in hand with those about inflation. According to Larry Summers (in an opinion piece for the Washington Post in October 2015), in the 2020-2025 period, inflation in the most dynamic country, the U.S., will be around 1.5 percent, a lot lower than official predictions. None of the central banks think inflation will go below 2 percent. The difference between interest rates and inflation is “extraordinarily low.” Summers said, “The current prediction for the next 10 years, as far as industrially developed countries are concerned, says that the interest rate will be around zero.”*
It follows, according to Summers, that “with such low rates, the possibility of an economic surge will be very low.”** And the global economy will find itself, once again, under conditions of low growth, low inflation, rates equal to zero – those are the conditions of a full stagnation.
Summers’s diagnosis (and his public evaluation is obviously important because of his influence on U.S. markets) is dramatic. “The world’s largest markets are telling us with ever-increasing force that we are in a different world than we have been accustomed to,” Summers wrote. “Traditional approaches of focusing on sound government finance, increased supply potential and avoidance of inflation court disaster. Moreover, the world’s principal tool for dealing with contraction — monetary policy — is largely played out and will be less effective if contraction comes.”
But not even Summers manages to say what should be said. Maybe because he does not go outside of the financial scheme that is in his head and in the heads of all market [analysts]. And that is that there are events in real life that cannot be influenced by any credit-based financial policy. Global warming — the summit in Paris has just concluded and nothing came of it — shows exactly that the world of Summers is no longer the one he was used to. And all of us along with him. The “Map of Money” (I am using the title of an upcoming, extraordinary book by Luigi Sertorio) cannot lead us to growth without limits; that is “the island that does not exist.” The “limits of growth” are appearing on the horizon — that is the physical impossibility of reconciling the pure immense power of money (infinity) with the overwhelming power of nature (finite in turn).
It’s a level of contradiction that presents a complexity superior to the conceptual forces of markets, and therefore, cannot be resolved by them. The task of the future will be to organize the intellectual forces present in different societies and different disciplines that are capable of working at this level of complexity.
*Editor’s Note: This quote has been paraphrased. The original quote reads, “The prevailing expectation is of extraordinarily low real interest rates … and the average real rate in the industrialized world over the next 10 years is expected to be zero.”
**Editor’s Note: This quote has been paraphrased. The original quote reads, “In the presence of such low real rates, there can be little chance that economies would overheat.”
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