has the financial crisis changed the world? martin wolf, associate editor & chief economics...
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Has the financial crisis changed the world? Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
John Weatherall Public Lecture
October 2 2013
Queen’s University, Kingston, Ontario
2
Panic
3
Has the financial crisis changed the world?
• It is too soon to know. But I do hope it has.
• In this lecture, I intend to address the following four issues:– Where we are.
– How we got here.
– Where we go.
– What we learn.
4
1. Where we are
• The high-income countries have been stuck in a “contained depression” for six years.
• What are the symptoms of this malady?
• The answer is the combination of:– Weak economies;
– aggressive monetary and (to a lesser degree) fiscal policies;
– and low inflation.
• Meanwhile crisis-hit eurozone members have fallen into deep slumps.
5
1. Where we are – the slump
THE LONG RECESSION
Q1 2
008
Q2 2
008
Q3 2
008
Q4 2
008
Q1 2
009
Q2 2
009
Q3 2
009
Q4 2
009
Q1 2
010
Q2 2
010
Q3 2
010
Q4 2
010
Q1 2
011
Q2 2
011
Q3 2
011
Q4 2
011
Q1 2
012
Q2 2
012
Q3 2
012
Q4 2
012
Q1 2
013
Q2 2
01390.0
92.0
94.0
96.0
98.0
100.0
102.0
104.0
106.0
GDP IN THE "GREAT RECESSION"
Eurozone Germany France US UK Italy
6
1. Where we are – fiscal deficits
United States United Kingdom
Japan France Italy Canada Germany-16
-14
-12
-10
-8
-6
-4
-2
0
2
4
GENERAL GOVERNMENT BORROWING(per cent of GDP)
2006 2007 2008 2009 2010 2011 2012 2013
EXPLODING FISCAL DEFICITS
7
1. Where we are – public debt
Canada Germany France United States
United Kingdom
Italy Japan0
20
40
60
80
100
120
140
160
NET PUBLIC DEBT (over GDP)
2007 2010 2013 2016
LEAD TO SOARING PUBLIC DEBT
8
1. Where we are – monetary policy
1/1/
99
6/1/
99
11/1
/99
4/1/
00
9/1/
00
2/1/
01
7/1/
01
12/1
/01
5/1/
02
10/1
/02
3/1/
03
8/1/
03
1/1/
04
6/1/
04
11/1
/04
4/1/
05
9/1/
05
2/1/
06
7/1/
06
12/1
/06
5/1/
07
10/1
/07
3/1/
08
8/1/
08
1/1/
09
6/1/
09
11/1
/09
4/1/
10
9/1/
10
2/1/
11
7/1/
11
12/1
/11
5/1/
12
10/1
/12
3/1/
13
8/1/
130
1
2
3
4
5
6
7
CENTRAL BANK POLICY RATES
Federal Reserve Bank of JapanBank of England European Central Bank
A WORLD OF FREE MONEY
9
1. Where we are – monetary policy
AND EXPANDING MONETARY BASE
May
-06
Nov-0
6
May
-07
Nov-0
7
May
-08
Nov-0
8
May
-09
Nov-0
9
May
-10
Nov-1
0
May
-11
Nov-1
1
May
-12
Nov-1
2
May
-13
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
BALANCE SHEET OF THREE CENTRAL BANKS
Federal Reserve ECB Bank of England
1. Where we are – monetary policy
10
YET MONETARY GROWTH CEASES
1/1/99 1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13100.0
150.0
200.0
250.0
300.0
350.0
MONEY SUPPLY IN THE GREAT RECESSION
US M2 Euro M3 UK M3
11
1. Where we are – long-term interest rates
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
130
1
2
3
4
5
6
7
8
9
10
YIELDS ON 10-YEAR GOVERNMENT BONDS
Germany UK US Japan Canada
BOND YIELDS FALL TO VERY LOW LEVELS
12
1. Where we are – eurozone depressions
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-1370.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
GDP SINCE THE CRISIS
Italy Spain Greece Ireland Portugal
SLUMPS IN CRISIS-HIT EUROZONE COUNTRIES
13
1. Where we are – eurozone depressions
1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/130
5
10
15
20
25
30
STANDARDISED UNEMPLOYMENT RATES
Germany Italy Spain Greece Portugal Ireland
UNEMPLOYMENT IN CRISIS-HIT COUNTRIES
14
2. How we got here
• The crisis is the result of a complex interaction between two forces:– A global saving glut; and
– A fragile financial system
• When the “Minsky moment” came in 2007-08, the results were:– A huge financial crisis;
– State-backing of the core financial system; and
– The hyper-aggressive monetary and fiscal policies.
15
2. How we got here – asset bubbles
Q1 19
95
Q4 19
95
Q3 19
96
Q2 19
97
Q1 19
98
Q4 19
98
Q3 19
99
Q2 20
00
Q1 20
01
Q4 20
01
Q3 20
02
Q2 20
03
Q1 20
04
Q4 20
04
Q3 20
05
Q2 20
06
Q1 20
07
Q4 20
07
Q3 20
08
Q2 20
09
Q1 20
10
Q4 20
10
Q3 20
11
Q2 20
12
Q1 20
130.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
-2
-1
0
1
2
3
4
5
REAL HOUSE PRICES AND REAL INDEX-LINKED YIELDS
US real (S&P Case Shiller National) UK real NationwideSpain real UK 10-year IL gilts
Re
al H
ou
se
Pri
ce
s In
de
x-lin
ke
d Y
ield
BEGINNING AND END OF HOUSING BUBBLES
16
2. How we got here – global imbalances
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016-3
-2
-1
0
1
2
3
4
GLOBAL IMBALANCES (as per cent of world GDP)
US Oil exporters Germany and JapanPeripheral Europe China and Emerging Asia Rest of worldDiscrepancy
WHERE EXCESS SAVINGS CAME FROM
17
2. How we got here – global reserves
Jan-
97
Aug-9
7
Mar
-98
Oct-9
8
May
-99
Dec-9
9
Jul-0
0
Feb-0
1
Sep-0
1
Apr-0
2
Nov-0
2
Jun-
03
Jan-
04
Aug-0
4
Mar
-05
Oct-0
5
May
-06
Dec-0
6
Jul-0
7
Feb-0
8
Sep-0
8
Apr-0
9
Nov-0
9
Jun-
10
Jan-
11
Aug-1
1
Mar
-12
Oct-1
2$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
FOREIGN CURRENCY RESERVES ($bn)
China Rest of AsiaRest of developing countries Industrial countries
THE ROLE OF GOVERNMENTS
18
2. How we got here – asset bubbles
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
US CUMULATIVE PRIVATE SECTOR DEBT OVER GDP
Households Non-financial Business Financial Sectors
THE RISE OF THE LEVERAGED ECONOMY
19
2. How we got here – financial leverage
LEVERAGE IN PRE-CRISIS UK BANKING
20
2. How we got here – eurozone
• The core of the eurozone financial crisis is not fiscal
• The fiscal crisis is more a symptom of the financial crisis than a cause of that crisis
• The crisis is largely the result of divergences accumulated in the years of excess: what made everything seem so good was in fact creating an acute long-term crisis
• External imbalances played a far bigger role than fiscal imbalances: it mattered less whether the private or public sectors were being financed than how big the external finance was
21
2. How we got here – eurozone imbalances
THE ROAD TO THE EUROZONE CRISES
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
EUROZONE IMBALANCES ON CURRENT ACCOUNT(as per cent of Eurozone GDP)
Germany Other persistent surplus FranceVulnerable countries Others Eurozone
Axis Title
2222
2. How we got here – eurozone imbalances
THE ROAD TO THE EUROZONE CRISES
Finla
nd
Netherla
nds
Germ
any
Belgiu
m
Austria
France Ita
ly
Irela
nd
Spain
Gre
ece
Portugal
-12.0-10.0
-8.0-6.0-4.0-2.00.02.04.06.08.0
5.6 5.4
3.52.5 2.0
0.2
-0.9-2.3
-6.2
-9.2 -9.7
AVERAGE CURRENT ACCOUNT BALANCES 2000-08
23
2. How we got here – eurozone debt
NOT THE ROAD TO THE EUROZONE CRISES
Gre
ece Italy
Belgiu
m
Portugal
France
Germ
any
Austria
Spain
Netherla
nds
Irela
nd
Finla
nd-100.0
-50.0
0.0
50.0
100.0
150.0
GOVERNMENT NET DEBT OVER GDP (per cent)
242424
2. How we got here – eurozone debt
CRISIS-HIT COUNTRIES SUFFER
Greece Italy Portugal Spain Ireland0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
NET GOVERNMENT DEBT OVER GDP (per cent)
2007 2010 2013
252525
2. How we got here – eurozone yields
CRISIS-HIT COUNTRIES SUFFER AND RECOVER
12/3
0/05
3/31
/06
6/30
/06
9/29
/06
12/2
9/06
3/30
/07
6/29
/07
9/28
/07
12/2
8/07
3/28
/08
6/27
/08
9/26
/08
12/2
6/08
3/27
/09
6/26
/09
9/25
/09
12/2
5/09
3/26
/10
6/25
/10
9/24
/10
12/2
4/10
3/25
/11
6/24
/11
9/23
/11
12/2
3/11
3/23
/12
6/22
/12
9/21
/12
12/2
1/12
3/22
/13
6/21
/13
9/20
/13
-2
0
2
4
6
8
10
12
14
16
SPREADS OVER GERMAN BUNDS
Portugal IrelandItaly Spain3-year Long-term refinancing operation "Whatever it takes"
26
3. Where we go
• Does this crisis mark a permanent slowdown in the growth dynamic of the high-income countries
• How does a growth slowdown affect debt management? Remember debts can be managed by:– Fast growth;
– Inflation;
– Low interest rates; and
– Outright default
• If growth is slow, it is the other three that must happen
2727
3. Where we go
THE LONG SLUMP
Q1 1980 Q2 1983 Q3 1986 Q4 1989 Q1 1993 Q2 1996 Q3 1999 Q4 2002 Q1 2006 Q2 2009 Q3 2012$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
US GDP AGAINST TREND TO 2007 IV ($bn)
US GDP annualised (bn) Trend to 2007 IVDeviation
2828
3. Where we go
THE LONG SLUMP
Q1 1
995
Q1 1
996
Q1 1
997
Q1 1
998
Q1 1
999
Q1 2
000
Q1 2
001
Q1 2
002
Q1 2
003
Q1 2
004
Q1 2
005
Q1 2
006
Q1 2
007
Q1 2
008
Q1 2
009
Q1 2
010
Q1 2
011
Q1 2
012
Q1 2
013€ 0
€ 500
€ 1,000
€ 1,500
€ 2,000
€ 2,500
€ 3,000
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
EUROZONE GDP AGAINST TREND TO Q4 2007 (euro bn)
Eurozone (at 2000 Constant Prices) TrendDeviation
2929
3. Where we go
THE LONG SLUMP
Q1 1980 Q2 1983 Q3 1986 Q4 1989 Q1 1993 Q2 1996 Q3 1999 Q4 2002 Q1 2006 Q2 2009 Q3 2012£0
£50
£100
£150
£200
£250
£300
£350
£400
£450
£500
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
UK GDP AGAINST TREND TO 2007 Q IV (£bn)
UK GDP quarterly (bn) Trend to 2007 IV Deviation
30
3. Where we go - potential
• Economies have responded in two ways to the crisis:– Productivity collapse and strong employment (e.g.
Germany and the UK)
– Rising productivity and weaker employment (e.g. US and Spain)
• Which of these indicates the best supply potential?
• Answer: we do not know. Will productivity rebound or will employment rebound?
3. Where we go - employment
31
Germany United Kingdom United States France Italy Spain50.0
55.0
60.0
65.0
70.0
75.0
EMPLOYMENT OVER POPULATION RATIOS (AGED 15-65)
2007 2012
DIVERGENT EMPLOYMENT PERFORMANCE
32
3. Where we go - productivity
Spain United States
Canada Japan France Germany United Kingdom
Italy-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0% 11.0%
5.6%
1.5%0.9%
0.2%
-0.7%
-3.0%
-4.2%
CHANGES IN OUTPUT PER WORKER 2007-12 (PPP $s)
PRODUCTIVITY GROWTH COLLAPSE
3. Where we go - recovery
• Whatever the potential for supply may be, where is the demand going to come from?
• With fiscal policy contractionary, it must come from private spending.
• In practice, rising consumption driven by credit growth is a necessary condition for a sustained recovery.
• So monetary policy is likely to remain ultra-easy.
• But such an expansion might prove unsustainable.
33
34
4. What we learn
• First, our economic ideas have been discredited:– Back to Wicksell, Hayek and Keynes
– End of market utopianism.
35
4. What we learn
• Second, the financial system is crisis prone:– We have allowed private institutions to serve a fundamental
public function – the creation of money.
– The result, in a fiat money system, in which bank reserves can be created without limit, is an explosive system.
– The financial system is always part of the state. It is not fully private.
– We need to make the financial system much more robust.
– The three most important reforms are higher capital ratios and workable macro-prudential policies.
36
4. What we learn
• Third, we may be moving into secular stagnation in the high-income countries:– Slowing trend productivity growth;
– Deteriorating demographics;
– Debt overhangs; and
– Financial repression.
37
4. What we learn
• Fourth, large current account imbalances (i.e. external imbalances) always suggest a crisis is on the way:– The concern over imbalances felt by Keynes at Bretton
Woods remains valid.
– But there is no mechanism to ensure global balance.
– Indeed, the role of the dollar seems to make balance almost impossible to achieve.
38
4. What we learn
• Fifth, management of the world economy has become more difficult as the economic and political weight of the West has declined.– We are in another period of difficult transition between
hegemonic powers, as in the 1920s and 1930s.
– The relationship between the US and China will be far more difficult than between the US and the UK.
– China cannot be the hegemon of a global market economy.
39
4. What we learn
• Sixth, the eurozone is a bad marriage, but divorce is very costly. Can it be made a good marriage?
• For that it needs:– Debt restructuring – debt overhangs are now large.
– Financing – largely supplied by the European Central Bank
– Adjustment – symmetrical adjustment of income and spending
– Fundamental reform – a banking union and a minimum fiscal union.
40
5. Conclusion
• Here are my four main conclusions:– We are in a contained depression. It will not end until we
have sustained growth at “normal” interest rates and without unsustainable debt build-ups.
– We got here because of the interaction of macroeconomic imbalances with an inherently unstable financial system.
– It is not clear what sort of “normal” the high-income countries can get back to. That will, in turn, determine how the post-crisis debt overhang is handled and where we end up.
– We need to learn some big lessons about how to understand and handle our economies and financial systems, including not least in the eurozone.