The Five Downside Risks for the end of 2012
A negative confluence can place together the rise in the price of oil and cereals, the recession in Europe and the slowing growth in the U.S. and China
The monetary policies of the central banks of the United States, United Kingdom, Eurozone and China, are not generating the intended effects on the real economy. The transmission mechanism is broken. And the combination of austerity policies and fiscal adjustment programs, simultaneously on a large group of countries, particularly in the Eurozone, as well as the threat of a wave of protectionism, worsen the outlook for global growth and international trade.
The latest forecast from the International Monetary Fund points to a slower growth of the world GDP, with the decrease in growth rate of 3.9% in 2011 to 3.5% in 2012. International trade should post an even larger slowdown: from a growth rate of 6.9% last year to 3.8% this year.
We are obviously far from the global recession of 2009, when GDP fell 0.7% and international trade fell 11%. But the fear of a global relapse into recession, a double dip, and increasing uncertaintymarcar among investors on the actions of policy makers and central bankers by the end of the year influences negatively the progress of two economies – the real and the financial.
The G20 finance ministers summit in Mexico on September 13/14, the EU summit on October 18/19 and the outcome of two political moments, in two superpowers, the Congress of the Communist Party in China in October and the U.S. presidential election on November 6, are critical dates.
Some economists and consultants suggest that the five major world central banks – the Federal Reserve, European Central Bank, Bank of China, Bank of England and Bank of Japan – could make a concerted intervention in the coming weeks. Two of BRIC countries already signaled their intentions. Wen Jiabao, Chinese premier, on a Beijing government website, have signaled that further “easy” monetary policy is on the way. And in Brazil, President Dilma Rousseff announced the launch of a stimulus program, Keynesian style, worth 133 billion reais (more than 53.4 billion euros).
In this second half of the year, there are five economic downside risks, that if combined together could negatively define the end of 2012. A major geopolitical event would be the icing on the cake. The Israeli newspaper “Haretz” refers that the Tel Aviv government could be preparing a surgical military operation against Iran’s nuclear program even before the U.S. presidential elections.
first. The Return Of The Food Crisis?
There is another index that points to a larger increase, of 9.3% between June and July, and 12.7% in the last six months. The Commodity Food Price Index, from Index Mundi, includes cereals, vegetable oils, meat, seafood, sugar, bananas and oranges.
The immediate culprits of the return of this specter are the worst drought in 56 years in the states of MidWest U.S. (with direct influence on corn and soybeans) that act as “bread basket” of the country and in many importing countries, and the annual declines expected for the wheat in Russia (20%) and Australia (19%). The U.S. are responsible for 53% of world exports of corn and 43% soybeans. In mid-July, 1300 counties in 29 states U.S. states were declared “natural disaster areas” and the Department of Agriculture of the Obama Administration has cut the estimation of corn production 17% for this year. The shortage in corn and soybeans should affect mainly China and Mexico, which are net importers. Ukraine, meanwhile, opted to ban the export of wheat due to poor harvest this year, and there are rumors that other states from the Black Sea, which are barns of the world, could do the same.
A recent study led by the scientist James Hansen, from NASA, warns that heat waves – like those felt in the U.S., Greenland and in southern Europe – will become more frequent and are linked to climate change. This is not a sporadic phenomenon.
Abdolreza Abbassian, FAO’s senior economist, told Reuters that “there is the potential for the situation to develop as happened during (the severe food crisis of) 2007 and 2008.” In the week starting on August 27, the Rapid Response Forum of the G20 will hold a conference call to review the situation of the recent rise in prices of some agricultural commodities and setup an emergency meeting on the subject in September or October, according the Food World News and Reuters.
second. Oil Shock In The Making?
Some analysts are waving the specter of a new oil mini-shock, as in the summer of 2008, when the price of Brent crude oil reached a record high of 143.95 Usd on July 3. However, later, there was a shock in reverse, with the price falling to less than 30 Usd on Christmas Eve 2008. An example of brutal volatility in half-year.
What causes alarm among analysts is the likelihood of convergence, in this second half of the year, of the rise in the price of oil with a food crisis.
There are several unknowns on the table which can push the price of oil in either direction. The first is the impact on global consumption if the economic slowdown in major economies become more pronounced, with a significant decrease in global demand and imports of crude. The second is the always present geopolitical risk, particularly in the Middle East (the main supplier of the Asia-Pacific economies), involving notably Iran and an eventual blockade of the Straits of Hormuz. The third is the evolution of the refining capacity (which in 2011 fell compared to the previous year).
third. The Return Of Recession To Europe
In the case of the two main engines of the euro zone, France is stagnant for half a year, according to figures from Insee, and Germany grew by only 0.3% between the first and second quarter. In the case of France, it is the third consecutive quarter in stagnation.
The Eurozone GDP decreased 0.4% in the second quarter year on year (compared to the same quarter last year) and decreased 0.2% compared to the first quarter this year, according to Eurostat. The most dramatic situation is the one of Greece does not grow for 14 quarters. The accumulated downfall in the Greek economy since the recession began in the second quarter of 2008, is now more than 17%. Portugal is in recession for seven consecutive quarters since the fourth quarter of 2010, after having been in recession between the 4th quarter of 2008 and the 4th quarter of 2009. The cumulative decline in the past four years is 4.9%.
The failure of the Eurozone monetary policy, carried thus far, even resorting to “unconventional” measures, was already admitted by Mario Draghi, the ECB president, not to mention the functioning of the transmission mechanisms, the fragmentation and the heterogeneity of the funding conditions in the Eurozone.
The provision of one trillion euros to Eurozone’s banks (through the two LTRO three years operations) did not echoed in credit to the real economy and reinforced the “symbiotic connection” between banks and sovereign debt. It also propelled the flight to speculation in commodity markets and “parking” money in the bank deposit facility (which, however, decreased by half from July 11 as the rate went down to 0%) and current account holdings (which nearly quintupled from July 11) at the ECB.
The heterogeneity of financial conditions has led to two extremes, with some countries funding with negative yields (ie, lenders take a loss to hold their debt in their portfolios) for short term debt, and others, the “peripherals” having to pay historic high yields. On the other hand, fiscal adjustments undertaken by governments collide with the rising unemployment, the destruction of large layers of the business fabric and reform “fatigue” in several layers of the population. Moreover, the fact that this kind of austerity policies are being carried simultaneously in several countries, has a negative chain effect across the Eurozone.
Finally, there is a less talked about aspect. Macroeconomic “internal” imbalances within the Eurozone, could worsen further if the current account surplus of Germany exceed 6% of GDP in 2012. Last year it was 5.9%. In relative terms, it will be much higher than China’s current account surplus, which is expected to be 2.5% of GDP this year. The German trade surplus grew in the first half, 18.4% over the same period. According to an estimate of the German Ifo institute, in 2012, Germany can achieve the world’s biggest surplus, close to 171.5 billion euros, ahead of China and the Gulf countries.
The German authorities do not recognize this excessive surplus as a systemic problem. While the Chinese economy is adjusting this trend, from 10% in 2007 to an estimated 2.5% in 2012, Germany will only “evolve” from 7.4% to 6% over the same period. For many politicians and electorates this hyper performance of exporting economies is not recognized as a time bomb.
In the meantime, with the leadership of Mario Draghi, the ECB is conducting a pragmatic change of its mandate. Officially focused on long-term control of inflation in the euro area “below or close to 2%” as it is incessantly repeated, a second mandate began to be spoken – the mitigation of systemic risk, which is understandable given the size and depth of the current recession. In the 6th conference on statistics organized by the central bank in April, the title of the report couldn’t be more explicit: “Central bank statistics as a servant of two separate mandates – price stability and mitigation of systemic risk”.
Constantin Gurdgiev, lecturer in Finance with Trinity College, Dublin, admits that it could occur an “amplification of the crisis” as investors assess the outcome of the October 18/19 EU summit, if it falls short of the expectations created throughout the year.
fourth. Uncertainty Over The U.S.
Gary Shilling, that in the years of the financial “bubble” alerted to the crash that would follow, pointed recently that “retail sales are falling for three consecutive months.” According to this analyst, this indicator does not lie: it happened 29 times since it began collecting data in 1947, and 27 of those 29 times, the country already was in a recession or at just three months from it.” Optimists expect 2012 to be the third exception to the rule.
The biggest factor weighing on the attitude of investors and companies’ decision makers in the U.S., is the “high uncertainty”, an expression repeated in all interventions from Ben Bernanke and all official communications of the Fed Committee. Uncertainty that arises from the effects of the debt crisis in the Eurozone, across the Atlantic, the risk of the resurgence of partisan debate in Congress, in Washington, on the debt ceiling in conjunction with a very aggressive presidential election campaign and the forthcoming fiscal cliff. The analyst Peter Cohan emphasizes that these issues will be disputed in the Republican agenda, especially now, with “Paul Ryan as a candidate for vice president with Mitt Romney.”
Most analysts doesn’t give more than a 15% chance of a budgetary disaster derived from the fiscal cliff. But the level of uncertainty, measured by the academic project Economic Policy Uncertainty, is rising again, albeit far from the highs in September 2008, by the time of Lehman Brothers bankruptcy or during the debt ceiling war in August 2011, that pushed to the limit the patience of financial markets.
In U.S. Municipalities, bankruptcies follow one another, even though the process has not yet reached the dramatic level suggested by the controversial analyst Meredith Whitney.
fifth. Incognita on China
Chinese economists had expected that exports – the engine of the Chinese economy in recent decades – could increase 8.6% in July over the same month last year. But export growth in July (YoY) was only… 1%. In June, annual growth (YoY) was 8%. In July, exports to the EU fell 16% YoY. This slowdown in exports may imply that the official forecast of 7.5% growth for 2012 is optimistic, despite being a downward revision of the political goal to maintain a growth rate of 8%. The International Monetary Fund maintains its forecast of 8% for this year.
Analysts are now speculating that the People’s Bank of China monetary policy could move towards new credit easing measures and that the Chinese government could draw more fiscal stimulus packages. In the first half of 2012 there have already been 123.7 billion Usd in fiscal stimulus.
“China will have a soft landing, but as it has immense capital, it will try its best to prevent this from happening. I do not think that there are major problems at the political level,” says Rui Oliveira, a Portuguese living in Shanghai, founder of Golden Development China.
Expectations turn to the 18th Congress of the Communist Party, in October, where the leadership change will take place and a shift in the “economic model” is expected, from mercantilist policy towards a higher weight of the domestic consumption.
As for Japan, the other fundamental economy in the Asia Pacific, the figures for the 2nd quarter of 2012 show a growth of 1.4% year on year, far below forecasts of 2.3%, and compared to 5.5% in the first quarter. Japan is experiencing a deflationary situation in prices, with negative inflation rate of 0.2% in June (ie, prices fell between June 2011 and June 2012) – which contrasts with the growth of the price index of 2 4% for the UK and the Euroarea, 2.2% for China and 1.7% for the U.S..
China: the challenges and the change
Six months before the Congress of the Communist Party of China, that will install a new leadership, and when the world carefully watches China’s appetite for commodities, the government set a GDP target lower than the magic 8 percent of the last eight years. Internally, the major worries are the abyss between rich and poor, the dependence on exports and the pros & cons of “state capitalism”. A comprehensive joint report of The World Bank and the Development Research Center of the State Council of the People’s Republic of China, recently released, points 6 strategic directions towards a China 2030: Building a Modern, Harmonious, and Creative High-Income Society.
Breaking the 8 percent GDP target tradition set in the previous eight years – exceeded every year, as the GDP target has been more a floor than a ceiling – in his annual work report to the National People’s Congress, China’s annual parliamentary session, Chinese Premier Wen Jiabao cut that target to 7.5 percent, set a 4 percent target for inflation, in line with 2011, and set “expanding consumer demand” as first priority for the year.
The lower growth target is being seen as some leeway to rebalance the economy and defuse price pressures in the months preceding the leadership handover. The Communist Party, will install a new leadership later this year. Early next year, Wen Jiabao and Hu Jintao will step down as premier and president.
With this leadership, China become the world’s second-largest economy. But now, Beijing wants to wean the economy off its dependence on exports and external demand. Faced with a sluggish U.S. economy and the European debt crisis, China’s slower growth, a result of the weaknesses in the rest of the world is showing the weaknesses of it’s own economic model, now faced with a need to change, if it wants to keep previous growth levels.
In recent years, an abyss have widen between rich and poor. Now, Wen Jiabao is saying: “We will vigorously adjust income distribution, increase the incomes of low- and middle-income groups, and enhance people’s ability to consume”.
The need to change
“The report has stressed that China needs a fundamental strategic shift and indicated that the government should gather the momentum to accelerate the pace of reform.” The joint report, also notes Xu Hongcai, “looks like China’s idiom: good medicine for health tastes bitter to the mouth”. But it’s “a valuable attempt because this was the first time that joint research was conducted by experts from the World Bank and China. (…) China is facing great challenge. In the next twenty years, China will perform a great transformation. China urgently needs to absorb the wisdom of the domestic and international community.”
World Bank Report | “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”
Hu Shuli: China’s schools of thought on state capitalism
Source: The Limits of State Capitalism by Hu Shuli, Caixin Online and Century Weekly editor-in-chief, on Caixin Online Editorial
William Brian Arthur: “impact on jobs caused by the digitization is higher than offshoring”
Undermining the stability of employment in developed countries, is the progressive digitization, creating an economy that is vast, silent, connected, unseen, and autonomous – the second economy. One that politicians don’t see when they speak of the current crisis. In late January, W. Brian Arthur went to the World Economic Forum, in Davos, as a guest to talk on this new world.
The “second economy” is the subject of election of William Brian Arthur, a 67 years old Anglo-Irish, technologist and economist, currently a researcher in the Intelligent Systems Laboratory at Xerox PARC -Palo Alto Research Center in Silicon Valley.
The “second economy” has nothing to do with the underground economy, the one not reflected in GDP. But in reality, the “second economy” is a parallel dimension, invisible to politicians and major economists. In an article published in “McKinsey Quarterly” at the end of last year, William Brian Arthur wrote that in about two decades the digital economy will reach the same size as the physical economy. In 1995, Don Tapscott wrote “The Digital Economy” and Nicholas Negroponte “Being Digital”. W. Brian Arthur goes deeper and shows this “second economy” as a structural element of the times we live in since the 1970s and one of the causes of the systemic crisis we are experiencing.
This invisible economy, acting as a neural system, points W Brian Arthur, can not be assessed based on old economic theories, daughters of a very different stage of capitalism, and that continue to motivate wars of words between economists and policy makers. A new wave of economists and researchers emerged, using the theories of complexity, to understand how the current economy actually works. One of the recent tragedies, even before the Great Recession of the last five years, is the problem of unemployment in developed countries, with alarming levels in youth and devastating the middle class. Politicians tend to blame the offshoring to emerging economies, that the second phase of globalization, since the 1980s, largely benefited. China is the first pointed as guilty, the world’s factory making significant losses in the West countries’ blue-collars; then India, devising algorithms.
But deeper, undermining the stability of employment in developed countries, is the virus of progressive dematerialization of communication, processes, flows of goods and services – the second economy, that W. Brian Arthur presents. When he was interviewed for EXAME, he was on his way to the World Forum in Davos this year, interestingly, under the theme: “The Great Transformation: Shaping New Models”. William Brian Arthur, our interviewee, has been at the forefront of creating these “new models” that help to understand the “great transformation” in progress.
The financial system is worth almost four times the world GDP. Some say it gain an insane dimension. Is the blame on the second economy?
The derivatives market grew in the Chicago exchange in the 1970s. In 1973, a scholarly article of Fischer Black and Myron Scholes would create the foundations. In the same year, the Chicago Board of Trade opened the Chicago Board Options Exchange. The new platforms were based on the computation of financial data. They no longer needed the Financial Times or the Wall Street Journal. (laughs) Trading become digital and grew. Before that, it was a matter of papers and people. Then, the whole financial system, has become digital. It is a new scale: eventually a trillion dollars a day.
With people behind these systems?
The contagion effect is even faster?
In your 1994 book, “The end of certainty in economics,” you wrote that the model of rational expectations clashed with the complexity of reality. You are pointed as one of the exponents of “Complexity Economics”. Is the second economy a proof of your view?
There are two aspects: autonomy and interconnectivity. The digitization is creating an economy that is vast, silent, connected, unseen, and autonomous – meaning that human beings may design it but they don’t need to drive it. And this economy is concurrent – meaning that everything happens in parallel. It’s the biggest change since the Industrial Revolution. And in here, everything is more interconnected. And this means that small changes in one place can have huge effects on other parts of the system. Creating more uncertainty.
In the past the world economy witnessed the development of what you called a “muscular system”. Now you refer the development of a “neural system”. Is this growing dematerialisation process, the inverse of the past?
The second economy is not fully replacing the previous “muscular system”. What happens is that on top of the muscular system, a neural system has developed, in which everything is interconnected as never happened before. The intelligent actions are taken digitally. The physical economy is not disappearing – we continue to use and consume energy, arable land, materials, goods, objects. What happens is that a good part of what we consume is being increasingly dematerialized. Think of the simple gesture of making the download of a movie file on a computer. More: even movie actors can be digital. In short, in the old economy, we had tangible products and services provided by people of flesh and bone. Now, much of what we need is already provided electronically by the invisible economy. This is inevitable – and a good thing, in my view.
This digitization was more influential for growth without net job creation (that we are witnessing in developed countries) than the offshoring to emerging countries (with cheaper labour and wild capitalism level of legislation)?
The offshoring was good for other economies in the world. But I think that the difficulties in employment derived mainly from the digitization that I have spoken, this growth of the second economy. The digitization and the second economy are both important and beneficial. But I recognize that there is a serious problem here, and that this economy is having an impact on employment greater than offshoring. Many jobs are disappearing because of the digitization. And they are not coming back. Consider the example of mail. Post Offices are not closing because of the offshoring to Mumbai, but because of email and digitization in general. I don’t remember the last time I sent a letter and pasted a stamp. Do you remember?
Very few people talk on that aspect that is rather trivial …
It doesn’t have the mediatization of offshoring. To politicians it’s easier to speak out against the offshoring to China than speak of the second economy. It’s easier to talk about India than digitization. Even part of the offshoring is derived from the benefits brought by dematerialization.
One of the greatest thinkers on technology, futurist and inventor Buckminster Fuller, referred to the coming of a process of “ephemeralization”. Is it another dimension of the problem?
In fact, when we distribute something digitally, it tends to be ephemeral. Tends to be used at that moment, although this is not true for all processes. But it’s a good point. And it is beneficial. Now, we don’t need to have the music CDs stacked there. We can hear it when we want by downloading it from the “cloud” – that is immaterial. It’s a purely digital experience.
Historically we had an “evolution” of waves of job creation, from hunting to agriculture, and from industry to services. Now we do not see any wave, despite the talk of the knowledge society, flood the world with knowledge workers. What could be the next net job creator sector?
That is a hard question. Frankly, I don’t know. (Laughs) Many jobs are being digitalized, as I pointed, following the expansion of the second economy. It is a sprawling ocean, leaving just some islands of jobs that still require human intuition or even personal touch. But even those could be threatened by the tide in the future.
Is the scenario that pessimistic?
Jobs are a relatively modern concept. Before, people had skills. Mass employment came with the Industrial Revolution. Those jobs gave money and money gave access to the economy. We’ll have to think in a different way to access the economy. In 20 or 30 years we may be thinking differently. We will certainly have more creative work. But I don’t have a solution in my pocket. I believe that when we have problems, as in the past, societies will eventually solve them. This will probably take two or three decades. Facing difficulties we have to adapt. The systems always adjust themselves, although I can not yet tell exactly how. One thing I can tell: the problem of developed economies is not the production. Period. The biggest challenge will be to move from producing prosperity to distribute that prosperity. The second economy will produce wealth, no matter what we do – but how to distribute this wealth has become the main problem.
Some scholars say that despite the huge revolutionary role of the internet, we still lack a sufficient clustering of innovations such as occurred during the Industrial Revolution. And that this weakness is guilty for the current crisis, as it doesn’t generate enough new job creating sectors?
There is some discussion on that. But I frontally disagree. I would even say, I violently disagree. (Laughs) In 2009 I wrote a book on the nature of technology, as it is and how it develops. My area is technology. I do research here in the middle of Silicon Valley and I confess that I do not see any lack of innovation. What is happening is not just the Internet. The second economy goes beyond the Internet, social networks, electronic business. Many activities that were previously made between humans are being dematerialized. I don’t see any slowdown in innovation. All the evidence is there. And there are also numerous technologies on the way. In 10 or 20 years we will have full working genome therapies, for example.
If today’s world is radically different, does it make sense to compare it with the Great Depression of the 1930s and with the controversies among economists of the past over solutions to combat the crisis?
Comparisons are still useful. But the situation has changed – you have to recognize that. In other words, both aspects are valid, in my view – compare and see what is new. And the one thing that is becoming clear is that the economic recovery is much slower. Today, it is much harder to create jobs. For the above reasons.
Source: “Os grandes desafios da economia invisível” | Jorge Nascimento Rodrigues | published in the printed edition of Exame, March 2012
English Edition by: JPO | LISwires
In the aftermath of the January 30 EU Council press statements of Rompuy and Barroso, in Twitter, Constantin Gurdgiev presented us with some of his strong views on the impossibilities of unwinding the Euro crisis.
Replying to one of our comments on growth, deleveraging and the new Barroso “social fund money”:
and on our comment on more virtual money in the way:
and this, writen in fast track.
Ian Stewart: “Go after business not dependent on GDP growth”
To Ian Stewart, chief-economist, Deloitte Research in London, the European Union is more a market than a political institution. With a Deloitte Research survey, he focuses on CFO’s expectations. And says that companies should go after business segments not dependent on the growth of gross domestic product.
“The challenge for entrepreneurs is to deal with the uncertainty and with an economy that does not grow,” says Ian Stewart, chief economist at Deloitte Research in London. The perception of uncertainty is, again, at high levels, not seen since 2009.
A huge change
“Germany used the crisis to become the dominant power. A huge change. This was the main consequence of this crisis, and we have to adapt to this new situation” refers Ian Stewart. But the German “party” could end if the country enters in stagnation.
The last known revision cut the growth forecast for Germany in 2012 from 2.2% to 0.7%, while in Europe growth could be around 0.4%. In addition it is expected that the annual dynamics of GDP in China will slow to below 8.5% and India to 8%.
China is now the main growth market for German exports and can overcome France by the end of this year.
In terms of competitive labour costs, Germany built up an advantage over a decade. The asymmetry is now striking. Labour costs in Germany rose only 5% between 2000 and 2010, while in the UK and Ireland rose 30%, in Portugal and Spain 33%, Italy 37%, and 44% in Greece.
“Every explanation that the Euro is strong despite the debt crisis in the Eurozone may suffer a concussion. I expect the Euro to continue to depreciate, particularly against the dollar and the pound, if a solution to the Euro area doesn’t emerge”, he points.
Ian Stewart refers that on the last Deloitte Research survey, what worries the most the British financial managers is the possibility of the collapse of the Euro area (33% of respondents). The probability of this happening is 37%, according to respondents, a higher percentage than the one of the economists surveyed by the Financial Times (28% probability).
We have faced a symbolic sign: “When in the recent past anyone asked the former President of the European Central Bank if there was any risk of Euro collapse, Jean-Claude Trichet, in his French tone, would reply: ‘absurd’. Now the new president , Mario Draghi, acknowledged the issue in a recent interview with the Financial Times.” A significant difference.
The UK is a paradox
It may seem paradoxical for continental Europeans that the British worry about the fate of the Euro area. “The UK itself is a paradox,” he laughs. “On the one hand, we expect the Euro to succeed – British banks are very exposed to the continent. Interconnection of today’s economies and financial systems in Europe is immense. But on the other hand, the current situation may jeopardize the UK relationship with the European Union”, he adds.
Free trade and free movement of capital and labor
“To me the EU is mostly the free trade and free movement of capital and labor, not a political institution. I don’t think that the UK will accepted the rules of the fiscal compact, the project that is now on the table. In fact, there is a long-term problem of what the UK wants with the European Union”, he also refers. Basically, there is a strategic dilemma for the British. “It is inconceivable to be part of the ongoing integration. The United Kingdom may be placed in a position in which it will be forced to leave the Union.”
In solving the European debt crisis, Ian Stewart would prefer to see the International Monetary Fund in the lead.
Do as the Chinese and Indians
For businesses, his message is clear: “Use the available liquidity to carry out low cost acquisitions, as Asians, Chinese or Indians do.” In fact, in a Deloitte Research survey, financial managers see growth opportunities in the acquisition of companies or other assets at low prices, and the chance to explore the weaknesses of the competition.
In terms of strategy, the chief economist at Deloitte Research argues that companies should go after business segments not dependent on the growth of gross domestic product, and that are relatively safe from the economic cycles fluctuations.
In the Deloitte Research survey to CFO’s, the priorities identified are focused in six areas: reduce costs, increase cash flow, introduce new products and services or expand into new markets, retain liquidity in the balance sheet, make acquisitions and mergers or expand organically – through job creation, fixed capital investments or development of products. “Invest for the long term,” advises Ian Stewart, to conclude.
Before joining Deloitte, Ian Stewart was Chief Economist for Europe at Merrill Lynch in London, for 12 years. He previously worked as Special Adviser to the Secretary of State for Social Security, as Head of Economics in the Conservative Party’s Research Department and as an economist with the Confederation of British Industry in London.
Jim O’Neill: “the US is already benefiting hugely from the rise of China”
He was not invited to Yekaterinburg Summit in June 2009, the geopolitical wedding of the BRIC club. But if these new four great powers use the BRIC brand, they owe it to Jim O’Neill.
The acronym BRIC (Brazil, Russia, India and China) established itself despite criticisms that it’s a mixed bag. Recently, with the evolution of the current Great Recession, it even assumed a political role, in a time where the G7, the rich club, loses power.
The Briton Jim O’Neill, currently president of Goldman Sachs Asset Management in London, eventually become known as “Mr. BRIC”. The concept that he launched in 2001 shed light on the second wave of globalization we are experiencing since the capitalist revolution in China in late 1970 and the fall of the Berlin Wall.
It’s ironic that he wasn’t invited to the ceremony of the foundation of the new political club, in 2009. And, on another hand, he doesn’t sponsor the linking of South Africa to the other four.
A native of Manchester, and a fan of the soccer club, O’Neill received a doctorate in economics from the University of Surrey and joined Goldman Sachs in 1995. Last year he published the book “The Growth Map”, to supplement the initial vision of a decade ago, which led to an interview published in the January 14 printed edition of the Portuguese weekly Expresso.
Here, some highlights of the interview:
Source: Alemanha vira-se para a China | Jorge Nascimento Rodrigues
English Edition by: JPO | LISwires
Spanish Edition: Jim O’Neill, el “padre” del acrónimo BRIC: “Me gusta la definición que he oído del Partido Comunista de China como una gran cámara de comercio”
Quote from: Jim O’Neill
Stolen from: Alemanha vira-se para a China | Expresso, Jorge Nascimento Rodrigues
2012: Total uncertainty in the year of the Dragon
Large uncertainties hover over 2012. Euro crisis, turmoil in Washington DC until the presidential elections in November, 18th Congress of the Communist Party of China in the fall, and several areas of the world at risk of military conflict with potential global economic impact
In Chinese zodiac, 2012 is the year of the Water Dragon. A mythological character loaded with success and luck, but totally unpredictable and risking excessive stress. And 2012 surely seems to come plenty of uncertainty and stress, according to thirteen academics and analysts from different points of the planet, surveyed by Expresso.
Solid forecasts are hard to find. Concerns are consensual: euro crisis, the United States, China, global imbalances between countries with deficits and surpluses, and areas at high risk of military conflict with global economic impact. The end result is a question mark.
The background remains the same – convergence of financial and economic crisis not seen since the 1930s, with a new phase of the globalization, that since the 1990s, brought new players into the geopolitical and geoeconomic spotlights.
1. Euro: sink or swim.
The first half of 2012 appears to be critical to the euro crisis. Italy and France surge into the limelight. Overall, the euro countries will have to refinance one trillion euros of debt along the year. Banks of the eurozone, in the first half of 2012, will have to pay € 665 billion debt maturing.
Italy will have to refinance € 440 billion, not counting new debt issues, according to the Treasury Department in Rome. “In March will be 200 billion. My fear is that market conditions become out of control, given the inability of governments of the euro area. If yields climb to 8%, they may become highly volatile and reach levels unimaginable a few months ago” points Diego Valiante, head of research at the European Capital Markets Institute, in Brussels. Valiante views Italy as the weakest point on the European debt refinancing in 2012, that might be the unpleasant surprise of the year – the “black swan”.
The hypothesis of a temporary default, (60% of sovereign debt is held by Italy), is not discarded. Fabrizio Goria, editor of Linkiesta.it, is even more radical: “Italy will require a restructuring of debt. Italy is not just too big to fail. Italy is too big to bail. The European Financial Stability Fund is not the solution and the new European Stabilization Mechanism may not arrive on time.” Hugo Dixon, editor of Reuters Breakingviews, believes that “Italy will appeal to the International Monetary Fund.” Constantin Gurdgiev, lecturer in Finance with Trinity College, Dublin, goes even further noting that “Italy can get to be a black swan in the euro area.”
France “will lose it’s triple A rating” says Fabrice Pelosi, editor of Yahoo! Finance France. The campaign for the presidential election in April and May will be fierce, with an upgrowth from the far right. The outcome is unclear, but Pelosi expects “a new austerity plan, rising unemployment and yield rise on the debt markets.” The outcome of the French elections may also have another consequence: the collapse of Merkozy axis (formed by German Chancellor Merkel and current French President Nicolas Sarkozy).
The euro crisis can open opportunities for outsiders, points Ashutosh Sheshabalaya, from IndiaAdvisory. “Trillions of European assets (excluding Germans) in stress, could appear appetizing to US and UK financial groups, Indian conglomerates or Chinese capital”.
The euro crisis could trigger a “chain of events,” adverts Bill Lucarelli, a professor at the University of Sydney. One risk is the “escalation” of the crisis. “If the current austerity policies continue, it is possible that the peripheral countries would enter in a prolonged period of debt deflation. A cascade of defaults is likely to follow this process adding stagnation and decline. In these extreme circumstances, monetary policy becomes ineffective and the situation could fall into one similar to Japan in recent decades”.
The shrinkage of the euro area is a realistic scenario that should be considered, despite the pretended leap forward with the “fiscal compact”. Michael Pettis, Professor, Peking University’s Guanghua School of Management, Beijing, is particularly critical: “Germany shows no signs of understanding their role in this crisis” and there are limits to political acceptance of shock therapy in the peripheral countries. Several member countries could “freeze bank deposits and implore the process of exiting the euro”, warns Pettis.
On other side, Paavo Okko, professor at the University of Turku, Finland, thinks there will be no defaults, only “a few spikes in yields.” Even the eventual exit of Greece from the Euro won’t happen in 2012. Hugo Dixon also believes that there will be no exits of countries from the Euro.
The cost of country exits from the Euro, and even the disintegration of the Eurozone, is high, but the situation could get to a point where “just a small additional shock is enough to trigger the collapse of the monetary union” points Ansgar Belke, from the University of Duisburg-Essen, Germany. This could happen if the “pain threshold” is reached by several countries in the Eurozone after a painful period of austerity and high levels of unemployment.
In case of exit, Sheshabalaya and Gurdgiev point to the possibility of a “dual transition” period of 3 to 5 years, with the Euro and the new national currencies, side by side, in the accounting of companies and banks.
2 – USA: intermittent default
“There may be moments of selective default every two months until the elections in November,” notes Peter Cohan, teacher at Babson College, who sees the pre-election political struggle as the real American problem. That could create acute crisis as in August of 2011, with the loss of the triple-A rating from S&P.
The real economy is in better shape than the image that is given daily in the U.S. media, points Cohan. In 2011, record profits were reached and in 2012 the U.S. economy could grow 3%, he also notes. Bob Eisenbeis, from Cumberland Advisors, puts the blame on the “dysfunctional behavior of politicians in DC that shows no signs of change.” But doesn’t believe in a further cut of U.S. debt rating, next year.
Constantin Gurdgiev underlines the increase of China and the Middle East positions in US debt. They will have the last word in the “debt imperialism” of the US, as Michael Hudson called it. Whatever happens in China and the Middle East, if negative, will have drastic effects in Washington DC.
3 – China: a huge question mark
The main challenge for China is controlling the over heating of the economy and preventing the burst of the real estate bubble as well as make the transition to a new economic model less mercantilist (exports and currency artificially undervalued) and more domestic consumption, a model approved in March 2011, in the five-year plan 2011-2015. One high point of this transition will be the election of the new leadership of the Communist Party of China in the 18th Congress, next fall.
Michael Pettis has doubts on that path: “China won’t be able to conclude its internal debate on what steps to take to rebalance its economy. Therefore, growth rates will remain high in the range of 7-8%. However, debt levels will soar, enough to alarm the world.”
Beyond the external projection of its capital, China is focused on the international affirmation of the yuan. The recent agreement with Japan to encourage trade to be held in respective currencies, not with the U.S. dollar, is a significant geopolitical change. China is the second largest economy and Japan is the third – the symbolism of the decision is more than obvious.
4 – The repeat of 1937: a nonacademic hypothesis
The year 1937 was baptized, during the Great Depression as the double-dip, or relapse into recession. Bill Lucarelli, professor at University of Sydney, Australia, thinks the pattern can be repeated. Global imbalances between deficit and surplus countries are expanding and the current “peace” might break on a moment’s notice. Lucarelli uses the expression “balance of financial terror” coined by Larry Summers, former treasury secretary under Bill Clinton, in 2004, to characterize the high-risk situation in which we currently live.
Despite forecasts of 3.6% global growth, “the myth that the emerging markets have split from the problems of the developed countries, could die in 2012″ claims Michael Pettis. The outcome could be an abrupt decline in the growth of the emerging markets, and a scenario of synchronized slowdown in most of the world.
Peter Drysdale, professor of Economics, Australian National University shows a different point of view: “the emerging Asian economies are still in a strong position. The growth potential remains high. That has not changed with the global crisis.” And he recalls the case of Japan between the two world wars of the twentieth century that, despite multiple shocks suffered, grew in real terms, more than 4% per year, an exceptional level for the standards of the time. The United States in the 1930s, grew on average 1.3%.
In the Eurozone itself, the growth range can be significant, and the asymmetries can widen. Five percent recessions could coexist with growth in Nordic countries.
5 – Geopolitical braziers
Along with the struggle for hegemony within the European Union and the growing radicalism within the U.S. Congress, there are several parts of the world on edge. The Global FX Outlook 2012 from Nomura lists ten geopolitical issues from a financial markets perspective. All and each one with enough power to shake the markets.
A potential conflict between Israel and Iran and the blockade of the Straits of Hormuz is underlined by Peter Cohan as a main concern. But surprises can happen also in Asia, where there are several potential braziers. Peter Drysdale refers as a significant uncertainty the U.S. anti-Chinese resentment, something that could be counterproductive.
Risks in the year of the Dragon
Source: Previsões 2012: incerteza total sobre o ano do Dragão | Jorge Nascimento Rodrigues
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Portuguese debt restructuring could be on the horizon
As the Greek political crisis reached a new peak, the IMF “entrance” in Italy, the ECB admitting a “mild recession” in the euro area “by the end of the year” and a hand full of nothing from G20 in Cannes, the frameset of the Portuguese economy has also moved.
In last Saturday edition (Nov. 5), Expresso released studies of scenarios made by groups of Portuguese academics. Those studies are pointing to a serious depression in Portugal in 2012, drifting far beyond the official forecast of a 2.8% recession.
One of the consequences of a worsening economic picture could be the need for a restructuring of the Portuguese debt. Expresso heard three Portuguese economists living abroad.
Although the Greek, Portuguese and Irish situations are different, the negotiations with private creditors of Greek sovereign debt (which might involve a cut of 1/3 of face value) and the possibility of a revision of the terms in Ireland of the promissory notes to banks, are processes to be followed closely.
Domestic recession and exogenous factor
“If the gross domestic product (real) drop 10% next year, it will be almost impossible not to have a debt restructuring. If it falls only 5%, probably not. In my view, it all depends on how severe the recession will be next year” said Daniel Dias, professor of economics at the University of Illinois at Urbana-Champaign.
Basically, Daniel Dias regards as decisive factor to the rush of a debt restructuring a deep depression in 2012 that exceeds the official forecast of a 2.8% contraction or even more pessimistic scenarios of some economists that point to a recessive range between 3% to 5%.
Nuno Monteiro, professor of political science at Yale University, considers that “sometime in 2012 or 2013,” the country will have to renegotiate its debt with creditors. “As I wrote in the Expresso and The Guardian, more than six months ago, the Portuguese public debt is too large to be refundable. Sooner or later, we will have to negotiate with creditors – and the great powers of the euro – such a restructuring, renegotiating repayment terms, interest rates, or even an haircut. It is a matter of time.”
Rui Esteves, professor of economics at the University of Oxford, United Kingdom, the current process in Greece of partial debt restructuring held by private creditors, is not “necessarily” a laboratory of what could happen with other euro area countries already under rescue plans, as Ireland and Portugal. “If the Greek problem could be circumscribed, it could still be possible for other countries to avoid a debt restructuring. But for that, the EU must move quickly to avoid the effects of contagion.” But the outcome of last week crisis in Greece and Italy and the lack of results from the G20 Summit in Cannes are not quite reassuring.
Recession of 2012 will be the worst since 1975
One certainty exists on 2012: the Portuguese economy will experience the worst recession since at least 1975 when the gross domestic product (GDP) fell 5% in a particular context of internal revolutionary upheaval and the impact of the waves of the 1973 oil crisis.
Some optimists still hope that next year recession might be less than 3%, but new projections being released are pointing to a range of 3% to 5%. And this is the range that brings together the consensus of economists surveyed by Expresso.
One of the negative premonitory signs is what is happening with the M1 indicator (a measure of money supply that includes currency in circulation and overnight deposits) that is falling “alarmingly”, with an annualized decline of 21%. Only in six months, Portugal approached the situation in Greece), as recently underlined The Telegraph. This indicator is regarded by experts as an “alarm signal” that comes six months to a year earlier.
In its October forecast, the Banco de Portugal (BoP) presented an estimated fall in GDP of 2.3% for next year. But the Portuguese central bank, stressed that at the time they were not taking into account the recessionary impact of the austerity measures of the proposed Budget for 2012. In these projections, the Portuguese central bank pointed to a 3.6% contraction in private consumption. That is less than the drop estimated by BoP for 2011, of 3.8%. Now the bank BPI estimates a drop in consumption of around 6.5%.
The dance of the official forecasts of economic performance for 2012 is almost a serials. The Stability and Growth Programme 2011-2014, submitted in March by the former Socialist government, pointed to a stagnation, with growth of 0.3%. Last August, the new right-wing coalition government, led by Pedro Passos Coelho, the Budget Strategy Paper 2011-2015 has pointed to a recession of 1.8%, and two months later, the government adjusted that to a 2.8% contraction in the proposed budget.
The model developed by the team of Elias Soukiazis, Pedro André Cerqueira and Micaela Antunes, Faculty of Economics, University of Coimbra, presents a 2012 recession range between 2.15% and 4.86%. If the interest rates rise from an average of 5%, as is assumed officially, to a “more realistic hypothesis of private financing in foreign markets on an average of 9%” for the estimated recession to be 3.13%, refers Elijah Soukiazis. And if there is a sharp drop in investment levels to near zero – as result of lack of domestic and foreign confidence and brutal contraction of bank credit due to no access to financing in the international markets – the forecast jumps to 4.86 %.
Expresso’s João Silvestre used the iSimulate simulator from World Bank, and concluded that the mere fact of private consumption dropping 5% instead of 3.6% (as estimated by the Bank of Portugal) is enough, all things being equal, to reach a GDP declined of 3.2%.
But if the contraction of the economy enters into a path of 5%, the dynamics of colossal depression can come into place in Portugal. Those are uncharted territories. Unexpected external factors – such as a recession, already pre-announced by the new European Central Bank president Mario Draghi, instead of stagnation estimated by the OECD of 0.3% for the euro area, the main international export market for Portugal. Or a greater rigidity to the internal adjustment than is expected. And the process can slip and the decline behave in a “wildly”, non-linear, manner.
The Economist Intelligence Unit (EIU) already points to a contraction of GDP in the euro area by 0.3% in the last forecast made in October. In September, the EIU expected growth of 0.8% but the sovereign debt crisis and problems in European banks led the EIU to anticipate and cut the projection to negative territory. And Mario Draghi last week, admitted a “mild recession” for the end of this year in the euro area.
For the Financial Times, “Eurozone GDP will contract by about 0.4 per cent in both the fourth quarter of this year and the first quarter of next year, according to Now-casting, a company that produces entirely computer-generated forecasts based on published economic data.
Convergence adjustments in Europe will ruin the room for maneuver
The export strategy is seen as “salvation” of the country. The BoP estimates that net exports (minus imports) could compensate for about half the decline in domestic demand. But the external front is under severe stress. Ricardo Cabral, an economics professor at the University of Madeira, and Julio Mota, Faculty of Economics, University of Coimbra, both refer that the simultaneity of fiscal adjustment processes in Portugal and in particularly in major economies such as Spain, Italy and France – will brutally tighten the room for maneuver of the Portuguese economy.
“It is not therefore correct to compare the adjustment in Portugal, especially in 2012, with adjustments made or started earlier in other European countries with IMF programs, as in Iceland, Hungary, Latvia and Romania, or even the processes started in Greece or Ireland. The current context is different and the forecasting models do not consider the kind of shocks that the economy will be subject to” stresses Ricardo Cabral, who fears that Portugal also enter a deflationary spiral. Mario Draghi, in his debut press conference, rejected the idea that there is a risk of deflation in the euro area, even slipping into recession.
As stated the team of Júlio Mota, Luis Antunes and Margarida Lopes, in a paper presented last week in Berlin, the Portuguese productive structure has several stiffness factors: 75% of companies producing for the domestic market; productivity is the lowest among the “peripheral” euro area; slow in making adjustments to new conditions of globalization, not only in terms of export markets, but even in the domestic market in the face of fierce competition from imported products and services.
Re-edition of an interview by Jorge Nascimento Rodrigues on May 3, 2011
[Contributor for Expresso weekly newspaper, Lisbon. Editor of Janelanaweb.com. Co-author of Business Minds and Pioneers of Globalization]
Raghuram Rajan is a politically incorrect economist. His most notorious episode was in August 2005, on the U.S. Federal Reserve conference in Jackson Hole. The last in which Alan Greenspan acted as chairman. One month later, the Indian scholar wrote an article that summarized it: “Has financial development made the world riskier?”
In January 2007, “discouraged” – in his words – by the fact that the IMF has “achieved so little results” Rajan left the institution and returned to academia, to the school where he started teaching, the Booth School of Business, University of Chicago, after his doctorate in economics, at the Massachusetts Institute of Technology, in 1991.
Three years after leaving the IMF, Raghuram Rajan wrote “Fault Lines”. Rajan, Professor of Finance at the University of Chicago, was born 48 years ago in Bhopal, the city that would be tragically famous with the accident at Union Carbide, in 1984.
Rajan is consultant of the Indian Prime Minister Manmohar Singh, the “father” of economic reform, and chairs the Committee of Indian financial sector regulation.
The world of economy and geopolitics would end up recognizing him. In 2010, the magazine “Foreign Policy” includes Rajan in 26th place in the TOP 100 of global thinkers, just alongside the Nobel laureate Paul Krugman, who, ironically, called Rajan’s views as “a structure based on sand foundations”. Early in 2011, a pool in “The Economist” just set the Indian economist as the most important thinker after the crisis. The public revenge.
Interview by Jorge Nascimento Rodrigues @ May 3, 2011
What suggestion do you make to Portuguese negotiators that are dealing with the Troika (EU/ECB/IMF) to set a Memorandum of Understanding to a Portuguese bailout? (May 3, 2011)
RR: The central question is how Portugal can maintain growth at a reasonable level. Surely this means agreeing to reforms that make the country more competitive. But if Portugal feels that the debt service will become impossible to fulfill – note that I am not saying that this will happen because I think that your country has a serious chance to get out of this crisis without a bankruptcy – but if Portugal feels that the burden is too heavy and will require sacrificing growth seriously, then perhaps it is better to negotiate the debt before any agreement. Of course Brussels, the IMF and the ECB will be happy if Portugal agree calmly to meet the debt service in exchange for funds, as this would avoid more problems for Europe. It is a decision that rests with Portuguese leaders to make, taking into account all the interests involved.
How was it possible to get to this point in the euro area debt crisis?
RR: The easy money. Easy money allows countries to spend beyond their means. The European Union allowed some countries to borrow at low rates, expand domestic demand, and delay needs to be competitive. It is clear that benefited exporters such as Germany, while importers such as Greece – through debt – and Spain – through private debt – could postpone the doomsday. Now, that day has arrived.
How did it happened?
RR: The Monetary Union and the feeling that the public debt of all member countries of the euro zone had a sort of implied warranty, facilitated this easy money, as in the case of Spain, for example. If Spain had independent control over its monetary policy, they would certainly have tightened credit much earlier.
The global economic situation is broader than the problem of the debt crisis in some euro area countries. Your book now launched in Lisbon analysis the “Fault Lines” in the global economy. What are those?
RR: In the book I stress my concerns on three levels. The first is the United States itself. Because of the lack of a social safety net, the American administration tends to respond to periods of recession with excessive stimulus to prevent the destruction of many jobs. This is not, in fact, the first jobless recovery that we are seeing. It is the third of its kind. However, we continue to respond with the same policies that had failed. This stimulus policies creates the ground for the next financial excesses.
And the second fault line?
RR: The very global issue. The strategy of growth based on exports by economies that have grown enormously – like China, Germany and even Japan – the world has become too dependent on a very small number of consumer countries like the United States, which became the “consumer of first resort” (and not last resort).
And in third place?
RR: I am very concerned about the U.S. financial sector. It is the link – critical, but very unstable – between an over-stimulated America and the rest of the under-consumer world. The later we fix these three problems, the harder it will be to solve them.
Between 1890 and 1929, the panics of 1890-1893 and 1907-1908 were nothing but the prelude to a major crisis. Is this crisis likely to be a similar “movie” in the near future?
RR: Possibly. It is, therefore, why I think we have to fix the fracture lines I mentioned.
Is there hope beyond the core of the developed countries? What can we expect from the BRICS (Brazil, Russia, India, China and South Africa)?
RR: Each member of this group will win, of course, more power as they become economically more important. However, I emphasize that I do not see the BRICS, as a group, having coherent interests, at least for now, as the G7 (seven more developed economies of the world, formed by the United States, Japan, Germany, England, France, Italy and Canada) had.
Can BRICS change the IMF, the World Bank and World Trade Organization, as they are the pillars of the “emerging” in the G20?
RR: I don’t see them as very pro-active in defining the agenda of these multilateral institutions. The influence of the BRICS as a group, if arises, will take time to build.
As adviser to the prime minister of India and chairman of the Indian financial system reform, how do you assess the process of reforms since 1991 in your home country?
RR: Slower than it would be desirable. But perhaps as fast as it can be in a democracy with many poor people.
And how do you compare the reforms in India and China?
RR: China has advanced much faster in reforms. When China decides to do something, does it quickly. However, it is reaching a stage of development in which the creativity factor becomes more important than the cement. My view is that creativity flourishes best in democracies. I think the great challenge for China is to manage the transition to democracy in a “soft” way.
What is the challenge for India?
RR: India has a vibrant and noisy democracy. The main challenge is to implement key reforms that promote growth – for example, in my view, advance in the field of infrastructures and education.
What is your assessment on the emergence of Brazil’s economy?
RR: Let me begin by noting that Brazil has high level managers, world-class companies and excellent natural resources. The former President Lula has focused on the weaknesses of the country – the high level of inequality and the fact that many in Brazil have low education. His high popularity when leaving office is a good indication of his ability to balance the problems of growth and distribution.
Did it became a major power or remains a promise?
RR: The world seems to have rediscovered Brazil. This was expected long ago – but also to some extent, it is problematic. The appreciation of the Brazilian currency has made exports more expensive. However, if Brazil is able to manage the overheating problems of its economy, it will certainly have a very attractive future.
Why did you write “Fault Line” at this time?
RR: The financial crisis that began in 2008 was a warning that had to be urgently addressed – hence the book. You surely had a crowd asking for the heads of bankers and brokers. But if we focus only on a few bad apples, we miss the main point, that is, this is a systemic crisis. The problem is not just the financial system. The United States has deep problems that go beyond the financial system, as with other countries in the world.
Who did you had in mind?
RR: People who have treated the crisis as simply a crisis of the traditional economic cycles, which can be fixed with stimulus. They were making a big mistake.
Did you wrote the book thinking on the ones who didn’t listened you before the outbreak of the crisis?
RR: There are always people to advise to the misfortune. The essential question is who can we take seriously, and who should we not. In a boom, there is little incentive to ear the naysayers. They warned a few times and they were wrong – until they were right.
The late economist Hyman Minsky was right when he said that in the 1990 financial capitalism has entered into the DNA cycles of euphoria and blast?
RR: He had correctly analyzed the anatomy of crises. And industrialized countries should have created testing and re-balance procedures against financial excesses.
What was the most surprising reaction to this book?
RR: I thought that the far left in America would be more receptive to the book. However, they reacted judging that I was condemning the victim, when I pointed that the inequality in the United States came from many people not having the skills needed on a modern economy. The far left would rather raise taxes on the rich, rather than focus on creating programs that help the poor improve their lives sustainably. This position disturbs me. Basically, it perpetuates the state of dependence of the poor, which is extremely harmful.
The Club of the Cassandras
During the “bubble” of the 1990s and 2000, Raghuram Rajan was considered one of the “Cassandras” of disgrace, now known as “permabears” (short for permanent bears – those who have permanent pessimistic expectations on the future direction of markets and/or economies).
Rajan became a politically incorrect economist in a top spot, as he was, from 2003 to January 2007, chief economist of the International Monetary Fund (IMF), the cathedral of the “Washington consensus”, full of economists seen as apolitical and well behaved in macroeconomics.
Nouriel Roubini, William White, (then head of monetary and economic department of the Bank for International Settlements (BIS) in Basel, Switzerland), Niall Ferguson (English historian), Kenneth Rogoff (academic that with Carmen Reinhart wrote the historiography the major financial crises and cyclical waves of default) and Robert Shiller (who spoke of “irrational exuberance”, bestseller in 2000), were the leading bears warning in midst of the euphoria that a major financial crisis could be on the way.
Several other academics – less known to the media – have analyzed, since the late 1980s, the possibility of a bust as the great crisis of 1929. This niche of scientists was based on so-called “long waves” – or long cycles, as Schumpeter called them – discovered by a Russian economist Nikolai Kondratieff, killed in Stalinist goulag in 1938. They published complex charts that politicians and journalists did not understood, nor endeavored to understand. Since the late 1980′s, they were looking for signs of a major downturn.
The theoretical basis for understanding what was happening in the financial system was given by another Chicago economist relatively unknown to the public: Hyman Minsky, who died in 1996. Since 1986, Minsky pointed that the financial system was inherently unstable, fragile and had as a standard a succession of euphoria, which lead a phase of downturns. The point where the situation changes from euphoria to the downturn became known as “Minsky moment”. As we saw in late 2007.
On the other hand, were the “deaf”, part of a financier ecosystem “that had little incentive to listen to them,” says Rajan. Powerful people – central bankers, government and bankers, excited to ride those long years of euphoria, first with the expansion of multinationals in the world (after the fall of the Berlin Wall and the collapse of the socialist system), then followed by the technological and internet revolution, and finally the real estate and financial innovation “bubble”.
Source: Não há só maçãs podres para arrancar nesta crise mundial | Jorge Nascimento Rodrigues
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