Grasshoppers, Ants and Locusts: the future of the world ... · – Grasshoppers spend: • Deficit countries; and • Households in these countries. – Locusts intermediate. –

1

Ralph Miliband Series on the Restructuring of World Power

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

Martin WolfAssociate editor and chief economics commentator, Financial Times

Professor David HeldChair, LSE

Ants, grasshoppers and locusts: prospects for the world economyMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times

Ralph Miliband Lecture

16th March 2011

London School of Economics

3

Ants, grasshoppers and locusts

4

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

5

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.

6

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 housingmarkets) in financial regulation.

7

2. What lay behind the crisis? Imbalances

THE RISE OF THE IMBALANCESGLOBAL CURRENT ACCOUNT IMBALANCES - PAST

AND PROSPECT(share of world GDP)

-3

-2

-1

0

1

2

3

4

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

US OIL DEU+JPN OCADCCHN+EMA ROW Discrepancy

Source: IMF, WEO October 2010

8


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

$10,000,000Ja

n-9

9

Jul-9

9

Jan

-00

Jul-0

0

Jan

-01

Jul-0

1

Jan

-02

Jul-0

2

Jan

-03

Jul-0

3

Jan

-04

Jul-0

4

Jan

-05

Jul-0

5

Jan

-06

Jul-0

6

Jan

-07

Jul-0

7

Jan

-08

Jul-0

8

Jan

-09

Jul-0

9

Jan

-10

Jul-1

0

China Japan Other Asia Other developing Other industrial

9


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%

199

0-I

199

0-IV

199

1-III

199

2-II

199

3-I

199

3-IV

199

4-III

199

5-II

199

6-I

199

6-IV

199

7-III

199

8-II

199

9-I

199

9-IV

200

0-III

200

1-II

200

2-I

200

2-IV

200

3-III

200

4-II

200

5-I

200

5-IV

200

6-III

200

7-II

200

8-I

2008

-IV

2009

-III

2010

-II

Government Financial Balance Household Financial BalanceBusiness Financial Balance Foreign Financial Balance

HOW THE US IMBALANCES EMERGED

10


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

11

2. What lay behind the crisis? Leverage


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

12

2. What caused the crisis? Leverage


PRIVATE SECTOR DEBT(relative to GDP)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

III

Households Non-financial Business Financial Sectors

13

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.

14


• 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 phaseof 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,…..

15


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

Q12008

Q22008

Q32008

Q42008

Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

Q32010

Q42010

France Germany Italy Japan UK US

16


A WEAK RECOVERY IN 2011?

SUCCESSIVE CONSENSUS FORECASTS FOR 2011

0

0.5

1

1.5

2

2.5

3

3.5

US UK

Japa

n

Euroz

one

German

y

Franc

e

Italy

Spain

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

17


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%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2010

2

Households Non-financial Business Domestic Financial Sectors Total Domestic Private

THE US LEVERAGE CYCLE

18


EXPLOSION OF FISCAL DEFICITS(as per cent of GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

4

Canada France Germany Italy Japan United Kingdom United States

2006 2007 2008 2009 2010 2011

FISCAL FIREPOWER USED

19


NET PUBLIC SECTOR DEBT OVER GDP

0

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

20


• 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.

21


GDP IN THE CRISIS

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

145.0

2005

120

05 2

2005

320

05 4

2006

120

06 2

2006

320

06 4

2007

120

07 2

2007

320

07 4

2008

120

08 2

2008

320

08 4

2009

120

09 2

2009

320

09 4

2010

120

10 2

Emerging Economies Advanced Economies

Source: Federal Reserve

CRISIS – WHAT CRISIS?

22


MORE STRONG GROWTH IN 2011?SUCCESSIVE CONSENSUS FORECASTS

FOR 2011

0.01.02.03.04.05.06.07.08.09.0

10.0

China India AsiaPacific

(NBExcluding

Japan)

Russia EasternEurope

Brazil LatinAmerica

World

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

23


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

24


COMPOSITION OF CHINA'S FINAL DEMAND

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Private consumption Government consumption GFCF Net exports

HOW INVESTMENT SOARED

25


• 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

26


HOW PRIVATE DEFICITS COLLAPSED

CHANGE IN SECTORAL BALANCES (per cent of GDP)

-15

-10

-5

0

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

27


HOW PRIVATE DEFICITS COLLAPSED

FINANCIAL BALANCES IN 2010

-15

-10

-5

0

5

10

15

Germany Japan France Italy UK US

2010 General Government 2010 Net Capital Inflow 2010 Private

28


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

Sta

tes

Italy

Brazil

United

Kingd

omFra

nce

Canad

aIn

diaTur

key

Austra

liaSou

th A

frica

Mex

ico EUArg

entin

aIn

dones

iaKor

eaSau

di Ara

biaRus

siaJa

panGer

many

China

Source: IMF. WEO database October 2010

THE CHALLENGE OF ADJUSTMENT

29


BALANCE OF PAYMENTS OF EMERGING ECONOMIES ($bn)

-800

-600

-400

-200

0

200

400

600

800

1000

2008 2009 2010f 2011f

Current Account Balance Private Inflows

Official Inflows Equity Investment abroad by residents

Resident Lending Reserves (-=increase)

Source: IIF

THE GLIMMERINGS OF ADJUSTMENT

30


• 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?

31


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.

32


ROAD TO THE FISCAL DEFICITS

GENERAL GOVERNMENT BALANCE(as per cent of GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

4

2005 2006 2007 2008 2009 2010 2011

Portugal Ireland Spain Greece

Source: IMF, WEO, April 2010

33


ROAD TO THE FISCAL DEFICITSNET 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

34


NUMBER OF BREACHES OF THE 3 PER CENT DEFICIT RULE

0 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

35 6. Why is the eurozone

the world in m

iniature?

TH

E G

OO

D, T

HE

BA

D A

ND

TH

E U

GLY

SP

RE

AD

S O

VE

R B

UN

DS

-200 0

200

400

600

800

1000

120001/01/1999

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

ItalyIre

landG

reece

Spain

36


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

37

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

38

Ralph Miliband Series on the Restructuring of World Power

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

Martin WolfAssociate editor and chief economics commentator, Financial Times

Professor David HeldChair, LSE

Documents

Grasshoppers, Ants and Locusts: the future of the world ... · – Grasshoppers spend: • Deficit countries; and • Households in these countries. – Locusts intermediate. –