CHAPTER 5
Renewed Centrifugal Forces
Ten years after the financial crisis, we are still facing headwinds. Our enthusiasm for 2015 turned to dismay for 2016 and 2017. After the great hope sparked by people coming together around shared and ambitious objectives, centrifugal forces are reasserting themselves. Tensions of all sorts, more or less contained until now, have come to the surface. Nothing seems to be spared. Economic, geopolitical, social, and cultural uncertainties abound, including anemic economic growth, ongoing wars, the European crisis; terrorism, populism, climate change, digital hacking, and the refugee crisis bring fears of the unknown and uncertainty. Our goal of regaining control of money to serve the common good is indeed facing some headwinds. But these headwinds can be seen as a call for action and can present cases where finances properly controlled can make a difference.
The Economic Hangover: End of a Cycle with No Precedent
The years since 2000 began with a positive development. China integrated into international commerce with its entry in 2001 into the World Trade Organization (WTO) and developed a model based on low-price production and exports, public expenses, and an artificially low exchange rate for the yuan.1 It was a win-win for everyone: European and American consumers have access to cheaper products, while suppliers of commodities and value-added goods and services can sell their products at high prices on the Chinese market. During this time, China has made a major economic leap, becoming the second most powerful global power and forming one of the largest foreign currency reserves on the planet.2 We forget that it was China that played a crucial role in saving the world from bankruptcy in 2008–2009 by restarting the global economy. As the Chinese said behind closed doors at that time, “Saving private capitalism is a priority!”
We knew that China’s dynamic, based on a model that originated during a period of profound imbalances, could not last forever. We are actually coming out of a historic convergence of three movements without real precedent: China catching up with the world economically, the “commodities super cycle,” and an unconventional monetary policy in the United States. All three movements will obviously continue to play a role going forward, but they are unlikely to be as highly charged and have the same high level of convergence.
China Slowdown
The first trend, China’s slowdown from double-digit to single-digit growth, is nothing more than a return to normality. While it is welcome, this normalization was nonetheless frightening for those who had bet on the potential of emerging markets. These markets, led by China, managed all the same to contribute 60 percent of worldwide economic growth over the past 10 years and avoided the recession in 2009! The collapse of the Shanghai and Shenzhen stock markets in the summer of 2015, which until then had been powered mostly by flows out of individual Chinese savings accounts, was a confirmation of this return to normality. Above all, the slowdown in Chinese growth revealed the new impact of this economy globally. The poorly communicated decision to depreciate the yuan in the summer of 2015 contributed to market turbulence by focusing attention on that for several months and kindling doubts about the quality of China’s statistical apparatus. It also illustrated financial players’ doubts: one could simplistically say that everything that the Chinese leadership did previously was considered with benevolence and admiration, and suddenly everything they did was questionable and mistrusted, especially because China’s ongoing transformation to an economy based on a more value-added production model, and more focused on domestic consumption and services, looked to be off to a slow and uncertain start. As Mohamed El-Erian, chief economic adviser at Allianz and chairman of former president Barack Obama’s Global Development Council, stated, “The regular upheavals this transition will cause will give the rest of the planet cold sweats.”3 By its growth normalizing, China had a full impact on a globalization, which remains imperfectly modeled. When the Asian financial crisis flared up in 1997, it had little impact on growth in Europe and the United States. In 2015 we had to adjust the model: the Asian economy was no longer 10 percent of global GDP but 25 percent, and the tremors could be felt around the world.
The End of the Commodities Super Cycle
The second trend is the end of the “commodities super cycle.” With uninterrupted growth of more than 10 percent annually over 30 years, China became the leading consumer and principal importer of most commodities (agricultural, mineral, and petrochemical): in 2015 it accounted for over 50 percent of global aluminum consumption, 50 percent of carbon and nickel consumption, 30 percent of cotton and rice consumption, and 12 percent of oil consumption.4 The slowing of Chinese economic activity, confirmed by the collapse of the stock market and paired with the devaluation of the yuan, against a background of slow economic growth elsewhere, led in recent years to a fall in commodities prices, which accelerated in 2015. Commodities lost 40 to 60 percent of their value in one year, despite the beginnings of a rebound in 2016 that is expected to continue for few years, although not to come back to the previous excessive levels. These losses were a shock for the global economy—a positive shock for importers like the European Union or India but a negative shock for exporters, particularly those in emerging countries.
Unconventional Monetary Policies: About to End?
The third trend in 2015–2017 may be the end of the monetary policy implemented by the US Federal Reserve, imitated by other major central banks, of low interest rates and easy credit (this point will be discussed later in more detail).5 We suspected that this extraordinary policy could not last long. But we were still not prepared to have to renounce it, and certainly not to see all of these phenomena interrupted at the same time! In one blow, the markets had lost all of their bearings. The drug had been good, and stopping it was dizzying.
The Uncharted Waters of Finance: A Transfusion and the Need to Stop It, but How and When?
The markets were all the more disoriented because global finance is still in recovery mode and for several years has been in “uncharted waters,” an expression often heard in international meetings, much to my surprise. One of the most insidious consequences of the 2007– 2008 crisis is that in order to revive anemic worldwide growth, the financial system has been put completely into the hands of the central banks, which have never lived up well to their names than during the past decade. What will the Fed say? The ECB? The Bank of Japan? The Bank of England? The whole world now waits on these financial institutions commissioned by governments—but legally independent on a daily basis—that have flooded the planet with liquidity to put out the massive fires represented by the crisis. We are now a bit closer to extinguishing the fires, but we have not yet repaired the water damage. The house is standing, but the foundation is shaky and there are cracks in the walls. Rather than implement structural reform, the governments, often underplaying their own structural and fiscal tools, have left unconventional monetary policies, designed as temporary measures, to prosper, placing central banks at the center of “the only game in town,” as Mohamed El-Erian has called it.6
As a result, we have low, or even negative, interest rates: over $10 trillion in government bonds are or have been issued this way. This is a new phenomenon in the world of finance. Apart from a brief time in Hong Kong in the 1980s, we have never lowered rates to the point of asking commercial banks to pay central banks to deposit their reserves there instead of being paid for the deposits. This short-term refinancing process is combined with a long-term practice called “quantitative easing,” initiated by the US Federal Reserve, which has since been imitated by central banks in the United Kingdom, Japan, and Europe. It involves buying bonds in bulk (sovereign, government, or even corporate bonds) to influence the market, lower interest rates over time, and thereby exert pressure across the whole rate curve, to stimulate demand via cheaper credit and a wealth effect.
From this point of view, the world is still getting a transfusion, and this remedy could turn out to be toxic if administered for too long. This is the core of the thesis developed by El-Erian: anemic global growth could soon transform into an economic recession, and the accompanying social troubles that result, if politicians in charge do not act quickly. For other financial experts, as long as global growth is kept around 3 percent with monetary injections, the system will hold. Adam Posen considers that the world has, for the first time in a long time, found a sustainable pace of growth that encourages a slow but sure economic recovery.7
In fact, the experts do not all agree about what direction we should take. After the phenomenal increase of wealth in the world during the past two centuries as a result of the Industrial Revolution, have we entered into a “new mediocre” phase (to use the concept advanced by Christine Lagarde, IMF managing director, a spin on El-Erian’s “new normal”), or even a “secular stagnation” phase (according to Larry Summers)? In a talk given in May 2016 at the Peterson Institute,8 David Lipton, number two at the IMF, provided a good summary of the two major theories we are grappling with today. On one side, some experts consider that the current slowdown is an effect of a crisis that we have not cleansed from the system, with symptoms such as late debt adjustments, persistent production surpluses, disagreements over monetary policy, perverse effects from austerity cures, and impediments to investment and consumption. On the other side, other experts feel that the low growth is itself a symptom of a scarcity of profitable investments, a condition that started well before the 2008 crisis and is indicated by 15 years of low interest rates while savings grew. This is economist Larry Summers’s theory, which predicts long-term secular stagnation.
In any event, how can we find the optimal balance between investment and savings under such conditions? How can we compensate for the underlying weaknesses of the labor market in advanced economies, which have lower rates of growth in their active populations and lower rates of productivity? How can we redirect monetary policy when we know that the world is weighed down by debt? How do we get agreement from emerging countries that had a large potential for growth and were on pace to catch up, according to the IMF’s mid-range forecasts, but were reduced to two-thirds of the expected pace for 10 years?
As David Lipton noted, the economic development model that experts and decision makers advocated during the 1970s—a globalization promising a bright future, synonymous with an opening of commerce, integration of foreign direct investment, convergence of advanced and emerging economies thanks to capital accumulation, education initiatives, and improved productivity enabled by technology—no longer works. The current political tensions in Brazil, Russia, Mexico, and even South Africa reflect popular disappointment in the barely realized convergence. Lipton is talking about a “counterintuitive phenomenon.” The fact is that globalization, faced with multiple transformations in recent years, is currently going through a complicated phase where both models and underlying analyses are being readjusted and reworked. It is not insignificant that the annual forecasts from the IMF, the World Bank, and the OECD are regularly reexamined and revised, most often downward.
For many people, the future of globalization has dimmed. The fear of market volatility outweighs the potential gains to be won from financial interconnection. In 2016 and 2017, the global economy was characterized by exacerbated anxiety and tensions on the one hand, and recovery prospects on the other. The rebound in the stock market that followed the US election, while strong, has again raised questions about its causes and its sustainability. Tensions on trade policies are on the rise again as demonstrated in a number of international forums.
Geopolitical Clashes
Furthermore, the geopolitical context is tense. The world is currently experiencing its highest level of instability in several decades, likely the highest since the Cuban Missile Crisis in 1962. According to the Uppsala Conflict Data Program, armed conflicts have returned to record levels since the end of the Cold War, and from this point of view 2014 turns out to be the second most deadly year on the global scale since World War II.9
Fortunately, the current geopolitical instability is not global, but its effects are felt in many areas as tensions spread to five continents. The Middle East has been torn apart by conflicts, both civil and multinational, against a backdrop of the failure of some of these states. Ukraine and Russia confronted each other right up to the Eurovision stage.10 The United States and China oppose each other over territorial disputes in the South China Sea, where bordering countries more or less peacefully challenge all who use it. Emerging economies are starting to openly contest advanced economies’ stranglehold on international finance. North Korea threatens to use nuclear weapons. The existence of a series of powder kegs in the Sahel in sub-Saharan Africa raises fears of the emergence of a new Afghanistan, without any solutions for stabilizing the area either politically or economically. Other perils exist in the ongoing conflicts in the Horn of Africa and the escalation of the security situation in western Africa, or even in the destabilization of Venezuela as well as a number of countries that are dependent on its petroleum exports.
The tensions are exacerbated by the challenges that petroleum-exporting countries are currently facing. While the fall in oil prices remains relatively good news for importing countries,11 it, combined with lower prices for other commodities, has had an increased impact in areas where geopolitical stability is closely tied to economic health. The Middle East is a textbook case, where the lower prices weaken Iraq and Syria even further, sandwiched as they are between major players in the region such as Egypt, Iran, Saudi Arabia, and Turkey. Decisions made on social and economic changes by the Saudi royal family over the past two years show the gravity of the upheaval, as well as the magnitude of the adjustments needed. Although many still doubt the capability of Saudi Arabia to implement the objectives it set out, the changes were recognition that the status quo was untenable. The oil crisis introduced additional weakness in influential countries like Russia, which is also burdened by international sanctions related to the crisis in Ukraine, and Brazil, which has been torn apart by a major political crisis. Other countries affected are those that are highly dependent on “black gold,” such as Nigeria, Angola, Algeria, and Venezuela.
Terrorism represents another aggravating factor. Kabul, Baghdad, Sana’a, Toulouse, Jakarta, Ankara, Brussels, Paris, Copenhagen, Tunis, Beirut, San Bernardino, Sousse, Bamako, Ouagadougou, Grand-Bassam, Lahore, Orlando, Istanbul, Nice, Manchester, London.12 The list of terrorist attacks keeps getting longer, the mindless violence increasing in indescribable degrees of horror. There is no longer any region of the world that seems safe. Not only does this wave of attacks feed defiance and fear within the global community, it weighs heavily on border controls and international financial flows—which are subjects of debates and tensions between the countries of the world.
The current instability in Europe is the sad result of this convergence of economic and geopolitical tensions. With the questioning of the Schengen Area,13 the Brexit shock, and the inability to mount a coordinated response to the refugee crisis, the stability of the European Union has never been more severely compromised. Nationalist movements are on the rise, and they have placed extreme right parties at the gates of power. The euro crisis marked the beginning of this break with reality: after a first alert during the failure of the 2005 referendums in France and Holland (on ratifying the constitution for the EU), the financial and then economic storms in 2008–2011 caused lasting harm to European populations in a system seen to be opaque, unjust, and undemocratic.
Even worse, the financial crisis has reopened old wounds between members of the EU. To me, as an Alsatian growing up on the German border, I always heard my grandfather explain that the Rhine was not a border but a passage, I grew up full of dreams of a “closer union between the peoples of Europe,” and I was disturbed to hear Germans strike out at the Greeks, telling them they just needed to sell their islands to soak up their debts, and the Greeks responding that they did not need to take lessons from those who raised the Nazi flag over the Acropolis. I was also saddened to hear people refer to dealing with “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain), meaning countries on the edges of Europe. It was a slur so common that I had to use it myself as a reference in some presentations.
After the North– South tensions around the euro crisis, the refugee crisis revealed disturbing tensions between the east and west of the EU. The refugee crisis worried me even more than the euro crisis. The euro crisis was perceived as a “technical crisis” for which a solution could be found with a few spare billions—while the refugee crisis raised questions about our common values. What do we share? This more existential question, which gets to the heart of things, will be much more difficult to answer.
The World at New Risk
To these numerous sources of concern are added new threats: climate change, the digital revolution, and pandemics.
Climate Change: Feeling the Heat
The visible impacts of human activity on the climate and extreme climate conditions are starting to exacerbate instability in regions already stressed by low economic growth and, in many cases, geopolitical tensions: look at Nigeria, Syria, and Yemen to start. We know without a doubt that for the poorest regions, starting with sub-Saharan Africa, the additional impact of global warming will be stronger and more disastrous in coming years. The report published by the World Bank at the end of 2014, Turn Down the Heat: Confronting the New Climate Normal,14 is unequivocal in this regard: from now until the middle of the century, Earth’s atmosphere is locked in to warming of nearly 1.5°C (3.6°F) compared to the preindustrial period, but even a mildly ambitious carbon reduction program could change this. The UN warned in April 2016 that over the course of the preceding 12 months, the world had seen the number of droughts double (triggered in part by the warm El Niño equatorial current), threatening food security for 100 million people.15 This climate phenomenon also caused a coral die-off, with severe consequences for the marine ecosystem. The floods that have deluged coastal regions in France and other countries in recent years remind us that the whole world is affected by these catastrophes. For example, rising sea levels will have a severe impact on Morocco, where over 60 percent of the population and over 90 percent of businesses are located in major cities along the Atlantic. We will likely face even larger population migrations in coming decades than those caused by the comparatively simple yet still unsolved Syrian refugee crisis.
These forecasts look even more threatening when you consider that the Paris climate accord, as ambitious and necessary as it is, is only a first step, still insufficient to effectively limit these effects. As the UN noted on the eve of the signing of this agreement, “there is a real danger of being overwhelmed by the rapid increase of the pace of climate change, unless the signatories significantly increase their commitments to reduce greenhouse gas emissions.” In practical terms, this means that “the world needs to make a stand now for a rapid transition from fossil fuels to renewable energy sources.”16 The world otherwise risks repeated humanitarian crises and enormous economic losses, with geopolitical consequences that we still have a hard time imagining today. Former president Barack Obama’s foreign policy focused much less on the crisis in Syria than it did on climate change with respect to its potential impact on American security. The new administration, although it is a work in progress, has on both of these issues, a significantly different view, as confirmed in particular by President Trump’s decision to withdraw from the Paris climate accord.
Digital Anxiety on the Rise
The digital revolution raises as many questions as it does hopes. Will the Uberization and robotization of the planet take our data, our privacy, our jobs, and our national sovereignties away from us? In their ambition to replace governments in all their domains, are Google, Apple, Facebook, Amazon (GAFA) and other web giants going to standardize the world while at the same time destabilizing the most fragile institutions, aggravating individualism, and deepening the wealth divide? If Silicon Valley becomes the heart of a new empire, where will we find the ways and means to an equitably connected world? Like finance, digital technology is a mindless force that, unless domesticated, can lead humanity to its ruin. As with financial language, binary language can lead to hubris: such is the pride of the people who build a Tower of Babel to the sky! The “exponential organizations” that are shaping globalization today may well promise us a peaceful, liberating revolution and pursuit of the good of all, but their disproportionate weight in the global economy raises many questions. These organizations are even more frightening in countries like France, and Europe in general, which don’t know how to create their own digital rivals (aside from a few Scandinavian unicorns), despite a swarm of initiatives.
In a Connected World, Higher Pandemic Risks
In our ever more connected world, the risk of a pandemic is high. Since 2000 this threat has materialized more and more often: E. coli, mad cow disease, bird flu, H1N1 virus, Ebola virus, Zika virus, MERS virus. Every three years or so, an epidemic launches from a more or less remote part of the planet. The scientific community and public authorities are convinced that this phenomenon will continue and accelerate. Today the earth has nearly 7.5 billion inhabitants, more than half of these humans are crowded together in giant cities, and the predominance of meat in our diet leads to increasing concentrations of animals—these are some of many factors that lead to the development of pathogenic viruses that, combined with the constant increase in air and sea interconnectivity, make the risk of a major global epidemic more likely. The World Bank estimates that a Spanish-flu–type epidemic, spread by airborne transmission, would kill over 33 million people in 250 days and cost the world over $3.6 trillion (or 4.8 percent of its GDP). Bill Gates said in Munich in February 2017: “Whether it occurs by a quirk of nature or at the hand of a terrorist, epidemiologists say a fast-moving airborne pathogen could kill more than 30 million people in less than a year. And they say there is a reasonable probability the world will experience such an outbreak in the next 10 to 15 years.”
Winds are blowing from everywhere and it is difficult for anybody to make sense of what is going on. What is coming seems gigantic and off the scale. Finance, which contributed with the crisis to unleash these hurricanes, seems an ideal culprit and at this stage not yet a contributor to a solution. With that in mind finance is high on the list of enemies of the common good and a great contributor to the social frustration felt in so many places.