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 1
Ants, grasshoppers and locusts: prospects for the world economy Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Ralph Miliband Lecture 16 th March 2011 London School of Economics
Ants, grasshoppers and locusts 3
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 4
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. 5
2. What lay behind the crisis? • What we have seen is a “developing country” crisis at the core of 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 on ratings) and omission (deregulation of securities and housing markets) in financial regulation. 6
2. What lay behind the crisis? Imbalances THE RISE OF THE IMBALANCES GLOBAL CURRENT ACCOUNT IMBALANCES - PAST AND PROSPECT (share of world GDP) 4 Source: IMF, WEO October 2010 3 2 1 0 -1 -2 -3 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 US OIL DEU+JPN OCADC CHN+EMA ROW Discrepancy 7
2. What lay behind the crisis? Imbalances FOREIGN CURRENCY INTERVENTION GLOBAL CURRENCY RESERVES $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 China Japan Other Asia Other developing Other industrial 8
2. What lay behind the crisis? Imbalances HOW THE US IMBALANCES EMERGED US FINANCIAL BALANCES FROM 1990 (per cent of GDP) 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% 1990-I 1990-IV 1992-II 1993-I 1993-IV 1995-II 1996-I 1996-IV 1998-II 1999-I 1999-IV 2001-II 2002-I 2002-IV 2004-II 2005-I 2005-IV 2007-II 2008-I 2008-IV 2010-II 1991-III 1994-III 1997-III 2000-III 2003-III 2006-III 2009-III Government Financial Balance Household Financial Balance Business Financial Balance Foreign Financial Balance 9
2. What lay behind the crisis? Imbalances HOW NON-FINANCIAL CORPORATES SAVED NET CORPORATE SAVINGS 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Germany Japan UK USA 10
2. What lay behind the crisis? Leverage HOW NON-FINANCIAL CORPORATES SAVED US PRIVATE SECTOR DEBT OVER GDP 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% 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 11
2. What caused the crisis? Leverage HOW NON-FINANCIAL CORPORATES SAVED PRIVATE SECTOR DEBT (relative to GDP) 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 I I 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 I 0 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 0 2 Households Non-financial Business Financial Sectors 12
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. 13
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 of 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,….. 14
3. Where are the advanced countries now? THE DECLINE IN HIGH-INCOME COUNTRIES GDP AFTER THE CRISIS 102.0 100.0 98.0 96.0 94.0 92.0 90.0 88.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 France Germany Italy Japan UK US 15
3. Where are the advanced countries now? A WEAK RECOVERY IN 2011? SUCCESSIVE CONSENSUS FORECASTS FOR 2011 3.5 3 2.5 2 1.5 1 0.5 0 S K n e y y n e n a n l i U U c a a a p o n t p m I a z a S o r J r F r e u G E Jan-10 Jun-10 Nov-10 Jan-11 16
3. Where are the advanced countries now? THE US LEVERAGE CYCLE TOTAL US PRIVATE BORROWING (as per cent of GDP) 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 2 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 0 2 Households Non-financial Business Domestic Financial Sectors Total Domestic Private 17
3. Where are the advanced countries now? FISCAL FIREPOWER USED EXPLOSION OF FISCAL DEFICITS (as per cent of GDP) 4 2 0 -2 -4 -6 -8 -10 -12 -14 Canada France Germany Italy Japan United Kingdom United States 2006 2007 2008 2009 2010 2011 18
3. Where are the advanced countries now? THE SOVEREIGN DEBT CRISIS NET PUBLIC SECTOR DEBT OVER GDP Source: IMF 180 160 140 120 100 80 60 40 20 0 Canada France Germany Italy Japan United Kingdom United States 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 19
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 19 th century. 20
4. Why do emerging economies matter? CRISIS – WHAT CRISIS? GDP IN THE CRISIS Source: Federal Reserve 145.0 140.0 135.0 130.0 125.0 120.0 115.0 110.0 105.0 100.0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Emerging Economies Advanced Economies 21
4. Why do emerging economies matter? MORE STRONG GROWTH IN 2011? SUCCESSIVE CONSENSUS FORECASTS FOR 2011 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 China India Asia Russia Eastern Brazil Latin World Pacific Europe America (NB Excluding Japan) Jan-10 Jun-10 Nov-10 Jan-11 22
4. Why do emerging economies matter? CHINA RISES TO THE TOP OF THE SURPLUS LIST CURRENT ACCOUNT BALANCES ($bn) $500.0 $400.0 $300.0 $200.0 $100.0 $0.0 -$100.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China Germany Japan 23
4. Why do emerging economies matter? HOW INVESTMENT SOARED COMPOSITION OF CHINA'S FINAL DEMAND 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 Private consumption Government consumption GFCF Net exports 24
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