No Central Bank will be able to issue enough currency or charge interests negative enough to save the economy from sinking.
Mervyn King was the governor of The Old Lady: the Bank of England, the second oldest central bank in the world, founded in 1694 to raise money to refound the English navy after it was destroyed by France.
Capable of shaking up British leaders and Europeans, and capable of buzzing the system and bankers alike, King is now detailing his insights about “a debt crisis”; one that will come soon, he says.
His management from 2008 was highly debatable, but afterward, he understood the problem better than others and adopted ultra-expansive monetary policies, despite the fact that he is now critical of central bankers. Especially with the ECB: “It has entered political territory,” he adds.
Covid is a classic example of radical uncertainty: a global pandemic was a highly probable event, as is a climate accident, but it still turned the world upside down.
The impossible thing was to know that a coronavirus from China was going to spread throughout the world and assign a probability to that event:
Mathematical models are great, but before engaging in this absurd task of trying to measure everything, you have to make an effort to understand the nature of phenomena like covid.
There are a lot of economists believing that they are going to apply their outfits to anything, and that just means they do not understand anything.
The Great Depression was a shock to economics. The Great Recession was disappointing in terms of economic thinking: the crisis was a failure of the system and the ideas that underpinned it, and yet we lost the opportunity to rethink it.
With the rules that regulate aviation, air accidents have become less common; financial crises, on the other hand, are becoming more frequent due to the centralized control of a few people who drive crises and booms to their advantage. They determine them and make them come and go away to further their interests.
But with covid, a good thing may happen: that the resources go from unviable sectors and companies to sectors and companies with a future. King paraphrases Schumpeter and the creative destruction of him.
The modern economy emphasizes efficiency. The financial system is a good example: before the crisis, banking was very efficient and made lots of money, but then we saw how fragile it was, due to its own nature and no effort was made to increase its resilience, once again we knew that more crises would come, with or without covid.
Countries have Social Security, benefits, public health services, but the coronavirus has revealed how fragile our societies are, even the most advanced ones: politicians must focus on that, on increasing the resilience of the system and in correcting the harmful origins of the crises: financial and economic greed and irresponsibility.
Next stop: Sistemic Debt Crisis
In 2020, developed economies fell by 10% and in 2021 they might grow by around 5%: the exact figures are completely unknown, but the really important thing is not to forecast GDP, but to broaden the focus. And what is looming is a debt crisis, which will come soon.
Global debt is above 2007 levels, and companies and states have increased it further with the pandemic. When the crutches of the State are withdrawn, there will be company bankruptcies and most likely sovereign debt crises in emerging countries.
The fact that all this is going to happen in a more or less synchronized way is a serious problem, with the potential to provoke a financial crisis.
It is impossible to know when and where exactly that will happen, due to the radical uncertainty, but the system creaks on the debt side.
It is time to say loud and clear that there are limits that central banks cannot cross because they do not have a mandate and because no one votes for central bankers.
In 2020, with the emergence of the covid, governments hibernated the economy: the current economic narrative tells us that the combination of fiscal stimulus and ultra-expansive monetary policies have been a failure. There is no benefit of the activism of the central banks.
What is needed is for governments to support companies and workers: it is not the central banks who have to do that, and they have no mandate to do so.
The danger is that central banks do things they don’t have a mandate to do and in doing so, jeopardize national and international stability.
The extreme case is the ECB, which has become a political animal: it has spent years relocating resources from one part of the eurozone to another without a mandate to do so.
The euro was created by pretending that a monetary union is viable without a fiscal union. This causes constant tension, as we saw in 2010 in the South: in the absence of fiscal transfers from the North to the South, it is very difficult to keep the eurozone together.
With covid, Europe has not opted this time for austerity but for European funds: for fiscal transfers. But at the moment, it is something temporary, for one time, and instead, that is a permanent challenge for the eurozone.
The only sure thing is that another crisis will come and then it will be too late to fix the plane in mid-flight.
The risk given the irresponsibility of politicians to take the step forward required is that governments will be pressured to make fiscal transfers through the back door via their central banks, which means more debt creation. That is not a transparent or honest way to deal with the problem.
ECB moving further and further into political territory
With the past crisis, we discovered that there is a limit to the economic pain that can be imposed in the search for a solution without a political response. And in the next crisis, divisions may resurface in that battle between political will and economic reality.
King harshly criticized the incompetent approach of politicians during the Brexit negotiation.
The British didn’t understand how strong that commitment was. Brexit was almost inevitable after the creation of the Economic and Monetary Union: Britain does not want to pay to keep the euro together. They prefer their Parliamentarism to the European Parliament, they do not want to be subject to the European ‘Court of justice’.
The political consequences of Brexit are formidable, but in a while, British people will see that the economic ones are not so bad. What they don’t know yet is whether the mechanism created for potential trade and regulatory disputes will work. That is going to be interesting.
There is a global demand problem: secular stagnation. If the economy worked reasonably well, the global economic equilibrium would regenerate in a recession because resources would go from companies in decline to companies with a future, from unviable sectors to viable sectors.
That does not happen because we have problems with prices: with exchange rates, for example. China is a textbook example. The euro too: Germany and the North have a significantly undervalued currency; The result is that Germany continues to invest in its export sector, despite very low returns, instead of investing at home, where it could make its domestic demand profitable.
It is possible that the looming crisis, paradoxically, will come in handy if we manage to have well-articulated restructuring mechanisms. But to do this we should be able to get the narratives right: Trump has convinced Americans that the US has been the losers of the Cold War and globalization; the Germans are convinced that they are the Paganinis of Europe.
The most obvious symptom of the great imbalance in the world economy is extremely low-interest rates. The other worrying figure is the level of debt. Sooner or later we will see company bankruptcies, private debt restructurings, and sovereign debt crises in emerging markets. We also need a reform of global monetary governance, which is in danger of fragmenting.