Satyajit Das is an internationally renowned derivatives expert. His works include Swaps/Financial Derivatives Library, a four-volume, 4,200-page reference work for practitioners on derivatives, and the best-selling Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives. His latest book Extreme Money – Masters of the Universe and the Cult of Risk deals with the messy details of the 2008 financial crisis, the lessons from which have still not been learnt.
In this freewheeling interview with Vivek Kaul, he talks about how the world is trapped in a slow growth cycle and how cheap money is more likely to set off asset price bubbles than stimulate growth when people are trying to cut debt levels. This in the second and concluding part of the interview, the first part being published on Saturday (read here).
In a recent column you wrote “Mr Economy has…not made the recommended changes necessary for a return to full health”. Could you elaborate on that?
The economic and financial problems of the global economy have a number of inter-related causes and these have barely begun to be addressed. Excessive debt was one of the problems. But five years on, borrowing levels remain unsustainable. Debt levels for 11 major nations have increased from 381 percent of GDP in 2007 to 417 percent of GDP in 2012. Debt has increased in Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the UK and the US. There has been a shift of debt from private lenders to governments. But that just shifts the problem and has triggered the sovereign debt crisis.
Have other causes been addressed?
Another cause was global imbalances – major current account surpluses and deficits with China, Japan and Germany exporting more than they import. There has been some improvement because of the slowdown in economic activity and the reduction in the availability of financing. But the large exporting countries remain resistant to abandoning their export-based economic model. Excessive financialisation (debt, complex products, etc) was another factor.
Little progress has been made in bringing the banking system under control. In fact, low interest rates and poor returns in many asset classes has set off a new boom in financial products – even things like CDOs (collateralised debt obligations) are now coming back into fashion. Most importantly, the world hasn’t learnt that perpetual growth and improvements in living standards driven by financialisation is not sustainable. But just because you ignore the facts doesn’t mean that they go away.
You recently wrote “physical examination revealed that the US is in marginally better condition than other organs – the “cleanest dirty shirt” is the expression.” What do you mean by that?
People have been quick to proclaim the Chinese or BRIC century. I would be cautious about that. I think the US will do better than most people think, although they will not be immune to some of the broader issues. The US remains the world’s largest economy, around 25 percent of global GDP, almost twice the size of China, the second largest economy. America remains relatively wealthy, with per capita GDP of around US$50,000, five or six times China’s per capita income. The US has significant financial assets despite losses caused by the financial crisis. Structurally, the US can function better because it can operate successfully as a closed economy.
What do you mean by that?
America’s economy is focused on its large domestic market. It is less exposed to trade (around 15 percent of GDP) than other large economies. American dominates key 21st century industries, such as technology and software, pharmaceuticals, complex manufactured products (aerospace, defence hardware, heavy machinery), entertainment and services. The US remains a major food producer. It is a net exporter of food, controlling almost half of world grain exports. It is also rich in mineral resources. Historically dependent on oil imports which make a substantial part of its $600 billion trade deficit, the US is cutting imports and increasing its energy independence through increased production of shale gas and oil.
The US also has greater policy flexibility. The US dollar remains the world’s reserve currency. The US borrows in its own currency. There is a ready market for its securities, both domestically and internationally. The US also has favourable demographics. It has high population growth relative to other industrialized countries, which have below-replacement fertility rates. Also, it is worth remembering that the US is, by a considerable margin, the pre-eminent global military power.
How do you view things in Europe? Do you see the euro surviving?
The survival of the euro is an unproductive tangent, beloved of commentators. Whether or not it survives is largely irrelevant. Most European countries have high debt levels, budget and trade deficits, social spending inconsistent with tax revenues and poor industrial competitiveness (with some exceptions). They are tied together by a rigid monetary system and inflexible currency arrangements. The European banking system has large exposure to sovereign bonds issued by peripheral nations. Intellectually and institutionally, Europe is unable to deal with its debt crisis.
Europeans believe stabilisation and recovery can be achieved through greater integration. Even if issues of national sovereignty can be overcome, integration will not work. Unsustainable levels of debt do not magically become sustainable by changing the lender or guarantor. The monetary arithmetic of European debt problems is that the EU and Germany, its main banker, do not have enough funds to rescue the beleaguered eurozone members. Austerity would doom Europe to a prolonged and severe recession as the debt burden is worked off. The alternative, a debt write-off, would result in a significant loss of wealth for the mainly Northern European lenders, triggering an economic contraction and prolonged period of economic stagnation. It’s Catch-22.