Grasshoppers, Ants and Locusts: the future of the world economy - - PowerPoint PPT Presentation

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Ralph Miliband Series on the Restructuring of World Power

Grasshoppers, Ants and Locusts: the future of the world economy

Martin Wolf

Associate editor and chief economics commentator, Financial Times

Professor David Held

Chair, LSE

Ants, grasshoppers and locusts: prospects for the world economy

Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times

Ralph Miliband Lecture 16th March 2011 London School of Economics

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Ants, grasshoppers and locusts

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Ants, grasshoppers and locusts

• 1. Who are our dramatis personae?
• 2. What lay behind the crisis?
• 3. Where are advanced countries now?
• 4. Why do emerging economies matter?
• 5. Why does rebalancing matter?
• 6. Why is the eurozone the world in miniature?
• 7. Conclusion

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• 1. Who are our dramatis personae?
• I explain where we are in terms of ants and

grasshoppers and locusts:

– Ants save:

• Surplus countries; and
• Western non-financial companies;

– Grasshoppers spend:

• Deficit countries; and
• Households in these countries.

– Locusts intermediate. – These relationships need to change if we are to have a healthy world economy.

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• 2. What lay behind the crisis?
• What we have seen is a “developing country” crisis at the core
• f the world economy. Why?

1. Undue belief in the “great moderation”; 2. Emergence of global imbalances and extraordinary reserve accumulations in the late 1990s and early 2000s; 3. Accommodative monetary policy aimed at targeting inflation; 4. Low real and nominal interest rates and a “reach for yield”; 5. Innovation in the financial sector, to provide notionally safe, high- yielding assets – 64,000 triple-A rated securities; and 6. Failures of commission (risk-weighted capital ratios and reliance

• n ratings) and omission (deregulation of securities and housing

markets) in financial regulation.

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• 2. What lay behind the crisis? Imbalances

THE RISE OF THE IMBALANCES

GLOBAL CURRENT ACCOUNT IMBALANCES - PAST AND PROSPECT (share of world GDP)

• 3
• 2
• 1

1 2 3 4 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 2 1 2 1 1 2 1 2 2 1 3 2 1 4 2 1 5

US OIL DEU+JPN OCADC CHN+EMA ROW Discrepancy

Source: IMF, WEO October 2010

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• 2. What lay behind the crisis? Imbalances

FOREIGN CURRENCY INTERVENTION

GLOBAL CURRENCY RESERVES

$0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

China Japan Other Asia Other developing Other industrial

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• 2. What lay behind the crisis? Imbalances

US FINANCIAL BALANCES FROM 1990 (per cent of GDP)

• 12.0%
• 10.0%
• 8.0%
• 6.0%
• 4.0%
• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 1990-I 1990-IV 1991-III 1992-II 1993-I 1993-IV 1994-III 1995-II 1996-I 1996-IV 1997-III 1998-II 1999-I 1999-IV 2000-III 2001-II 2002-I 2002-IV 2003-III 2004-II 2005-I 2005-IV 2006-III 2007-II 2008-I 2008-IV 2009-III 2010-II

Government Financial Balance Household Financial Balance Business Financial Balance Foreign Financial Balance

HOW THE US IMBALANCES EMERGED

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• 2. What lay behind the crisis? Imbalances

NET CORPORATE SAVINGS

• 2.00%
• 1.00%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Germany Japan UK USA

HOW NON-FINANCIAL CORPORATES SAVED

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• 2. What lay behind the crisis? Leverage

HOW NON-FINANCIAL CORPORATES SAVED

US PRIVATE SECTOR DEBT OVER GDP

0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0%

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Households Non-financial Business Financial Sectors

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• 2. What caused the crisis? Leverage

HOW NON-FINANCIAL CORPORATES SAVED

PRIVATE SECTOR DEBT (relative to GDP)

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8 2 1 I I I

Households Non-financial Business Financial Sectors

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• 3. Where are the advanced countries now?
• The economic collapse was large.
• The rescue has been dramatic:

– Implicitly, the entire liabilities of the core financial system were nationalised; – Monetary policy has been unprecedented; and – Fiscal policy has been on a war-time footing.

• This has worked. But we are not back to normal.

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• 3. Where are the advanced countries now?
• Carmen Reinhart and Kenneth Rogoff, in their masterpiece,

This Time is Different, argue that the consequences of previous financial crises in advanced countries includes:

– Profound declines in output and employment: the unemployment rate rises an average of 7 percentage points over the down phase

• f the cycle, which lasts on average over four years, while output

falls (from peak to trough) average over 9 percent – Exploding public debt: debt rises by an average of 86 percent of

• GDP. The main cause of debt explosions is not the widely cited

costs of bailing out and recapitalizing the banking system, but the recessions. – By these standards, we have done quite well. Nevertheless,…..

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• 3. Where are the advanced countries now?

THE DECLINE IN HIGH-INCOME COUNTRIES

GDP AFTER THE CRISIS

88.0 90.0 92.0 94.0 96.0 98.0 100.0 102.0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010

France Germany Italy Japan UK US

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• 3. Where are the advanced countries now?

A WEAK RECOVERY IN 2011?

SUCCESSIVE CONSENSUS FORECASTS FOR 2011

0.5 1 1.5 2 2.5 3 3.5 U S U K J a p a n E u r

• z
• n

e G e r m a n y F r a n c e I t a l y S p a i n

Jan-10 Jun-10 Nov-10 Jan-11

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• 3. Where are the advanced countries now?

TOTAL US PRIVATE BORROWING (as per cent of GDP)

• 20.0%
• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 1 9 7 5 1 9 7 7 1 9 7 9 1 9 8 1 1 9 8 3 1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 1 2 3 2 5 2 7 2 9 2 1 2

Households Non-financial Business Domestic Financial Sectors Total Domestic Private

THE US LEVERAGE CYCLE

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• 3. Where are the advanced countries now?

EXPLOSION OF FISCAL DEFICITS (as per cent of GDP)

• 14
• 12
• 10
• 8
• 6
• 4
• 2

2 4 Canada France Germany Italy Japan United Kingdom United States

2006 2007 2008 2009 2010 2011

FISCAL FIREPOWER USED

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• 3. Where are the advanced countries now?

NET PUBLIC SECTOR DEBT OVER GDP

20 40 60 80 100 120 140 160 180 Canada France Germany Italy Japan United Kingdom United States

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: IMF

THE SOVEREIGN DEBT CRISIS

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• 4. Why do emerging economies matter?
• The rapid rise of emerging countries, above all China

has played a crucial role in this story

• Three aspects may be particularly important:

– Dis-inflationary shock; – Real wages and the credit cycle; – Global imbalances

• It is particularly remarkable that China has emerged

as the fastest growing country in the world and the largest capital exporter. Thus it combines the twin roles of the UK and US in the late 19th century.

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• 4. Why do emerging economies matter?

GDP IN THE CRISIS

100.0 105.0 110.0 115.0 120.0 125.0 130.0 135.0 140.0 145.0 2 5 1 2 5 2 2 5 3 2 5 4 2 6 1 2 6 2 2 6 3 2 6 4 2 7 1 2 7 2 2 7 3 2 7 4 2 8 1 2 8 2 2 8 3 2 8 4 2 9 1 2 9 2 2 9 3 2 9 4 2 1 1 2 1 2

Emerging Economies Advanced Economies

Source: Federal Reserve

CRISIS – WHAT CRISIS?

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• 4. Why do emerging economies matter?

MORE STRONG GROWTH IN 2011?

SUCCESSIVE CONSENSUS FORECASTS FOR 2011

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 China India Asia Pacific (NB Excluding Japan) Russia Eastern Europe Brazil Latin America World

Jan-10 Jun-10 Nov-10 Jan-11

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• 4. Why do emerging economies matter?

CHINA RISES TO THE TOP OF THE SURPLUS LIST

CURRENT ACCOUNT BALANCES ($bn)

• $100.0

$0.0 $100.0 $200.0 $300.0 $400.0 $500.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China Germany Japan

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• 4. Why do emerging economies matter?

COMPOSITION OF CHINA'S FINAL DEMAND

• 10.0

0.0 10.0 20.0 30.0 40.0 50.0 60.0 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9

Private consumption Government consumption GFCF Net exports

HOW INVESTMENT SOARED

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• 5. Why does rebalancing matter?
• The crisis has left important high-income countries

with damaged financial systems, overleveraged household sectors and large fiscal deficits

• These advanced countries are no longer in a position

to absorb net exports of capital from emerging economies and the chronic surplus advanced countries will not take up the slack

• If damaged advanced countries are to recover, while

de-leveraging their private sectors and reducing fiscal deficits, they will need higher corporate investment or a large shift in net exports, or both

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• 5. Why does rebalancing matter?

HOW PRIVATE DEFICITS COLLAPSED

CHANGE IN SECTORAL BALANCES (per cent of GDP)

• 15
• 10
• 5

5 10 15

Germany Japan France Italy UK US 2006-10 General Government 2006-10 Net Capital Inflow 2006-10 Private

Source:IMF, WEO October 2010

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• 5. Why does rebalancing matter?

HOW PRIVATE DEFICITS COLLAPSED

FINANCIAL BALANCES IN 2010

• 15
• 10
• 5

5 10 15 Germany Japan France Italy UK US

2010 General Government 2010 Net Capital Inflow 2010 Private

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• 5. Why does rebalancing matter?

CURRENT ACCOUNT BALANCES 2010 ($bn)

• $467
• $58
• $52
• $50
• $46
• $44
• $44
• $38
• $30
• $15
• $12
• $11

$6 $6 $26 $29 $70 $166 $200 $270

• $600
• $500
• $400
• $300
• $200
• $100

$0 $100 $200 $300 $400

United States Italy Brazil United Kingdom France Canada India Turkey Australia South Africa Mexico EU Argentina Indonesia Korea Saudi Arabia Russia Japan Germany China

Source: IMF. WEO database October 2010

THE CHALLENGE OF ADJUSTMENT

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• 5. Why does rebalancing matter?

BALANCE OF PAYMENTS OF EMERGING ECONOMIES ($bn)

• 800
• 600
• 400
• 200

200 400 600 800 1 000 2008 2009 201 0f 201 1 f

Current Account Balance Private Inflows Official Inflows Equity Investment abroad by residents Resident Lending Reserves (-=increase)

Source: IIF

THE GLIMMERINGS OF ADJUSTMENT

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• 6. Why is the eurozone the world in miniature?
• The eurozone is the world in miniature
• The eurozone is facing a long-running crisis
• It needs to restructure debt
• But it also needs to rebalance
• Can it do so?

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• 6. Why is the eurozone the world in miniature?

THE GOOD, THE BAD AND THE UGLY

CURRENT ACCOUNT IMBALANCES IN THE EUROZONE (as a share of eurozone GDP)

• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Germany Netherlands Spain France Italy Portugal and Greece Eurozone

Source: IMF, WEO, April 2010.

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• 6. Why is the eurozone the world in miniature?

ROAD TO THE FISCAL DEFICITS

GENERAL GOVERNMENT BALANCE (as per cent of GDP)

• 14
• 12
• 10
• 8
• 6
• 4
• 2

2 4 2005 2006 2007 2008 2009 2010 2011

Portugal Ireland Spain Greece

Source: IMF, WEO, April 2010

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• 6. Why is the eurozone the world in miniature?

ROAD TO THE FISCAL DEFICITS

NET PUBLIC DEBT (ratio to GDP)

• 20.0

0.0 20.0 40.0 60.0 80.0 100.0 120.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Greece Ireland Portugal Spain

Source: OECD

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• 6. Why is the eurozone the world in miniature?

NUMBER OF BREACHES OF THE 3 PER CENT DEFICIT RULE

1 2 3 4 5 6 7 8 9 10

Greece Italy France Germany Portugal Austria Ireland Netherlands Spain Belgium Finland Luxembourg

Source: Unicredit

THE GOOD, THE BAD AND THE UGLY

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• 6. Why is the eurozone the world in miniature?

THE GOOD, THE BAD AND THE UGLY

SPREADS OVER BUNDS

• 200

200 400 600 800 1000 1200 01/01/1999 01/07/1999 01/01/2000 01/07/2000 01/01/2001 01/07/2001 01/01/2002 01/07/2002 01/01/2003 01/07/2003 01/01/2004 01/07/2004 01/01/2005 01/07/2005 01/01/2006 01/07/2006 01/01/2007 01/07/2007 01/01/2008 01/07/2008 01/01/2009 01/07/2009 01/01/2010 01/07/2010

Portugal Italy Ireland Greece Spain

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• 6. Why is the eurozone the world in miniature?

LOST COMPETITIVENESS IN THE PERIPHERY

UNIT LABOUR COSTS (Total economy relative to Germany (Q1 2000 = 100))

95 100 105 110 115 120 125 130 135 140 Feb-99 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 Feb-03 Jun-03 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10

Eurozone Spain France Ireland Italy

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• 7. Conclusion
• The world economy has changed in big ways:

– End of private leverage cycle in high-income countries; – End of reliance on US as borrower and spender of last resort; – Emergence of huge developed country sovereign debt problems; – Big challenge of global rebalancing and returning to stable global growth. – Grasshoppers become antlike and ants become grasshopperlike – and locusts behave themselves! – Is this too much to hope for? Perhaps

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Ralph Miliband Series on the Restructuring of World Power

Grasshoppers, Ants and Locusts: the future of the world economy

Martin Wolf

Associate editor and chief economics commentator, Financial Times

Professor David Held

Chair, LSE