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Current Debt Crisis: Causes in Historical Perspective
Mah-Hui LIMSouth Centre
Eurodad – Glopolis International Conference 2013
Debt, Finance and Economic CrisisPrague
June 3 – 5, 2013
Three Levels of Causes of Crisis
Flaws in Theory & Method of Macro Economics &Finance-Market Efficiency Theory & Fallacy of Composition
Deregulation, Practices and Malpractices of Financial Industry
Macro-economic structural causes – Current account imbalance Financial vs Real Economy imbalance Income/Wealth Imbalance
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Economic Crisis and a Crisis of Economics
P Krugman in 2009 Lionel Robins Memorial Lecture at LSE:
Much of mainstream macroeconomic theory in the past three decades have been “useless at best and harmful at worst”
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Financial Industry- Minsky
Financial fragility is determined by margin of safety (banks’ ability to meet liquidity demands) & ability of borrowers to repay from cashflow
As banks have moved from hedge financing to speculative & Ponzi financing – financial fragility & instability increases
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Frequency of Banking Crises – 1880s to 2009
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Focus on 2 Structural Causes – Financialization & Inequality
Key to understanding long term structural causes of Global Financial Crisis is to examine the link between:
financialization, debt and inequalityNot an ordinary banking crisis
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Inequality Preceded Great Depression and GFC
Why Inequality related to recent financial crisis
2 measures of inequality: Gini index Wage share of GDP (vs capital share)
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Declining Wage Share of GDP – 1970 to 2010
Source: UNCTAD, TDR 2012 & CEIC
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Globalization and Increasing Inequality
Growth has been accompanied by growing inequality in most countries
In 4 largest economies – US, Europe, China, Japan - common phenomenon of unrelenting pressure on labor income despite rising productivity
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Productivity Growth vs Wage Growth
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U.S. - Wages lagged behind productivity
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Wages – play two functions
A cost component of production Also a component of aggregate
demand With neo-liberalism – labor flexibility
> labor loss of bargaining power, rise of temporary – casual labor, wage suppression > wage growth lagged behind productivity and wage share of GDP declining
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Inequality & Under-consumption
Decline of wage should suppress household consumption, i.e., under-consumption (as in China)
Under-consumption or drop in aggregate demand can be counter acted in 2 ways Increase in debt (as in the US) Increase in exports (as in China)
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Enter Monsieur & Madam Finance - Financialization
US became a debt driven economy 1960-2007
US GDP rose 27x Total debt rose 64x to 350% of GDP Household debt rose 64x to reach 100%
of GDP in 2007, while real wages stagnated or declined
Debt bubble built up
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U.S. - Growth of GDP (27x) and Debt (64x) btw 1960 & 2007
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Composition of USD total debtGDP rose - 27x
Total Debt - 64x
Financial -490x
Household- 64x
Non Financial Corp – 53x
Govt- 24x
Excess Savings of Rich Invested in Risky Financial Products
Most of income gains accrued to top 1% of households
Propensity to consume of rich much lower than the poor
Excess savings chasing for high yields and invested in risky assets (financial innovation) > asset bubble
BOTH BUBBLES IMPLODED 2007
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Conclusion & Policy Implications
Wage Repression + Financialization a toxic mix results in financial crisis
Policy Implications: Need finance to serve real economy
but NOT financialization which drives speculation and bubbles
Finance needs to be better regulated because finance is an industry with high negative externalities
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Financial Regulation & Functional Income redistribution
Studies on contribution of finance to growth is mixed – probably it’s a inverted U shape – positive effect up to a point and then becomes negative
Need to address problem of inequality Can be ex-ante or ex-post Ex-ante – wages tied to productivity
growth over long run – cannot be less or more without causing instability
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Income redistribution
Ex-post – government must have fiscal policies to redistribute income and enhance social safety nets
Civil societies must push for all the above
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References
Michael Lim Mah-Hui and Khor Hoe Ee, “Inequality and Financial Crisis: From Marx to Morgan Stanley” in Development and Change, Volume 42 (1) January 2011.
Michael Lim Mah-Hui & Lim Chin, Nowhere to Hide: Great Financial Crisis & Challenges for Asia, 2010. Inst of SEAsian Studies, Singapore
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IMF Working Paper 10/268
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THANK YOU
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