Friday, October 8, 2010
In this morning session, and my first at the GES, were the following speakers:
Willem Buiter, Chief Economist, Citi Investment Research & Analysis
Peter Jungen, Chairman, Peter Jungen Holding;
Edmund Phelps, Nobel Laureate; Professor of Political Economy, Columbia University;
Martín Redrado, Professor of International Economics, School of Business - Pontifical Catholic University of Argentina;
HongCai Xu, Research Fellow and Professor of Finance, China Centre for International Economic Exchanges
Ibrahim Turhan, Deputy Governor, Central Bank of Turkey;
The session was moderated by Niels C. Thygesen, Professor of International Economics (Emeritus), University of Copenhagen.
Since this is an on-the-record session, I can report what was being said by whom.
Unsurprisingly, Mr. Xu noted that the dollar had led to global economic imbalances. I will not offer a treatise on the validity of this claim, other than noting that this seems like confusing the symptoms like the disease itself, although I would argue that there are inherent problems with having a single global currency and that single global currency being a country’s national currency. If you have the time, I would highly recommend Financial Times Chief Economist MartinWolf’s latest book, Fixing Global Finance, for an in-depth look at how the global imbalances have formed.
Since Mr. Xu sees the dollar as the main culprit of the world’s woes, his first proposal is for the dependence on the dollar to change. Fine, but that is easier said than done. This was thoroughly discussed when Chinese officials first brought this issue up a couple of years ago, but just to recap: At the time, markets were worried such a policy change would lead China to dismantle its holdings of Treasuries, leading to a bloodbath in bond markets. In other words, although Clinton adviser James Carville wanted to come back to life as the bond market and scare everyone, it was the bond markets that were scared then. But that is exactly the point: China has much more to lose for a sudden dismantling of the dollar-dependent system than anyone else.
Anyway, Mr Xu had some sound and honest recommendations for his country as well. He said that for the global system to rebalance, China should lead from export to domestic demand-led growth and ease capital restrictions. These are not novel recommendations, economists have made these points a zillion times. But it was nevertheless hope-spurring to hear a Chinese economist make the points, even though Mr. Xu is not a policy-maker.
Mr. Buiter’s speech sounded very much like a research house’s quarterly global economics outlook report, and that should not be a shocker, as he is the chief economist of Citi. He mainly concentrated on major risks to growth and recovery in the coming decade.
Mr. Buiter’s expectations on the world economy have worsened, but not because he sees new data that have convinced him to a turn for the worse. He is rather arguing that the ability to respond to shocks has decreased. To expand on that a bit, with interest rates already at record-lows and developed countries’ fiscal problems not going away, there is not much room for either monetary or fiscal policy. However, the key word here is “developed”; many emerging markets have ample leeway for policy action.
And that’s what Mr. Buiter points at as well. He warns the audience not to confuse the rest of the world with the U.S. economy, as many did over the summer. He specifically notes that there is the possibility of diverging performances, with a stronger outturn in emerging markets.
Mr. Buiter then squeezed some academics into his speech by quoting the recent research of Harvard economist Ken Rogoff and University of Maryland’s Carmen Reinhart. The duo, often referred to as R2 (R2-D2, where are you?) in the academia have shown that the decade following a crisis is usually one of slow growth, and Mr. Buiter sees no reason to believe it will be different this time around, to quote the title of R2’s recent book, which brought their research to the masses- and is highly recommended if you have the time.
Mr. Buiter’s main reasoning on why there will be a slow recovery is that there is still quite a bit of leveraging. The only way out, according to him, would be to equitize this debt. Otherwise, we are likely to see a decade of slow growth, he notes.
The fiscal situation further complicates the picture, as fiscal tightening is likely to become the norm in industrial countries, according to Mr. Buiter. However, he is quick to note that he is not as pessimistic as Nobel Prize winner economist and New York Times columnist Paul Krugman, who thinks we are on the wrong side of the fiscal Laffer curve. But he is pessimistic because we still need structural changes in China and the US. In particular, the U.S. needs low credit growth and shift to tradables, China has to move the other way.
As for the Euro Area, Mr. Buiter argues that nothing has been resolved there yet in terms of banking and sovereign debt problems. He is harshly noting that some countries are overselling themselves. He is especially critical of the EU banking sector, noting that the sector is undercapitalized and the new stress tests do not make sense.
Mr. Buiter’s pessimism stems from the argument that there is not much monetary policy can do to stimulate the global economy (or even many national economies). Hr argues that quantitative easing is an insurance against catastrophe, but no panacea for a chronic demand deficiency. As for currency depreciation, Mr. Buiter is quick to note that it is a zero-sum game globally. These comments are worrying, as the world could be at the brink of a currency war.
As for emerging markets, while he is more optimistic, Mr. Buiter notes that some EM have overheating issues and have stayed behind the curve in exit strategies, so there is the danger of asset bubbles forming in EM.
While I am not in a position to validate this claim on a country-by-country basis, Turkey would have fit this description perfectly a couple of weeks before Mr. Buiter's speech. Since mid-September, however, the Central Bank of Turkey, or CBT, has been implementing a quick and hard-boned exit strategy that I have summarized in my weekly Hurriyet Daily News & Economic Review column as well as my blog.
Finally, Mr. Buiter sees the rise of protectionist policies and trade warfare as a major threat as well.
Nobel Prize winner Ed Phelps had a different approach in his speech, choosing to concentrate on long-run trends rather than an up-to-date outlook of the world economy.
He sees the decrease in propensity to innovate, less tendency to venture into the unknown and shift from work to leisure as main dangers to the world economy. He was extremely critical of the institutional framework of Europe, boldly stating that “if you get rich, they take it away from you in Euroe”. In a similar vein, he noted that he was shocked to see an argument for more leisure in a recent report from the EU. According to him, we need better jobs that are intellectually stimulating.
Peter Jungen, a venture capitalist, carried on with this theme as well, noting the difference between invention and innovation- the latter is the actual commercialization of the invention. He emphasized the lack of venture capital in Europe, concluding with the warning that fearful societies are never successful. He also told one of the best one-sentence descriptions of economic systems I have ever heard: "Capitalism creates crises, socialism accumulates them":)....
Finally, Ibrahim Turan of the Central Bank of Turkey outlined the major threats to world economy. He concentrated on both macro risks such as lack demand in the developed world and structural problems like protectionism and ageing population & the saturation of consumption this ageing population has caused.
As for emerging markets, Mr. Turan expects interest rate differentials to continue. This will mean that there will be pressure on currencies to appreciate because of flows. Finally, he noted that he saw the rise in commodity prices as major risk as well.