8.6 Economic Problems Facing the world today
Of course, it would be
misleading to understand all economic problems in the world as simply symptoms
of a limits to growth crisis. There are other processes going on too that
contextualise the situation in which engineers are working. Two other processes
in particular are having dramatic consequences for economic activity:
financialisation and changing competitive imbalances between countries.
8.6.1
Financialisation
This is the growth and
influence of the finance, real estate and insurance sector in many countries
has transformed what were service activities into being effectively the dominant
sectors in economies – with considerable influence in political systems.
Globally the number of transactions involved in trading financial and other
assets, transactions in foreign currency exchange, in borrowing and lending, as
well as the transactions which are essentially bets about the forward prices of
currencies, interest rates and financial assets are all, taken together, much
greater than the number of transactions involved in the production of goods and
services in the so called “real economy”.
As a general rule the
finance sector attempts to put all of the risk of borrowing onto the borrower.
Other forms of capital provision approaches are possible – for example capital
providers and capital users can share profits and losses. However, most Western
debt finance involves requiring borrowers to forfeit collateral, for example
their house. Thus modern financial systems tend to lend very little to what are
seen as risky businesses ventures – instead a large part of lending is for land
and buildings and indeed most bank lending is collateralised against the
housing and property markets.
Another part of finance
sector lending is to governments. If states cannot pay their lenders then the
practice enforced by economic orthodoxy is now to privatise their assets – as
in the current Greek crisis. Of course, in theory countries that issue their
own currencies can always get their central banks to print more to pay their
debts and mainstream economists are typically disapproving about this.
“Monetizing state debts” risks creating too much money chasing too few goods –
in other words it is said to risk inflation and a fall in the value of money to
the detriment of savers, typically pensioners. Thus the Treaty of Maastricht
bans central banks in the European Union from directly providing money for
state bonds. And of course in the eurozone member states cannot print money as
they do not issue their own currencies.
This is somewhat ironic
because when the money supplies of countries have been created and controlled
by the private banking sector in a completely unregulated way then money
creation oscillates between the over creation of money which inflates asset
prices (particularly land and house prices) and the under creation of money
which leads to recessionary conditions. This should not surprise. Banks lend
when they and borrowers are most confident, which is during periods of
expansion. They thus create credit money and purchasing power when it is not
needed and thus tends to over hype the booms. Land prices and rents in
particular are inflated because the supply of land and locations is fixed. So
wealth concentrates in property and credit is created to cash in on rising
property values, which pushes rents and prices up even more. This is a
speculative bubble which ends typically because servicing the debt accumulated
when buying at the higher and higher prices becomes unsustainable.
Subsequently, in the
recession, sentiment is pessimistic so banks are cautious about lending and
borrowers cautious about borrowing. So banks create debt money when it is not
needed and do not create it when it is needed.
None of us have a divine
gift of being able to foresee the future which remains inherently uncertain.
This is true also for players in the financial markets who, when they commit
money, are making judgements about what they think will happen motivated by the
prospect of gain and the fear of loss. So how do they make these judgements?
The answer is that, to a large extent, they go along with what other traders
are thinking. Markets are powerfully driven by crowd...or herd...psychology. In
a speculative boom optimism prevails. In a recession pessimism is infectious
Indeed a largely ignored
economist called Hyman Minsky described bubbles as “the euphoric economy”. In
such periods of over confidence ethical restraints also tend to loosen. A
professor of economics and law, William K Black, estimated that there were at
least one half a million crimes committed in the period of the sub prime bubble
in the USA. Reckless lending to people with no income and no assets brought the
brokers bonuses and then the risks of these unsound loans were parcelled up
into collateralised debt obligations and passed on to unsuspecting investors
like pension funds and banks on the other side of the world.
As Black observes,
neoclassical economists like to point out that when economic actors pursue
their private interests through markets that a self organising process occurs
that leads to the provision of the goods and services that people want. But the
same self organising process, motivated by self interest, will also self
organise the provision of ‘bads’ too - for example, a market for crooked
accountants to look the other way during a bonanza of predatory lending.
Another important observation
is that financial markets (and the politicians looking after their interests)
are incredibly short term in their thinking. It is these markets, and their
players that have most influence over governments and preoccupation with short
term financial issues tends to crowd out consideration of the long term issues
that is needed to take decisions about sustainability.
8.6.2
Competitive imbalances between countries
Debt and financial
problems are compounded by changing power relationships between nations and
parts of the world. Borrowing is a mechanism for dealing with imbalances – if
an individual, company, state or nation is spending and consuming more than its
income this is possible by running down savings and/or by getting into debt –
but only up to a point beyond which crises loom. As competitive imbalances
between countries grow, a mechanism for rebalancing exists in changing the
exchange rate between their currencies. If the dollar falls against the Chinese
yuan then American people have to pay out more dollars to buy yuan and pay out
more dollars to buy Chinese goods. At the same time American exports to China
would become cheaper in China. It is therefore controversial that the Chinese
peg the yuan to prevent this at a rate that makes Chinese imports into America
cheap.
In the eurozone, member
countries have given up national currencies and therefore lost a mechanism
adjusting for competitive imbalances. The southern eurozone countries are
sending their purchasing power abroad to buy German goods more than the Germans
and northern Europeans are buying in the southern countries and Ireland. This
produces shortages of purchasing power – and then unemployment not to mention
causing shortages of state revenues and increased state support expenditures in
the countries of the south. To a large extent the budgetary crisis in the
southern countries are an indirect result of the inability of southern
countries and Ireland to compete with Germany. The budget and state debt crises
of these countries cannot be solved by cuts and tax increases as this only
drives these economies deeper into recession causing state revenues to fall
even more in a vicious circle. The other aspect of the crisis has been a
property bubble – cheap finance from eurozone banks created speculation in the
building and property that burst and leaving southern and Irish governments to
bail out the banks.