Christine St Anne: There has been much debate that investors are set for a low growth environment. Today, I’m joined by Extreme Money’s author Satyajit Das to give us his views on whether this phenomenon is actually going to be a reality. Das, welcome.
Satyajit Das: Nice to be here.
St Anne: Das, if we could begin with the U.S., do you think that they are going to be stuck in a very low growth environment?
Das: If you look at the United States, they’ve actually done a little bit better than most people would have thought. I always thought the growth trajectory of zero to two, which is well below peak growth for their more trend growth, is probably possible. They have some advantages. The first is, they were the first hit by the crisis. They actually did something which is very interesting. The Americans have a capacity to leave the past behind which is - they drew a line in the sand, they wrote off a lot of stuff, they recapitalized their banks. They did it quite early and aggressively. So, basically they are a little bit cleaner than say the Europeans, where the Europeans refused to admit reality and didn’t take the hard decisions, the hard write-offs, the hard recapitalization issues, with certainly the banking system.
The second issue is the U.S. people forget it’s quite a closed economy. Trade is not as bigger part of the U.S. economy and so as a result of that, they can sort of muddle along and unlike Europe, they have the advantage that they control their own currency which also happens to be a reserve currency. So what they are trying to do, the strategy seems to be, is to print money and to basically keep the economy going and printing money has a lot of side effects. But one of the effects it has for the United States anyway, is it’s keeping interest rates very, very low and the second issue, which is kind of paradoxical because you would expect printing money to push up interest rates its having the reverse effect.
The second issue is that it’s reducing the quantum of debt that they have to service in two ways: One is that they just pay it out of the printing presses. But on the other side, the devaluation of the U.S. dollar, it helps them. So overall, they are robbing their creditors to basically keep the economy going. The big problem for them is going to be if the rest of the world basically slows down and particularly, the money markets around the world seize up, again as they did in 2008. They can’t be completely immune from that. So they are actually, ironically in a little bit of space than say – for instance, I would say Europe and maybe possibly China.
St Anne: Das, what about Europe? What’s your outlook there?
Das: Well, Europe is kind of a dystopia on a large scale at the moment. But you’ve got to come back a stage and say, look we can go through the entire very convoluted history, but what should they do? What they should do is pretty straightforward. One is the peripheral economies like Greece, Ireland, Portugal, maybe Spain and even Italy, have too much debt and you are going to have restructure some of them down, because there’s no way they can continue to go. I think Spain and Italy might muddle through; the other ones are more dubious.
The second thing they should have done is the resulting losses to the banking system that would result from these write-offs; they had to recapitalize their banking system. The third, they needed to put a fairly big wall around Spain, Italy and ultimately the core which is France, Belgium, Germany and so forth. And at the same time they needed to have a mechanism for growing Europe because ultimately we know, you can’t get out of debt problem just by cutting, it’s got to be by growth.
The problem with all of that is they sort of buried their heads deep in the sand for almost two years and now they’ve come to the realization that they have to do all of this and what they are doing is too little, too late.
The joke is that in Greece, they’ve decided to cut a €100 billion off their debt. Now, of that €100 billion that they are going to cut off, firstly it only reduces their debt by less than 30% and will soon leave them debt to GDP of 120%, which nobody believes is sustainable. So you’re really not dealing with the problem aggressively enough, and then you quarantine Ireland and Portugal and say they’re off-limits.
Secondly, the recapitalization they're talking about of €106 billion, looks very light. It's got to be probably three or four times that. And finally the European Financial Stability Fund, which they put in place, I mean is becoming almost irrelevant because firstly, it hasn't enough money and it may have had enough money for Greece, Ireland and Portugal, but now that you've got Spain and Italy.
I mean Spain and Italy between them have to roll over, something like $1 trillion of debt next year and so under those circumstances, I think it's going to be very difficult for them to be bailed out by the European Financial Stability Fund and they haven't helped themselves by having half baked proposals like basically, oh well let's go and leverage the European Financial Stability Fund or let's go to the Chinese and co-invest. All of those are pretty half baked and what's now happened as a result of all of that is European Financial Stability Fund itself is finding it very, very difficult to raise money.
They had to raise €3 billion to fund the payment to Ireland and they found it pretty difficult to raise it. So they're likely irrelevant, so all the planks of the plan look pretty dodgy to me and there's no plans of how they're going to grow the economy. Their idea to everything is, let's become more austere, let's become more German if you like and basically have less debt and basically cut the budget deficit down to manageable proportions, but they are not going to grow, there're just going to shrink to oblivion.
St Anne: So Das, are investors looking at lost decades of growth like what happened in Japan?
Das: Well, everybody thinks we're turning Japanese and I think there's a element of truth in that. I mean look, when all this problem occurred, the first thing is in 2008 everybody said there was a crisis and it was, but also it was a massive warning light going blink, blink, blink, think about what you are doing.
Instead of which we sort of decided that we had a very glib answer, which is to flood the system with money, government assume all the debt and hey presto, everything would be magic or we would raise the magic wand.
So we really wasted three years not dealing with the problems and during that period we wasted a lot of money and what we've done is basically contaminated the government balance sheets. The governments aren't in a position to respond to the same degree. And what that now means is our policy options are narrowing all the time. So, I think it's probably more likely than not at what we're going to end up with is a period of long slow growth, which would be sort of Japanese experience of a couple of last decades of gradually working through these problems.
Now, in many ways investors might turn around and say that's bad. The answer is that's neither bad nor good, you're just going to have low growth. The problem with low growth is, we have a system, which is basically engineered for high growth and you are going to have low growth. So you're going to have to just adjust to that. But the other interesting thing about that entire process is that Japan had certain advantages that the world doesn't actually enjoy.
One, Japan had this massive savings pool, and that massive savings pool allowed them to gradually, sort of, ride this out.
Now, where is the savings going to come from in the world? That's the next question that you've got to answer if you say we’re turning Japanese. The second issue is, Japan has a large export industry and the rest of the world during the Japanese lost decades was doing quite okay for the most part. So, their export industries did well again cushioning some of the problems, and the last issue is Japan is a deeply conservative, homogeneous society and culturally they are very stoic, and they actually accepted a lot of the loss of living standards and a lot of the hardships and I think the problem is, the rest of the world may not cope culturally with this period of low growth and the lower living standards and the social dislocation, but look there are two other options.
The one is that somebody somewhere presses the wrong red button in terms of policies, in which case we could get a disastrous collapse, which I hope doesn't happen. The last issue is, well a space ship could arrive from Mars with little Martians who might hand out little trillions of dollars to us earthlings and everything could be fine. So it's not all bad news.
St Anne: So are these Martians China by any chance?
Das: I think it's unlikely to be China. I think it is Martian life I'm looking for. Look, China could help. These countries with large reserves could help, but they have their own internal issues. To some extent, there is a fundamental problem here.
The way the developed economies, like the United States, the U.K., Europe are going about dealing with some of their internal problems, is hugely disadvantaged to people like China. I'll give you a simple example of that. The devaluing of the currency, which forces up the Renminbi, and then basically what that happens is all their foreign exchange reserves which is their savings basically gets reduced in value.
The second thing is, because most commodities are traded in U.S. dollars, the price of that goes up, they actually import an inflation, which causes domestic pressures and huge social discontent in places like China, where food prices and energy prices are going up very sharply and same in India and other places.
The last issue is when they ask for help from China, they actually ask for it in a, sort of peculiar way. Christine Lagarde goes to Beijing to basically ask China to contribute to the efforts to rescue Europe, and basically then lectures the Chinese officials and the Chinese Bureau about how they should behave in terms of currencies and so forth.
I mean I think I would have gone there and said, you can help Taiwan, you can have Tibet, you can have the Dalai Lama, you can have probably the Eiffel Tower and the Parthenon, can we have the money please, instead sort of lecturing the people who hold the keys to the treasury.
So, I think there is a cultural issue and my fear is that the emerging nations may decide. It wouldn't be in the long-term benefit of them or of the global economy, is to circle the wagons and say, well, this is all too hard, the developed economies have more problems than we do, maybe we just focus internally and try to save ourselves. People forget that a country like China is not terribly engaged with the rest of the world. Their engagement with the rest of world, certainly economically, is only a recent phenomenon.
If you look at 4,000 years of history, the Chinese are not noted for basically being engaged with the rest of the world. Any country whose symbol is the Great Wall is hardly suggestive of somebody who believes in engagement. So, I think there is some huge geo-political tensions and unfortunately we all need to pull together to solve this problem. But at the moment, I think all the horses are pulling in opposite directions, which complicates dealing with the problem quite considerably.
St Anne: Das, so do you think that it's really the culture of risk rather than government's inability to manage budgets that has lead to this crisis?
Das: You have to down to the root cause. The root cause was we're hooked on growth. The growth that occurred in effectively the last 30 or 40 years, and maybe beyond that, was driven by three factors. One, financialization, which is really the growth of debt and the taking of risk. The second is under-pricing certain resources like, obviously, climate damage and climate change and also under-pricing certain things like nonrenewable resources.
Now the problem is, we relied on those three things to drive growth and that period is now coming to an natural end and rolled up in that, is the fact that we thought we understood the financial system in terms of its risk and we thought we could manage the system far better than we can actually do.
I always say that these days there is a very complex crisis. At one level it's economic. It's at a more fundamental level about other things: our belief in growth, our belief in our ability to manage the economy as well as we think we can, and also psychologically - people's expectations of higher living standards and how they want to live. I think it's more a crisis of that. If we could address those, perhaps the economic crisis would be a lot easier to address.
St Anne: Das, thanks so much for your time today.
Das: It's my pleasure.