Finance is Super Rational about Profits, Irrational about Global Economy – Flassbeck (2/3)

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Baltimore.

I’m discussing with Heiner Flassbeck the global exchange rate system, and to make that even more meaningful, a crisis that’s hitting many developing and emerging economies, from Turkey to South Africa to Argentina–lots of talk whether this could be another contagion, lots of talk about whether we’re poised for another global recession. We’re–obviously the global economy is not quite so rosy and the union of the United States not quite so rosy as President Obama suggested it was in his recent State of the Union speech.

Now joining us again, and from France, is Heiner Flassbeck. Heiner served as director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development, known as UNCTAD. He was also a vice minister at the Federal Ministry of Finance in Bonn, in Germany, from October ’98 to ’99. He’s now a professor of economics at Hamburg University.

Thanks for joining us again, Heiner.


JAY: So I’m going to just pick up where we left off in part one. If you haven’t watched part one, I suggest you do so.

So, Heiner, you have proposed a model which I think we should get into about what a more rational exchange rate global system of currency exchange would look like. So talk a bit about it. But I’m going to very quickly kind of get to the question–there is a sort of rationality to what’s going on. In other words, if you’re sitting on great big pools of money and you’re making killings off all this volatility, I mean, you are being rational in a sense, aren’t you?

FLASSBECK: Absolutely. From a microeconomic point of view, these people are rational. They are super rational. And they’re making a lot of money, as I said. So that’s absolutely clear.

But we have to ask the question whether it’s rational from a macroeconomic point of view, from a global point of view, and there it’s definitely not, because what happens is–and I said it in the first part–what we have is money carried from low interest rate countries to high interest rate countries. But that implies at the same time, because interest rates are low, because the inflation rate is low in Switzerland and Japan and the euro area, in the United States, that implies that money is carried from low-inflation countries to high-inflation countries. Turkey, the inflation rate is not super high, but it’s 7 percent. In Argentina we all know it’s much higher. In Brazil it’s a bit higher.

And this means, this implies absolutely clearly and obviously that the currency, as long as the hot money flows into the high-inflation country, the currency of the high-inflation country is appreciated. This is exactly the opposite of what we expect from a functioning market.

JAY: This has to be entirely clear. It actually adds more inflation.

FLASSBECK: Yeah, it has–it doesn’t have more inflation, but it has an overvaluation. The overvaluation is getting worse because if you have high inflation rate, your goods prices are higher than in the rest of the world. But if you get an appreciation on top of that, your goods prices are rising even more and more, so that you lose your competitiveness. Then you lose your competitiveness, and you run into a current account deficit. Then the current account deficit widens, it widens, and a certain point of time, the trigger comes–this time the Fed, or whatever it is–the trigger comes; then the people are rushing out of the country and producing much more damage than they have produced before. But they have created the risk; these flows, these short–the hot money flows have created the risk that they’re then flying. Then they’re fleeing when they go out of the country.

JAY: So what’s your proposal? When you were at UNCTAD, you made some very specific proposals on what to do about this.

FLASSBECK: Well, we said it’s very simple in today’s world where you have high frequency trade. And so what you need is you need to adjust the exchange rate very quickly to the inflation differential, which–differential means that the high-inflation countries would depreciate systematically. So you split the period in which you depreciate or appreciate, according to the inflation forecast or according to the interest rate differentials (that’s not a big, big difference), and you split into seconds or minutes or hours or days. And so the central banks of the world, so to say, or global central bank, as it was under Bretton Woods, or the central banks coordinate in a way that they say, well, we’re steering the exchange rate of each country according to the inflation differential to the rest of the world. And then all this carry trade is gone, then all the speculative money is gone in a moment, because this is clearly the source of the highest profits that we had in the last [crosstalk]

JAY: So let me make sure I’m understanding this. There’d be some ratio, as hot money enters a market, there would be–various banks would agree to lower the value of the currrencies, which would demotivate the hot money from going in.

FLASSBECK: Exactly. That’s the idea, that’s the idea, to demotivate them. But then, obviously, there are some nice opportunities to make profits, and very high profits. This is a very profitable business over a long time, because the interest rate differentials are determined by central banks, and central banks do not act that quickly, so you are rather sure that for a year or two you have a high interest rate differential if you move the money in. And as I say, the politicians in the receiving country are normally a bit stupid and happy about all the money coming in. They’d say, oh, we have the confidence of the capital markets and the world, and they’re proud about it. And so you have an easy game, and the risk is really not big, up to the point where then the move back begins.

JAY: And I would assume the big multimillionaires and billionaires in all of these countries that are being affected, they’re playing the same game too. It’s not like–you know, it may be screwing their own countries, but, you know, as individual billionaires in Mexico or Brazil or wherever, they’re probably in on all of this, are they not?

FLASSBECK: Yeah, yeah, sure. There’s no doubt about it. It’s done from inside and from outside. You can do it either way. That’s not important. But you have to have really a deep pocket and you have to have access to different currencies at any time. And then you can play the game.

JAY: Now, the proposal you’re giving would mean you would have to have a global agreement, which would mean, you know, Wall Street more or less would have to agree with this, or at least the American government would–and it’s hard to see the American government doing much that Wall Street doesn’t want it to. What happens if you cannot get this global agreement? And so far, you cannot. I mean, you’ve made this proposal, I think the first time, what, back in 2009.


JAY: So I don’t know how much they’re listening to you. There does–I mean, as we said earlier, you know, there is a rationality to this. If you’re making tons of money out of the chaos of the system, then you wouldn’t want a rational, more stable system. But for developing and emerging markets, you would think there’d be a preponderance of people, even at the governmental level, that do want less craziness. What can they do if they cannot get an agreement from European and American, Canadian banks? Can they not band together themselves? I mean, cannot all of Latin America get together and introduce certain kinds of capital controls or something?

FLASSBECK: Yeah, that’s exactly right. They could band together, they could come to a cooporation, monetary cooporation. We have made proposals along these lines. But, again, it’s very difficult to find a number of governments–let me say in particular in Latin America–to bind together and to come to an agreement on something very substantial. That’s not so easy. They have a lot of attempts. They started, with Ecuador and other countries, some approaches to coordinate. But they’re very far away still from a real monetary coordination. I mean, what we have done in Europe in principle was a good idea, insofar as it protected smaller countries from falling into the same trap. Unfortunately, the euro was so badly managed that they’re now in an even worser trap. So that’s really [incompr.] model.

But there could be–clearly there could be cooperation, there should be cooperation among developing countries. And I think in 2010, 2011, among the G20 countries there was a serious discussion about monetary cooperation, a new monetary system. And I think the developing countries missed the chance to really come up with a strong proposal along the lines, maybe, that one–the one that we had given, or others, to come up with a strong proposal that would have put pressure on the industrialized countries to react in either–in one or the other way. But instead, they started using the U.S. and the low interest rate countries for doing the wrong thing, which is not easy to justify, because if you are in a bad situation, as the U.S. was and as Japan is and Europe is, what should a central bank do as long as we do not have strong regulations that prevents the people from playing with the cheap money in the casinos? Well, then the only way out for the central bank is to lower the interest rate further and further down, up to zero, to get the economy started. And this has, clearly, repercussions, negative repercussions in the financial markets.

So we have to start the whole thing not with monetary policy, not with [incompr.] monetary policy, but with changing the financial market, the whole system that we’re living in. We do not have this kind of a game in the currency market. We had it in the commodity markets to a very large extent, and we have it in the stock market in the same way. They’re all–we have new bubbles. New bubbles are inflated everywhere. And then at a certain point in time, when something happens like the trigger of the Fed or so, then everybody seems to be surprised–oh, now we have the bubble is bursting and new damage is done. Well, we didn’t act before. We had the biggest crisis you could imagine in 2008, and the politicians have failed to react sharply and harshly to get the system to fix the system.

JAY: And just to put a human face on all this, we’re not just talking about financial markets and such. We’re talking about significantly higher unemployment in all the countries we’re talking about. We’re talking about the price of food when you’re talking commodity manipulation. You’re talking about more starvation, more hunger. I mean, we’re talking about millions of people’s lives being undermined, even destroyed in many cases. So this isn’t sort of an abstract problem for people, even though sometimes this financial stuff sounds a little abstract.

FLASSBECK: No, definitely not. And I would really wish that some more people take the opportunity to–this opportunity again to really reconsider what is happening in the markets and the misbehavior of the markets, the mispricing of the markets, and all these things–but as I said, even otherwise rather progressive economists shying away from naming it, naming it what it is, namely, the failure of the market to find the right price for the currencies. It’s not a lack of capital controls and things.

All this can help, but it’s not a solution. The solution is: take the currency valuation, the exchange rate out of the hands of the market. This is the only solution that is reasonable and rational.

JAY: Which is a sacrilegious principle at most financial institutions around the world.

Thanks very much, Heiner.

And all of you, please join us for part three of our series of interviews with Heiner Flassbeck on The Real News Network.


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