Capital flight and bank fragility are profound dysfunctions in the way the global economy is now organised that will surface as real-world economic dislocation.
The , warning at last week’s annual meeting in Peru of $3tn (£1.95tn) of excess credit globally and weakening global economic growth.
The heart of the economic disorder is a world financial system that has gone rogue. Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level.
The false boom that follows seems to justify the lending. Property prices rise. Companies and households grow overconfident about their prospects and borrow freely. Economies surge well above their trend growth rates and all seems well until something – a collapse in property or commodity prices – unravels the whole process. The money floods out as quickly as it flooded in, leaving bust banks and governments desperately picking up the pieces.
Act one was in 2007-08 in Britain and the US. Buoyed for the previous decade by absurdly high inflows of globally generated credit that created false booms, they suddenly found their overconfident banks had wildly lent too much. Collateral behind newfangled derivatives was worthless. Money flooded out, leaving Britain’s banking system bust, to be bailed out by more than £1tn of liquidity and special injections of public capital.
Act two was in Europe in 2011-12, when it became obvious that the lending had been made on the incorrect assumption that all eurozone countries were equal.
Now act three is beginning, but in countries much less able to devise measures to stop financial contagion and whose banks are more precarious. For global finance next flooded the so-called emerging market economies (EMEs), countries such as Turkey, Brazil, Malaysia, China, all riding high on sky-high commodity prices as the China boom, itself fuelled by wild lending, seemed never-ending. Chinamanufactured more cement from 2010-13 than the US had produced over the entire 20th century. It could not last and so it is proving.
China’s banks are, in effect, bust: few of the vast loans they have made can ever be repaid, so they cannot now lend at the rate needed to sustain China’s once super-high but illusory growth rates. China’s real growth is now below that of the Mao years: the economic crisis will spawn a crisis of legitimacy for the deeply corrupt communist party. Commodity prices have crashed.
ME: HERE COMES THE SOLUTION, MORE OF WHAT THE ARTICLE DECRIES
The world needs inventive responses.
It needs western governments to launch massive economic stimuli, centred on infrastructure spending. It needs new smart monetary policies that allow negative interest rates.