[OPE] Roubini and the problems of our times

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> From: adsl675281@telfort.nl
> Subject: Roubini and the problems of our times
> Date: Tue, 8 Jun 2010 13:32:34 +0200
>
> Mr Roubini has an interesting article in the FT ("Solutions for a crisis in
> its sovereign stage", byy Nouriel Roubini and Arnab Das, May 31 2010).
>
> His story is that:
>
> "Starting in the 1970s, financial liberalisation and innovation eased credit
> constraints on the public and private sectors. Households in advanced
> economies - where real income growth was anaemic - could use debt to spend
> beyond their means. The process was fed by ever laxer regulation,
> increasingly frequent and expensive government and International Monetary
> Fund bail-outs in response to increasingly frequent and expensive crises,
> and easy monetary policy from the 1990s. Political support for this
> democratisation of credit and home-ownership compounded the trend after
> 2000.
> Paradigm shifts were invoked to justify debt-fuelled global growth: the
> transition from cold war to Washington Consensus; the re-integration of
> emerging markets into the global economy; the "Goldilocks" combination of
> high growth and low inflation; a much-ballyhooed convergence ahead of
> monetary union across Europe; and rapid financial innovation. The result was
> a consumption binge in deficit countries and an export surge in surplus
> countries, with vendor financing courtesy of the latter."
> http://www.ft.com/cms/s/0/8eda2c3e-6cde-11df-91c8-00144feab49a.html
>
> But the last sentence is precisely what isn't true - all OECD countries (the
> developed countries) shared in the "consumption binge", and the "surplus
> countries" in terms of the balance of foreign trade (principally, China,
> Germany, Japan, the Gulf countries, Netherlands, Scandinavia) ran up very
> large debts anyway. But the consumption binge was very unequally distributed
> to the extent that the disparities in real incomes of the population
> increased strongly; in many cases, average real wages stayed virtually
> constant and whatever income gains there were, were due almost exclusively
> to capital gains on property and upward labour mobility.
>
> In the bourgeois globalization theory nowadays, disequilibrium occurred in
> the real economy, because the ratio between domestic investment and
> consumption expenditure was disproportional to the ratio between imports and
> exports. In the classical bourgeois model, income from producing stuff is
> either spent on consumption, or it is saved, and if it is saved, it is
> invested. There is therefore a zero-sum trade-off between consumption and
> investment. If you consume more, you can invest less, and vice versa. This
> model can be extended to take into account foreign trade, such that if you
> import more than you export (trade deficit), you can consume and invest less
> domesticallly, whereas if you export more and import less, you can consume
> and invest more domestically (trade surplus).
>
> The bourgeois commentators then bewail the fact that deficit countries
> consumed too much, and surplus countries did not consume enough; the
> differential is bridged by escalating debts. This violates the morality of
> frugality, thrift and prudence. It follows that to curb the debt, some
> countries have to consume less and some countries have to consume more, but
> to the extent that all of them in reality face escalating debts, all should
> consume less. Yet if all consume less, business activity reduces across the
> board for lack of sales, and debts are likely to increase even more in
> consequence.
>
> The problems with the model are (among other things) just that:
> 1) there is no evidence of a zero-sum trade-off between consumption and
> investment beyond a formal accounting identity contrived for selected
> transactions; investment funds can equally be hoarded or diverted to
> non-productive uses, armaments, luxuries and the like. (World military
> expenditure reached $1,531 billion last year, a 5.9% rise in real terms from
> 2008, according to SIPRI).
> 2) there is a burgeoning international sector of trade in already existing
> physical and financial capital assets, quite apart from current production.
> 3) it is meaningless to focus simply on the balance of foreign trade in
> goods and services, without considering the inflow and outflow of money
> capital (the foreign trade in capital).
> 4) as soon as the trade in debt itself becomes a skyrocketing business, the
> propensities to save, invest and consume no longer stand in any necessary
> proportion.
>
> Thus, the principles of macroeconomic textbooks are actually completely out
> of step with the reality of what really happens in the world economy.
>
> The wonderful thing about the debt business - the biggest business in town -
> is that you can make money from assets which you do not own, and make far
> more money than you could from the assets that you do own, and on top of
> that it enables you often to avoid paying tax on that activity. With a
> minimum collateral, you can borrow funds and invest them elsewhere at a
> higher return. There's only one problem, and that is if the real economy
> below the arbitrage deals of high finance crumbles, since the basis of the
> whole thing is still a continuous stream of new net wealth. There are at
> least two good reasons to think why it will crumble (and why it has to an
> important extent already): firstly, inexorably the increase in general
> indebtedness diverts more and more resources to debt repayment in the form
> of interest and rents (an impost on the sphere of production); secondly, the
> risk-return ratio becomes unfavourable for any larger, longer-term
> investments in the real economy. In a real sense, beyond a certain point the
> booming debt business destroys the goose that lays the golden egg, by
> undermining the position of the very people whose work can pay off the debt
> (the devaluation of labour). But once the "fleecing" has occurred, there is
> little left to fleece... then it becomes more like a snake eating its own
> tail.
>
> Jurriaan
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Received on Tue Jun 8 08:13:24 2010