The Global Crisis: Beyond Secular Stagnation

My talk last year (2017) at the Critical Economics Summer School of the Unviersidad de Valldolid (in Spanish). It was great to meet and interact with lots of progressive thinkers in Spain.

When Things Don't Fall Apart by Ilene Grabel

Ilene Grabel's new book, When Things Don't Fall Apart: Global Financial Governance and Developmental Finance in an Age of Productive Incoherence, is out. From Dani Rodrik’s Foreword:

“It happens only rarely and is all the more pleasurable because of it. You pick up a manuscript that fundamentally changes the way you look at certain things. This is one such book. Ilene Grabel has produced a daring and delightful reinterpretation of developments in global finance since the Asian financial crisis of 1997–1998.”

From the jack description:

In When Things Don’t Fall Apart, Ilene Grabel challenges the dominant view that the global financial crisis had little effect on global financial governance and developmental finance. Grabel’s chief positive claim is that the global crisis induced disconnected and ad hoc discontinuities in global financial governance and developmental finance that are now having profound effects on emerging market and developing economies. Most observers have failed to appreciate this phenomenon owing to a heroic narrative of social change that discounts all but grand, systemic ruptures in institutions and policy. The chief normative claim is that the resulting incoherence in global financial governance is productive rather than debilitating. In the age of productive incoherence a more complex, dense, fragmented, and pluripolar form of global financial governance is expanding possibilities for policy and institutional experimentation, policy space for economic and human development, financial stability and resilience, and financial inclusion. Grabel draws on key theoretical commitments of Albert Hirschman to cement the case for the productivity of incoherence. Inspired by Hirschman, Grabel demonstrates that meaningful change often emerges from disconnected, erratic, experimental, and inconsistent adjustments in institutions and policies as actors pragmatically manage in an evolving world. Grabel substantiates her claims with empirically-rich case studies that explore the effects of recent crises on established and new networks of financial governance (such as the G-20); transformations within the IMF; institutional innovations in liquidity support and project finance from the national to the transregional levels; and the “rebranding” of capital controls. Grabel concludes with careful examination of the opportunities and risks associated with the evolutionary transformations underway.

The book has been endorsed by Antonio Ocampo, Jayati Ghosh, Ha-Joon Chang, and Mark Blyth. It's a must if you're interested in the changes in the post-Bretton Woods financial architecture after the Global Financial Crisis of 2008.

Chinese slowdown and the world economy

The Conference Board argues that Chinese official data should be taken with some skepticism. Nothing new there. They have adopted a new measure, which implies "Chinese economic growth at a more realistic 3.7 percent" for the recent past. In this scenario, interestingly enough, "it’s likely that the bulk of China’s slowdown has already taken place since 2011, even if unapparent in official statistics." So the picture is probably worse than the official one (as shown below, from The Economist)

So China will grow at about 4% and has already been growing at that pace for a while, if one believes the Conference Board (in the official data above one might think there is more space for a slowdown, but clearly it has gone already down too). The big questions are whether this will continue, and what would be the impact for the global economy (and the US).

Arguably the slowdown is the result of the transition from an export-led development strategy to a domestic, consumption centered economy, compounded by the problems of an unregulated banking sector, the infamous shadow banks. Note, however, that most problems are associated to domestic demand, and debt in domestic currency. China still has current account surpluses and huge external reserves, even if the latter have decreased. So the problems of a typical developing country, which cannot grow given the external constraint, are nonexistent. Also, it is true that some firms have debts in dollars (and revenue in yuan), and the depreciation of the yuan poses problems, but again the People's Bank of China has enough dollars that rescuing and absorbing the costs of exchange rate risk should be a minor issue. This is not to say that a further slowdown is impossible, but if it continues it should be counted as a policy mistake, not a structural constraint.

On the effects on the world economy my impression is that there is also a great deal of exaggeration. China is the second largest economy in the world, for sure, and has become central for the global economy in many ways. But its role in the global economic problems has been overstated. In Brazil, for example, the Chinese slowdown played virtually no role, as I discussed here. In the US the usual complain is that the depreciation of the yuan is behind deindustrialization, and that the Chinese crisis, that has led to a more depreciated currency, is hurting the manufacturing recovery. I am skeptical of the argument. The figure below shows manufacturing employment and a broad trade weighted exchange rate for the US.

As it can be seen the decrease in manufacturing jobs, which started in the early 2000s (before that it was more or less constant; see discussion here) is connected to the entry of China in the World Trade Organization (WTO). But the collapse of manufacturing jobs went hand in hand with a depreciation of the dollar. And some of the, admittedly slow and small, recovery since the 2008 recession has gone with an appreciation of the dollar. This indicates that Free Trade Agreements (FTAs) and the WTO play a more important role than exchange rates.

China is important, but the notion that it will derail the US recovery seems incredibly hyperbolic. My bet is the US will continue its slow recovery, and the Fed will increase interest rates at an even slower pace than they suggested, as the last meeting indicated.

Cooney & Vernengo on the Global Crisis of Capitalism

Professors Matias Vernengo and Paul Cooney discuss their analyses of the global economic crisis.

Keynes is all you need

From BusinessWeek:

Is there a doctor in the house? The global economy is failing to thrive, and its caretakers are fumbling. Greece took its medicine as instructed and was rewarded with an unemployment rate of 26 percent. Portugal obeyed the budget rules; its citizens are looking for jobs in Angola and Mozambique because there are so few at home. Germans are feeling anemic despite their massive trade surplus. In the U.S., the income of a median household adjusted for inflation is 3 percent lower than at the worst point of the 2007-09 recession, according to Sentier Research. Whatever medicine is being doled out isn’t working. Citigroup (C) Chief Economist Willem Buiter recently described the Bank of England’s policy as “an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions, and half-developed insights.” And that, he said, is better than things countries are trying elsewhere.

Read rest here.

New Book: "The Euro, The Dollar and the Global Financial Crisis" By Miguel Otero-Iglesias

Editorial Reviews:

Many scholars have contributed to ongoing debates about the competition between the dollar and the euro for global monetary dominance. Few have added as much value as Miguel Otero-Iglesias with his systematic and original survey of the views of financial elites in major emerging market economies. Where conventional interpretations emphasize material "reality," Otero-Iglesias's ideational analysis clearly demonstrates how important it is to consider as well how "reality" is perceived and framed by key actors. The euro may be structurally weak, limiting its "hard" power. But at the cognitive level of "soft" power, Otero-Iglesias suggests, Europe's money poses a significant challenge to America's greenback. This is an argument to be taken seriously.

Benjamin J. Cohen, Louis G. Lancaster Professor of International Political Economy University of California, Santa Barbara, USA.

This is a book I’ve been waiting for: a detailed analysis of what financial elites in the large reserve-holding countries are thinking about the future of the international monetary system. Drawing on extensive research, Miguel Otero-Iglesias argues persuasively that the views of authorities in China, Brazil, and the Gulf states matter enormously for the future of the global roles of dollar and the euro. An engaging and innovative book that makes a major contribution to our understanding of the world’s money."

Eric Helleiner, Faculty of Arts Chair in International Political Economy and Professor in the Department of Political Science of the University of Waterloo

In this original, well written and carefully researched book, Otero-Iglesias suspends motion in this fast moving story of currency rivalry to give the reader a view into the deeper logic of global monetary change. The author has synthesized skilfully across a wide spectrum of perspectives, from various systemically important emerging countries, and for which he has accessed key financial elites, and policy shapers, in China and Brazil, as well as the Gulf States. This book is truly a must read for scholars of the politics of the international monetary system, especially those with an eye to systemic change.

Gregory T. Chin, Associate Professor, York University, Canada and Co-Editor, Review of International Political Economy'

About the Author:
Miguel Otero-Iglesias is Senior Analyst on the European Economy and the Emerging Markets at the Elcano Royal Institute in Spain and Research Fellow in International Political Economy at the EU-Asia Institute at ESSCA School of Management in France.

For more info go here.

***My RIPE paper with Matias Vernengo, "Hegemonic Currencies During The Crisis, The Dollar Versus The Euro In a Cartalist Perspective" (see here), is cited.

Leo Panitch on how the US still decides the future of global capitalism

Leo Panitch offers an antidote to the growing consensus that the new development bank launched by the BRICS manifests a significant challenge to US hegemony.

From The Guardian:

International attention has been diverted away from this year’s G20 meetings in Australia by the declaration from the leaders of Brazil, Russia, India, China and South Africa, at their meeting in Fortaleza Brazil this July, that they would launch a new “Brics bank”. Created by the US Treasury in the wake of the Asian financial crisis at the end of the 1990s, the G20 was designed to get the major “emerging market” states to take responsibility alongside the G7 for the “new international financial architecture”. This was seen as providing legitimacy for the continuing central role of the US in superintending a greatly expanded but increasingly volatile global capitalism

Read rest here.

Tokunaga & Epstein - Endogenous Finance of a Dollar-Based World-System: A Minskian Approach

Junji Tokunaga & Gerald Epstein 

From the Abstract:

Global financing patterns have been at the center of debates on the global financial crisis in recent years. The global imbalance view, a prominent hypothesis, attributes the financial crisis to excess saving over investment in emerging market countries which have run current account surplus since the end of the 1990s. The excess saving flowed into advanced countries running current account deficits, particularly the U.S., thus depressing long-term interest rates and fuelling a credit boom there in the 2000s. According to this view, the financial crisis was triggered by an external and exogenous shock that resulted from excess saving in emerging market countries, not the shadow banking system in advanced countries which was the epicenter of the financial crisis. Instead, we argue that a key cause of the global financial crisis was the dynamic expansion of balance sheets at large complex financial institutions (LCFIs)(Borio and Disyatat [2011] and Shin [2012]), driven by the endogenously elastic finance of global dollar funding in the global shadow banking system. The endogenously elastic finance of the global dollar contributed to the buildup of global financial fragility that led to the global financial crisis. Importantly, the supreme position of U.S. dollar as debt- financing currency, underpinned by the dominant role of the dollar in the development of new financial innovations and instruments, and was a driving force in this endogenously dynamic and ultimately destructive process.

Read rest here 

Honduras Since the Coup: Economic and Social Outcomes

By Jake Johnston and Stephan Lefebvre of CEPR. From the abstract:

This paper presents a broad overview of economic and social trends in Honduras since 2006, including the years following the military coup of June 2009. It finds that economic inequality in Honduras has increased dramatically since 2010, while poverty has worsened, unemployment has increased and underemployment has risen sharply, with many more workers receiving less than the minimum wage. While some of the decline was initially due to the global recession that began in 2008, much of it is a result of policy choices, including a decrease in social spending.

Read rest here.

Chandrasekhar & Ghosh on the missing global recovery

"In mid-November the OECD Secretariat issued the second of its annual assessments of the Economic Outlook for the world economy. The previous assessment was in May. In the short span of time between these two reports, the outlook has indeed changed. The optimism that desperately-searched-for-and-found “green shoots” of recovery generated has waned. To quote the OECD’s report: 'The global recovery remains modest and uneven ... Outcomes this year and near-term prospects appear a little weaker than had been expected in May, at the time of the previous Economic Outlook, with global GDP growth revised down by just under 1⁄2 percentage point both this year and in 2014 to 2.7% and 3.6% respectively.'"

Read the rest here.

Jan Kregel: The Continuing Risk of Derivatives

New Book From Monthly Review Press: 'Capitalist Globalization - Consequences, Resistance, and Alternatives'

Globalization, surely one of the most used and abused buzzwords of recent decades, describes a phenomenon that is typically considered to be a neutral and inevitable expansion of market forces across the planet. Nearly all economists, politicians, business leaders, and mainstream journalists view globalization as the natural result of economic development, and a beneficial one at that. But, as noted economist Martin Hart-Landsberg argues, this perception does not match the reality of globalization. The rise of transnational corporations and their global production chains was the result of intentional and political acts, decisions made at the highest levels of power. Their aim—to increase profits by seeking the cheapest sources of labor and raw materials—was facilitated through policy-making at the national and international levels, and was largely successful. But workers in every nation have paid the costs, in the form of increased inequality and poverty, the destruction of social welfare provisions and labor unions, and an erratic global economy prone to bubbles, busts, and crises.

Read rest here.
Other books by Hart-Landsberg, see here

The weakening global economy

The graph below shows the evolution of world GDP, and it is clear that the global economy is slowing down (source here), from a growth rate of more than 4% after the crisis to around 2% this year.

In particular, the slowdown is taking place in rich countries, but also in the emerging markets, with the exception of the BRICs. However, note that within the BRICS, Brazil slowed down significantly, from 7.5% in 2010 to around 1% last year, and Russia slowed down somewhat (from 4.6% to 3.5% in the same period) from levels that were not that impressive, while China and India also slowed down, but still maintain high levels of growth (slightly below 8% and around 6%, respectively).

In other words, China and India are growing, but the others not so much. Not a very good scenario. Austerity has been winning globally, and a global Keynesian push is more needed than ever.