Economic system

An unstable global economic system ignored

By Daniel Albert

Today, the International Monetary Fund announced a further reduction in its global growth projections for 2014, with its estimate of US growth also reduced (citing government spending cuts, but not the current US government shutdown – or hitherto unthinkable notion of the US government failing to fulfill its obligations). Despite the apparent urgency of the global economic downturn, when world leaders attended their annual fall conference at the United Nations in New York last month, they focused on physical security diplomacy (Syria, Iran, etc.) .). Thus, another year has passed in which global economic security issues were not on anyone’s agenda.

Policymakers continue to fail to understand that today’s most daunting economic challenge lies in the area beyond a nation’s or region’s borders – and that multilateral action to address this challenge is arguably more important than the increasingly ineffective internal stimulus efforts.

Current economic imbalances – particularly those resulting from the rapid emergence of post-socialist nations over the past 15 years, with their associated supply of excess labour, productive capacity and global capital, relative to demand – have crippled the economies of advanced countries. nations. Such economic dislocation can no longer be resolved by a single power, or even by two or three.

Indeed, the risk is now enormous that unilateral or bilateral actions will be perceived by excluded actors as economically threatening or even hostile, leading to economic countermeasures. The problem is aggravated by the complexity of relations between developed countries on the one hand and emerging countries on the other. It is hard to imagine moving beyond a world economy that is barely coping, and therefore at significant risk of a new and deeper crisis, without a more open dialogue between the countries of the Group of 20 (G20) and proactive steps towards mutual compromise.

There is, however, a huge common interest if nations can find the right way to open a dialogue with each other. Surplus and debtor nations have thus far understood that it is in no one’s interest to attempt to aggressively advance their vested interests at the expense of their trading partners. We are all in the same boat, our interests are intertwined in a flat world, and we face more economic interdependence than ever before.

Three key multilateral issues need to be addressed in order to achieve global economic stability:

The situation in the Eurozone will continue to weigh on the global economy until it stabilizes or a solution is found. I don’t believe it will self-stabilize (despite recent quiescence), so several proactive alternatives should be considered.

Along the same lines, regionally, China is at a crossroads in terms of internal rebalancing from an oversaving and overinvesting nation (with a national savings rate – not to be confused with the personal savings – in 2011 equal to 51% GDP) to that where consumption plays a greater role. The same is true, to a lesser extent, for other developing countries.

Finally, part of any major G20 deal must include banking reform. At the start of the financial crisis in 2007, Warren Buffett was widely quoted as having observed: “It’s only when the tide goes out that you learn who swam naked. It turned out that the parade of naked bathers was quite long and included banks, investment banks, insurance companies, government-sponsored companies and, in the case of the European periphery, entire countries .

Some were washed away by the tide, but a significant number have since gotten bathing suits and are walking the boardwalk as if nothing had happened. The fact is that many financial institutions today look pretty gloomy under their cover-ups. Additionally, there is a substantial difference between regions of the developed world in terms of what constitutes a strong financial institution. Given the enormous interdependence of global financial institutions, having multiple standards means that the entire international financial system is as vulnerable as the weakest of these standards – which, in the case of euro area banks , is indeed very low.

Evidence of stunting trends in the global economy is abundant. For example, in my recent book The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy, I refer to the “triple hoarding” of US dollars in (i) the more than $3.5 billion held in reserves of change; (ii) the nearly $2 trillion of excess domestic liquid assets held by U.S. non-financial corporations; and (iii) the trillions of dollars of uninvested household wealth, 75% of which is held by the top 10% of households. richer. And I don’t fault any of the aforementioned holders for not investing their money in new capabilities at a scale large enough to move the global needle. There is, after all, nothing very sensible to invest in, given the existing excess supply. Similar points can be made with regard to the world’s secondary reserve currencies, the euro and the yen, but the numbers are of course much smaller.

Fixing all the problems discussed here is an ambitious program to say the least. This will require an overhaul of the global economic and financial system on a scale no less than that of the Bretton Woods agreement of 1944, which established a new such order for the post-World War II period, or the agreement de facto Bretton Woods II that has prevailed since the United States ended the convertibility of the dollar into gold in 1971 and most major world currencies became floating.

Some may say that the problems are too complex to solve and the best we can do is wait for them. If we could do that, policy makers would avoid having to make very difficult decisions. But the economic, political and social pressures arising in this era of oversupply are not likely to grant us that luxury. It is high time to sit down and establish a new economic playing field conducive to more equitably shared growth.