1 world economic crisis, deflation, recession and the coming shift in the balance of global economic...
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WORLD ECONOMIC CRISIS, DEFLATION, RECESSION AND THE COMING SHIFT IN THE BALANCE OF GLOBAL ECONOMIC POWER
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OUTLINE
• Nature of crisis
• Sources of crisis
• Actual and future policy responses
• Prospects for the advanced countries
• Prospects for the developing countries
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NATURE OF CRISISNATURE OF CRISIS
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General Nature of the Crisis
• Financial
• EconomicEconomic
• Global
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Financial crisis
• Bursting of housing bubble• Liquidity crunch – shortage of
cash• Credit crunch – lending activity
ceases• Global crash of stock markets*• Collapse of major financial
institutions
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Beginnings of an Economic Crisis and Recession
• Fall in Industrial Production and GDP
• Rise in unemployment
• Collapse in consumer and business confidence
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US Industrial Production, Jan 1989 – Sept 2008
-8
-6
-4
-2
0
2
4
6
8
31-1-89 31-1-92 31-1-95 31-1-98 31-1-01 31-1-04 31-1-07% c
han
ge
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SOURCES OF CRISISSOURCES OF CRISIS
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Perceived Sources Of Problems
• Burst housing bubble (sub-prime mortgages) which spilt over into other sectors
• Greedy bankers and speculators (short-traders)
• Misguided policy makers
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The Actual Sources
• Long business cycle– Long period increases and falls increases and falls in
economic growth, employment and inflation alongside rises and falls in profits, real wages, and interest rates
– ….resulting from major changes in the technologicaltechnological base of production
• Shift in global power
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LONG WAVE
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trough peak trough duration hegemonic power technology1790 1814 1848 58 Britain canals1848 1872 1893 45 Britain railways, steam (steam
engine)1893 1917 1940 47 Britain steel, combustion engine,
electricity, chemicals,telephone
1940 1975 2000? 60 United States electronics, plastics,aerospace, nuclear energy
2000 2030 2050 50 United States computers, biotechnology,robotics
Source: Goldstein 1988 (modified)
LONG CYCLE DATING
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What Happens in The DOWNWAVE – i.e., 1980-Present
• Rise of Neo-liberal/Neo-classical type ideology• Fall in inflation*• Fall in growth rates of advanced economies*• Fall in interest rates• Rise of financial sector and speculative activity
– repeated “asset bubbles” (1)(2)*• IllusionIllusion of prosperity
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US Inflation Period Averages 1950-2007
0
2
4
6
8
10
12
1950-59 1960-69 1970-79 1980-89 1990-99 2000-2007
per
cen
tag
e
Williams Official
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US Long-Cycle Average Growth Rates: Official vs Williams
-1
0
1
2
3
4
5
1950-59 1960-69 1970-79 1980-89 1990-99 2000-mid2008
per
cen
tag
e
Williams Official
2.6%
3.6%
1.1%
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US TOTAL Debt as % of GDP
SourceSource: US Federal Reserve and Financiële Strategie: US Federal Reserve and Financiële Strategie
260
220
180
140
100
20031933
1926 35 45 55 65 75 85 95 03
In In % of GDP% of GDP
264%264%
330%330%
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Derivatives Growth
1997 2007
Outstanding derivatives contracts
$75 trillion $600 trillion
As percentage of World GDP
250% 1100%
Source: Bank for International Settlements
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Relative Decline of The US Economy Using Published Data
US share of world economy
0
10
20
30
40
50
60
1950 1960 1970 1980 1990 2000 2006
per
cen
tag
e
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INTO THE NEXT LONG INTO THE NEXT LONG UPSWING?UPSWING?
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What Is Needed For The Upswing To Start And Progress?
• A major crisis and a shift in global economic power• Destruction of debt (1)• Elimination of excess capacity• Restoration of productive profit rates from;
– Lower costs of capital– Relocation of production to lower cost areas– Less competitive environment
• Change in dominant economic thinking and policy making (towards Keynesianism) (2)
• More transparency in and regulation of the financial system• Recognition and elimination (or at least reduction) of fraud in
economic data computations (3)• New international financial system• New international trading system
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ACTUAL AND FUTURE POLICY ACTUAL AND FUTURE POLICY RESPONSESRESPONSES
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Actual responses
• Fixing the financial sector– Injections of liquidity (money) into the system
(1)– Bail-outs of banks
• Purchase of “toxic assets” (2)• Nationalisations and capital infusions• Guarantees of deposits
– Talk about tightening financial regulation
• Sharp reductions in interest rates
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Proposed Responses
• More interest rate cuts
• Massive increases in budget deficits (1)(2)
• Bail-outs of certain sectors
• “Nuclear option” (3) - Economist
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PROSPECTS FOR THE PROSPECTS FOR THE ADVANCED COUNTRIESADVANCED COUNTRIES
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Short-term (1-2 years)
• More turmoil in the financial system – insurance companies and pension funds
• Bankruptcies in the productive and non-financial service sector (1)
• Fall in GDP to zero or below zero*• Rise in unemployment• Threat of deflation (2)*
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World Growth Forecasts
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Deflation Coming – Economist primary Commodity and Metals index, Jan 1989- end Oct 2008
0
50
100
150
200
250
300
350
31-1-89 31-1-92 31-1-95 31-1-98 31-1-01 31-1-04 31-1-07
Ind
ex 2
000=
100
All Metals
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Longer-term (1)
Stagflation (2)Stagflation (2)
or
Depression (3)Depression (3)
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PROSPECTS FOR THE PROSPECTS FOR THE DEVELOPING COUNTRIES DEVELOPING COUNTRIES
(1)(1)
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Short-term
• Balance of paymentsBalance of payments and exchange exchange raterate weakness problems
• Exchange rate/inflationinflation vicious cycle
• Sharp falls in economic growtheconomic growth
• Worst affected will be those countries where Neo-liberal ideologyNeo-liberal ideology still dominates policy making (1-3)
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Balance of Payments and US Dollar (and Yen) Shortage
ProblemsCurrent account problems(1)• 80 developing countries have current account deficits of
more than 5% of GDP• Turkey (-6.4%), Pakistan (-8.7%), South Africa (-7.7%),
Bulgaria (-25%) Ukraine (-10%), Hungary (-5.5%), Poland (-4.9%), Baltic states (-6% to -15%)
Swap facilities with US (2)• Brazil, South Korea, Singapore and Mexico
Yen debt problems• Affecting South-East Asian countries that borrowed in
Yen – so-called “carry trades”
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…..Possible Short-term Silver Linings
• Benefit from expansionary policies in the advanced countries and richer developing countries
• Relocation of capital from the advanced countries and high cost developing countries
• Lower international borrowing costs
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The Long-term – Shift in Economic Power to The Non-
OECD Countries• Non-OECD countries have more flexible production
bases• Many developing countries will benefit from increases in
primary product prices• Relocation of capital from advanced to developing
countries• Increasing South-South cooperation• The rise of Asia and the advent of an Asian currency
bloc• Hypocrisy of Neo-liberal development and stabilisation
policy prescriptions become apparent
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The Long-term – The Potential Dangers
• Policy makers still steeped in Neo-liberal/Neo-classical thinking or jumping into Keynesian follies (1)
• New development policy thinking – poverty alleviation and Aid-based infrastructure development
• EPAs, Doha Multi-lateral trading round and Breton Woods II