The world is back in the brutal grip of financial sorcerers
Small wonder that the total debt of the seven major developed countries is estimated at around $100 trillion in the third quarter last year
The alarming levels of public and private debt are back at the global centre stage. It was only 10 years ago, a debt-driven growth model caused the worst financial crisis since the great depression in 1930s. Despite grand claims of the end of “boom and bust” by then British chancellor Gordon Brown, and heralding the “Great Moderation” by Ben Bernanke, the former US Federal Reserve chairman, the modern day financial sorcerers who control the Wall Street brought untold misery on almost every country. Such is the scale of wreckage that it is “still with us almost a decade later,” says Yanis Varoufakis, a former Greek finance minister, in his book Adults in the Room- My Battle with Europe’s Deep Establishment.
Last week, the International Monetary Fund (IMF) rang alarm bells at its spring meetings on the ticking debt-time bomb. “The world’s $164 trillion debt pile is bigger than at the height of the financial crisis a decade ago,” the IMF has warned, according to a news report in Financial Times on 18 April. It urged private and public sectors to cut debt levels for reinvigorating the economic growth. “Fiscal stimulus to support demand is no longer the priority,” the IMF said.
Finance ministers and central bank governors from around the world also expressed concerns over the escalating number of trade disputes launched by the US. But, the US treasury secretary Steven Mnuchin blamed countries running persistent trade surpluses for the growing trade tensions.
Coming back to the dangerous debt levels, it is well established and also acknowledged by the IMF that lax fiscal policies, particularly by Washington, are at the heart of the problem. Six major industrialized countries—the US, Japan, France, Britain, Italy, and Canada—have increased their gross liabilities as percent of gross domestic product (GDP) to 105%, 221%, 124%, 121%, 157% and 97%, respectively.
Ahead of the IMF meeting, two former senior officials of the Bank for International Settlements (BIS)—Herve Hannoun, a former deputy general manager, and Peter Dittus, former secretary-general—issued a scary report called Revolution Required - the Ticking Time Bombs of the G7 Model.
Presenting their findings at a meeting convened by the Geneva-based South Centre, which was set up by former Indian prime minister Manmohan Singh, the two former BIS officials have pronounced unambiguously that “the current economic model built on unsustainable growth of debt, asset prices inflation, arms race, and unsustainable use of carbon will come to an end.”
Since 1971, when President Richard Nixon unilaterally ended the direct international convertibility of the American dollar to gold, the US continued to enjoy the “exorbitant privilege” (of printing its currency and paying other nations for goods and services bought from them). That it has become the epicentre for the unsustainable monetary policies without any concern for its ballooning twin deficits is well established.
The US, in turn, exported all its failures to curb the “twin deficits” (fiscal and current account deficits) to other G7 countries, which followed the US model, except Germany. “The US administration multiplies new expenditure and tax cuts by trillion dollars, with no funding other than more debt” which includes $1.5 trillion tax bonanza for the big corporates, $1.5 trillion infrastructure plan, colossal increase in the Pentagon budget by more than $700 billion. Unfortunately, other G7 countries kept mum about this dangerous “opening of the flood gates.”
But, the party goes on despite “the reckless behaviour” of the US whose fiscal deficit is projected around $1 trillion in 2019. Of course, this would not be possible without the permissive monetary policy conducted by the US Federal Reserve (the American central bank) since 2009. “The silence or complacency of the Big Three US-based rating agencies (Standard and Poor, Moody’s, and Fitch group), with the blessing of the International Monetary Fund,” exposes the hypocrisy of the watchdogs.
Indeed, the G7 central banks “have become the facilitators of unfettered debt accumulation” at “near zero or negative nominal interest rates.” Such low interest rates remain the price of leverage in an economy with the main beneficiaries being “non-bank corporations” who buy back their own shares, thereby increasing “leverage and deteriorating deliberately their gearing ratios to please their shareholders.”
Small wonder that the total debt of the seven major developed countries is estimated at around $100 trillion in the third quarter last year. Of the total world debt, the US, Britain, Canada, Japan, and the eurozone account for 64%. The extreme fundamentalist monetary policies followed by the seven developed countries since 2012 have undermined “the foundations of the market economy.”
The eminent former governor of the Reserve Bank of India Yaga Venugopal Reddy who navigated India out of the 2008 financial crisis with aplomb has largely concurred with the findings of Hannoun and Dittus. Reddy called for rebalancing on several fronts: “rebalancing has to be between national and global economy, state and market, finance and real.” At a time when the G7 monetary policy is captured by financial markets and regulatory policies are framed by large banks and financial industry, the world is truly in the brutal grip of financial sorcerers. But can they control “the powers of the nether world” this time around?
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