Dr. Heiner Flassbeck: We’re in worse shape now than in 2008 because at least then there was hope governments would face up to the situation
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.
The conventional wisdom about the current state of the American and global economy is there’ll be a slow recovery. Even the retraction in public spending that’s taking place in most parts of the world is apparently supposed to only slow down the recovery.
Well, I’m left with a question why. Why do they expect any recovery at all, given the current conditions?
Now joining us to discuss all of this is Heiner Flassbeck. Heiner served as director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development, known as UNCTAD. He was also vice minister at the Federal Ministry of Finance in Bonn in Germany from October ’98 to April ’99. He’s now professor of economics at Hamburg University.
Thanks for joining us, Heiner.
HEINER FLASSBECK, PROF. ECONOMICS, HAMBURG UNIVERSITY: Thanks for having me.
JAY: So what do you make of this idea that, yes, there’s a retraction in public-sector spending, yes, there’s tens of thousands of layoffs of public-sector workers? In the U.S. you have these sequestration cuts moving its way through the economy. And we’re told that at worst this is simply going to slow down an inevitable recovery. What do you make of that?
FLASSBECK: Well, if you read a bit between the lines and you look at the figures, then you see the story is a bit more complicated. The story is that obviously, as I read the figures for the United States, it’s like that, that the private households are driving down the savings rate again. This is always, so to say, the measure of last resort to save the economy. And that seems to be what is happening now, because there is not much of an income increase, there’s no wage increase in the United States that is significant. And so people desperately trying to keep their consumption level are doing what they have done for a lot of years before.
But it’s making the whole system not more stable, but it’s making it more fragile. And it is no relief for the government, because this cannot go on forever. As I see it, the private households savings rate in the United States is close to 2 percent, so you have another 2 percent to go, but then it’s over.
JAY: I see in my mail I’m getting more and more ads for credit cards again. I mean, is this because the banks are having a little more confidence in the economy? Or are they simply trying to start another credit bubble?
FLASSBECK: Yeah, it seems to be–it’s a credit bubble, but it’s a smaller one that we have experienced in the past. But nevertheless, the fact is that with falling interest rates, as I said, savings are less attractive, so people use whatever they get for consumption. But it’s not sustainable. It’s not a thing that can go on forever.
The first signal from central banks that interest rates would go up or the first signal that the economy is nevertheless stagnating, what I’m expecting would mean that people could go the other way around, namely, they could get anxious about the economic outlook and would increase the savings rate. So this can be a typical straw fire, the kind of straw fire that people are expecting from Keynesian demand programs. But this time the straw fire comes from private households because the governments are cutting.
JAY: And in a recent book that you’ve released, called Act Now–I think you edited, is that correct?–you write that not only do you not foresee a recovery any time soon, but you think there’s a danger of another deep recession or even depression.
FLASSBECK: Yeah, I did the book together, I coauthored it with a number of people–James Galbraith is one of them, Richard Koo from Japan, and Paul Davidson from the United States, Jayati Ghosh from India. We wrote the book together in our–because we have the view that indeed there is a big danger for the world economy, because what we see is that the G-20 is stalled somehow. Nothing happens. They are blocked by a confrontation between, well, the United States that want more from the surplus countries, and the surplus countries that are refusing to do so, mainly Germany, mainly Germany, a little bit China. China has done quite a bit, but Germany’s not doing anything. And in Europe they are cutting. In Japan they’re trying to expand, but it’s very difficult.
So we’re back in the old picture that in the three big blocs in the world, not much is happening. Japan, United States, and Europe is still in a very miserable state of affairs. The developing countries are doing the normal thing. In Asia they’re growing a bit, and Latin America not very much. So for the whole world economy, it’s still a very bleak outlook, and there is nothing on the horizon that would give you hope that it could change rather soon.
JAY: And what about the whole issue of the financial crisis, as opposed to sort of the deeper structural crisis, in the sense of regulation? And nothing seems much to have changed on that.
FLASSBECK: Yeah. And you look at the stock markets, you see what is happening. The stock markets take the opportunity of having very low interest rates from the central bank to create a new bubble, to blow up a new bubble. That is what we see at this moment of time.
We never before had such a disconnection between the stock market and the real economy. And the real economy since 2008, 2009 is more or less flat. We’re talking about double-dip recessions, triple-dip recessions in the United Kingdom, a deep depression in some parts of Europe.
And nevertheless they are celebrating on the stock markets. I don’t know what. Something that doesn’t exist. So this is the bubble that has been inflated and will burst sooner or later. It has to burst. And I think it will not only happen when we are back into a recovery. It will be long before, because people have to realize that what they expect and what their expectations show on the stock market is not realistic. It’s not there.
JAY: When one looks at the policies of most of the governments in the industrialized world, and mostly austerity policies, it seems rather obvious that these austerity policies do not speed up recovery. At best, they slow down recovery. At worse, they actually lead to more recession. I mean, I don’t know how it could be any more obvious than that. And you look what’s happening in Europe. So doesn’t that lead to the conclusion that they don’t want a recovery? I mean, there’s so much money being made out of this recession in many ways, I mean, low wages, privatization, cheap money, as you say, to drive up this bubble on the stock market. I mean, why would anyone want this to end if you’re in a position to take advantage of it?
FLASSBECK: Well, it’s not quite clear whether they want to go on like that, but it’s sure that they cannot go on like that, because, as I said, sooner or later the expectation in the stock market cannot be fed anymore by anything, because interest rates are zero. And what else should happen now? The last move was from the European Central Bank.
If the austerity goes on and private households are getting frustrated at a certain point of time or are getting anxious, as I said, about their low savings and the bleak future, then the thing will collapse. It will collapse for sure. It’s only the question when it collapses. This is–nobody can forecast when it will collapse, but it will collapse. And then we will see that we need total different policies.
What we have is in some company, in the company sector–that is what you are referring to–in the company sector, they’re still sitting on very high profits. But that is due to the last years, to the years in which the government was still doing some deficit spending, because companies can only accumulate–this is a simple truth in macroeconomics–companies can only accumulate profits if one of the sectors is going to spend and one of the sectors is running a deficit. So if private households are driving down their savings, that directly contributes to higher profits. If the government is cutting spending, it directly reduces profit. So what happened in the past, that they got high profits, but now I don’t see the room of maneuver, I don’t see the leeway for really new deficits somewhere in any sector of the economy. So this thing, what you see now, is an illusion, and it will not go on.
JAY: But is it not an illusion that if you’re in the driver’s seat, in the sense if you’re in one of these big companies sitting on piles of cash or any of the big banks, who are also–what–sitting on, what, a trillion and a half of cash, one, you make money now out of the stock market bubble, and then, once it crashes–and I assume everybody knows that bubble will burst–but you’re sitting on so much cash, you can go on a buying spree, can you not? And then you can start going to this crazy–you know, not mergers, but takeovers and even more concentration of ownership. I mean, I don’t suppose in the final analysis one would think it has to end badly, but don’t these guys think of things in terms of après moi le déluge, you know, the floods, let them come later, right now I can make a lot of money?
FLASSBECK: That’s exactly the attitude, I’m sure, in the financial markets; that’s the attitude, après moi le déluge. They think, I don’t care if I made money in the next two years or the next year; what do I care about the future? That’s exactly the attitude. This is the herding behavior that we have in the stock markets. That is one of the problems we’re addressing in the book, again, namely, that nothing has been done against this herding behavior, nothing has been done against the exploitation, so to say, of the cheap money from central banks by the banking system. So all these things have not happened.
And that is why we’re in worse shape today, in much worse shape than we were in 2008 and 2009, because in 2008, 2009 you could hope, you had some hope that governments would address these problems and would do something about it. Now the hope is gone. So where are we? We are in a stagnation. We are, as I said, in the permanent danger of falling into a second dip or a triple dip or whatever it is. Unemployment is still very high. So there is no way out.
JAY: Okay. In the next part of our interview with Heiner, we’re going to dig into a little further about what’s going on and what he thinks is the way out. Please join us for part two of our interview with Heiner Flassbeck on The Real News Network.
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