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  • Bubble in Developing World Won't Substitute for Domestic Demand


    Yilmaz Akyüz: There needs to be a write-off of household debt to spur a real recovery -   December 12, 2012
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    Bio

    Dr. Yılmaz Akyüz was the Chief Economist and the Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development (UNCTAD) when he retired in August 2003. He was the principal author and head of the team preparing the Trade and Development Report, and UNCTAD coordinator of research support to developing countries (the Group-of-24) in the IMF and the World Bank on International Monetary and Financial Issues. He taught at various universities in Turkey and Europe before joining UNCTAD in 1984 and after his retirement, and published extensively in macroeconomics, finance, growth and development. He is the second holder of the Tun Ismail Ali International Chair in Monetary and Financial Economics at the University of Malaya, established by Bank Negara. He is now Chief Economist of the South Centre, an Intergovernmental Think Tank of the Developing Countries, based in Geneva.

    Transcript

    Bubble in Developing World Won't Substitute for Domestic DemandPAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

    According to our next guest, the global economy is as fragile and as poised for a crash as it was in 2008. The current policies that are supposed to be leading to a recovery are having very little effect, except perhaps creating a new bubble in the developing countries, which in theory are supposed to be the markets that are going to save the global economy.

    So let's break all this down. Now joining us from Geneva is Dr. Yilmaz Akyüz. He's the former chief economist and the director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development, known as UNCTAD. And he's now the chief economist of the South Centre, an intergovernmental think tank of the developing countries based in Geneva. Thanks very much for joining us.

    YILMAZ AKYÜZ, CHIEF ECONOMIST, SOUTH CENTRE: Thank you.

    JAY: So let's start from the beginning. The policies that are taking place now, mostly driven by the United States, which is more or less the manager of the global economy, is to pump a lot of liquidity into the system, practically zero interest rates, quantitative easing and such. So is this working?

    AKYÜZ: Not really, or at least it's not working as rapidly as it should be, as rapidly as we need. I think there are basically two policy errors, both in the United States and Europe. First, they've not really dealt with the debt overhang. And as long as they don't deal with the debt overhang, the debtors will retrench. As long as the debtors retrench, the economy will not have the stimulus to go forward. The second problem they're facing is that they have not been able to come up with a program, a credible program that will allow the public sector to provide stimulus to the economy without running into a public debt problem.

    JAY: When you said "debtors," who were you talking about?

    AKYÜZ: I'm talking about—in the case of the United States, it is the mortgage holders, of course. They are the ones who are indebted, the household sector. And they are trying to reduce their debt by cutting spending. And this is not what we need now.

    So what I have suggested in my various presentations is that you need a debt writeoff, a significant transfer from creditors to debtors. Secondly, you need to be able to increase government spending without running into government debt trouble. And the only way to do it is by printing money for deficit spending, and neither Europe nor United States are willing to do that.

    JAY: So the first thing is this debt of households. When you're talking about this transfer, essentially you're saying is the mortgage holders, which primarily are the big banks, should simply forgive a big section of mortgage debt.

    AKYÜZ: Well, I see the problem, of course, in the case where the creditors are also debtors to the opposite holders, there is a case of the problem for the lenders.

    Now, the question is who to bail out in this matter. So far, the government is bailing out the creditors, the creditors, that is, the lender banks. And what they could do is actually they could write off the debt of the households, the mortgage debt.

    JAY: So in the end it is public money that's fueling this.

    AKYÜZ: In the end, you need the public sector, to the extent that the creditors' assets could not cover the losses. I'm talking about the banks actually meeting the losses. It will fall on the public sector.

    And of course financing of debt should not increase the debt burden of the government. And again, this should be financed by money printing. So what I'm suggesting is that you're printing money, but you can be printing for a different reason. You can be printing it to [incompr.] government spending, and you can be printing that money for bailing out some of the debtors, to writing off some of the debt.

    JAY: Well, the argument against that, I assume, is that people think that will be inflationary, and people then begin to lose confidence in the currency.

    AKYÜZ: Why should it be inflationary to print money to increase government spending when the economy has underutilized resources and unemployment reaching 8 percent in the United States and 9 to 10 percent in Europe?

    JAY: Well, I guess the theory is is that if you just create currency, eventually that creates a spike in prices because there's too much demand. But I think the argument most people give that don't like this idea is more that it undermines confidence in the money.

    AKYÜZ: Well, you see, the whole point is that the agenda is really set by financial market. The response to the crisis is set by the financial markets and still by financial orthodoxy. In fact, there is strong reasons now for governments in the United States and in Europe to print money for deficit spending. And, in fact, no other time has the reason been so strong for doing such an action.

    JAY: If it's so simple, why don't they do it?

    AKYÜZ: Well, as you said, it is—I mean, governments are really terrified by the ratings by financial markets. This is why they're not doing it.

    JAY: Now, even if they do this and create a certain amount of stimulus and get a certain amount of demand going, for example, by reducing people's mortgage payments, but in the long run it still hasn't dealt with this sort of underlying fundamental problem, which is, wages aren't going up and are stagnant and are not matching productivity—so, in the long run, don't you have to address the issue of real demand?

    AKYÜZ: Sure. I mean, this—the wages falling behind productivity is a global phenomenon. It is there in Germany. It is there in Japan. It's there in China. And this is the outcome of the increased competition among global working classes. And this means capital being footloose, capital being—moving rapidly across the globe. The governments are competing to get more capital. You have a reserve, global reserve army of workers. And as a result, wages are falling behind productivity.

    Now, so far, Germany, Japan, and China have dealt with the situation, the problem of underconsumption this would imply, by exporting their unemployment abroad. And U.S. actually dealt with the situation by increased indebtedness of the household sector to keep up consumption and property investment. As a result, you have a crisis in your hand. As a result, you have serious global imbalances.

    JAY: And, in fact, the policies being followed both in Europe and the United States and Canada are all aimed at actually lowering wages.

    AKYÜZ: That's right. The wage cutting is actually the order of the day, [incompr.] cutting government spending, cutting spending by the debtors,. Shoring up profits, shoring up incomes through wage cutting is their response. And that is actually self-defeating.

    JAY: Well, I guess their theory is that if they can get wages low enough in Europe and North America, then they're going to make their money by exporting to China and India and these developing markets. So in the next section of our interview, we're going to talk a little bit more about will the developing world's markets save the global economy. So please join us for the next segment of this interview on The Real News Network.


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