Un-repayable debt an elephant in the room

Governments and central banks have offered no credible policy response to a looming global economic crisis greater than that of 2008, argues Ray Kinsella

IRELAND exists, for the moment, outside of the systemic convulsion in world financial markets which has impacted on the world economy.

As a small and highly opened trade-dependent economy, that can’t last.

Of course, markets rise and fall in response to new information, expectations and policy responses. But what has been unfolding is not the normal ups and downs around a trend; the scale of the decline in key market measures and the volatility is something we have not seen for a very long time.

There is, to use a metaphor, a constellation of meteorites encircling the global economy. All of them are exerting a gravitational pull towards an economic crisis greater than that of 2008.

There is quite simply no credible policy response, either from governments, or from global central banks, which have shown themselves incapable of dealing with this crisis. The most recent pronouncements from the governor of the ECB fall into this category of too little, too late, and too ill-judged.

The key features of the global macro economy are well established. In China, the transition to lower growth would, in any event, have been disruptive. But this disruption has been magnified by understating the sheer extent of the contraction. And also, by misconceived and very expensive attempts to intervene in the markets to push back against what was already under way.

Un-repayable debt an elephant in the room

In principle, lower oil prices should be good news. Not on this scale, or this rapidly. Even with the increase in recent days, we are talking of a decline of nearly 75% since last year. It is shutting down vulnerable oil exporters. Even Saudi Arabia has had to cut back.

None of the banks, or forecasters, remotely envisaged such a decline — and that in itself is a worry. Few seem to remember the impact of what happened back in the 1970s from an opposite shock when an unprecedented rise in oil prices by Opec inaugurated a collapse in the global economy.

There was a massive transfer of wealth from developed countries to Opec and a painful adjustment, as oil- dependent countries such as Ireland had to borrow ( or ‘recycle’) these same transfers in order to finance ballooning deficits. The consequences were far-reaching.

In Europe, we have yet to admit that what we are looking at now is a consequence, and an extension, of the era of austerity. Many economists — including me — said it was wrong at the time.

The troika of the ECB, IMF, and the European Commission made policy on the hoof and in a way that prioritised financial markets over businesses and families. They got their forecasts wrong and they got their sums wrong — they were even divided among themselves.

Ireland was at the sharp end of this so-called ‘adjustment’. But the perfect metaphor for ‘Schaubelnomics’, this irrational and insensitive approach to adjustment, was in Greece.

Un-repayable debt an elephant in the room

There is a jarring lack of alignment between the West and Russia which has ratcheted up military tensions and expenditure. This reflects, at least in part, a political and strategic failure in the West to understand the likely impact of Nato’s encirclement of Russia.

Emerging economies have been caught up in these failed policies. A massive in-flow of loose money from the developed economies seeking higher returns has now left many more vulnerable than ever. Any of these impulses would shock the global macro economy. But this is enormously leveraged by geo-political instability. The epicentres of this instability are in the Middle East, in the massive destruction in Syria, Iraq, and Lebanon, and the displacement of families and communities.

Part of this instability is rooted in the despotic regimes in some of these countries, but it has been torched by the venal military intervention by the West in Iraq and Libya, which has triggered a humanitarian catastrophe that has paralysed the EU.

The impact is all too evident — from the bodies washing up on the shores of Greece, of all countries, to the nihilistic war on civilisation by IS.

Every generation confronts its own set social, political and ideological challenges. But we haven’t seen anything of this scale, outside of a global conflagration. The global financial markets reflect these tectonic pressures. There has been no credible policy response — not from the IMF, which has scaled back its growth forecasts and said ‘get used to it’, and not from Davos, whose prominence masks the absence of any credible system of global governance.

The response by the Mr Draghi and the ECB is to say that there are ‘no limits’ to how far they are willing to intervene. But there should be limits. The ECB’s mandate is not to save the global economy from political folly.

Un-repayable debt an elephant in the room

There are diminishing returns from printing trillions of euro. The former president of the Bundesbank and now head of UBS, Axel Weber, has challenged Mr Draghi’s analysis and the ECB’s policy.

In any event, a brief look at the ECB’s bloated balance sheet drives home this single reality: Central banks are all out of weapons to deal with a crisis of this magnitude. They, and powerful countries, have failed utterly to deal with the core problem. Un-repayable debt. That is the elephant in the room.

The scale of the ECB’s QE programme, pushing interest rates deep into negative territory, has failed. Anaemic growth and near-zero inflation tell their own story. That’s where we’re at. In any event, the ECB or global central banks cannot, and shouldn’t attempt to, compensate through lax monetary policy for what is missing in terms of credible structural policies and a moral economic alternative to corporate capitalism.

The former chief economist of the BIS and chairman of the OECD’s review committee, William White, recently put it this way: “The situation is worse than it was in 2007. Our macro-economic ammunition to fight downturns is essentially all used up.”

The resultant instability is undercutting democracy and international co-operation. The realisation that the global financial system is hostage to a massive overhang of un-repayable debts and a repressive order in the eurozone and globally constitutes a tipping point. Peoples and countries are caught between the ‘rock’ of corporate capitalism and the ‘hard place’ of secular communism.

Economists have long called for a global economic order based on justice and the capabilities of individual people — one which is sustainable in terms of use of resources, and which is more equal and inclusive than the rogue model that is now in charge and pulling the global economy towards the brink.

Well, you don’t win elections by trying to demonstrate to people that ‘needs’ are more important than ‘wants’. How many political parties are fighting the general election on the platform of the common good?

Pity — it’s a lost opportunity.


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