Guide New Profits From The Monetary Crisis

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A trade war would lower export sales for most countries and drive up prices of imports for households and companies. As a result, economic growth would slow, along with employment and investment. Real incomes would fall for the very people Trump claims his protectionism would benefit. If this happens — just at a time that the US Federal Reserve is thinking about raising the cost of borrowing to control budding inflation — it could be the final ingredient in a recipe for new economic recession, at a time when most countries are just recovering, 10 years after the last one.

Michael Roberts works as an economist in the City of London. His latest book is Marx Lulu and he blogs at thenextrecession. Debt crises are an ever-present risk for developing countries. In the case of sub-Saharan Africa, the post-independence build-up of debt to official creditors — be they governments, the World Bank or the IMF — led to a debt crisis in the s and s. This was only alleviated due to a combination of debt relief — under the Highly Indebted Poor Countries Initiative, with conditions that the recipients adopt free-market policies — and the resumption of growth in the s.

The latter was primarily due to a commodities boom, bolstered by robust global economic growth.

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But the spectre of a debt crisis once again haunts sub-Saharan Africa. The total value of outstanding debt in the region has almost doubled between and , to more than billion dollars, of which more than a fifth is to private lenders. The continued accumulation of debt at the current pace, especially if accompanied by low commodity prices and higher global interest rates, may eventually cause some countries to be unable to repay their debts. Damningly, the world has failed, despite recurrent international debt crises, to establish either principles for creditors that would diminish the accumulation of unsustainable debts, or a debt resolution mechanism that could deal with such crises effectively when they arise.

Although this may reduce future risks, it cannot substitute for a set of background principles governing the accumulation of sovereign debt, and, in the event of crisis, bringing about its orderly restructuring including write-offs. Such principles should protect the most essential forms of government spending — those relevant to protecting vulnerable populations — and require a sharing of risks between debtors and creditors, much as domestic bankruptcy law ensures. There has been considerable discussion, within academic circles and international agencies, about the logical and practical basis for such principles.

It is time to codify and implement them. Otherwise, in the event of a global economic downturn or other events causing debts to become unsustainable, development both in Africa and globally will be severely challenged. A bank is an institution that lends money and which uses deposits, guaranteed by central government, to finance that lending. Shadow banks, in contrast, lend money without taking deposits that are guaranteed by the state; examples include hedge funds, pension funds and private equity.

So if a shadow bank defaults, its investors have to bear all the risk, whereas if a bank defaults, the government will step in to save depositors. Many of the complex instruments that caused the financial crisis — from asset-backed securities to CDOs — were concentrated in the shadow banking sector. When the value of these assets collapsed in , the shadow banking system — concentrated in the Global North — collapsed with them. Sine then, however, the fortunes of the shadow banking system have turned.

The 2008 Crash: What Happened to All That Money?

The Financial Stability Board has shown that the share of financial assets held by non-deposit taking institutions reached almost 50 per cent in Shadow banks can provide credit with fewer restrictions and there are concerns that many shadow banks are relaxing their underwriting standards, particularly when it comes to refinancing existing debt. It is true that the regulatory environment has moved on since the financial crisis. Ambitious proposals have been put forward for the regulation of both banks and shadow banks — from breaking up commercial and investment banking to taxing financial transactions.

Some of this has been implemented. But as the dust has settled, much of it has been forgotten. In fact, just as before the financial crisis, some fairly tough regulation has been imposed on banks while the shadow banking system has been left almost entirely untouched. There is no shortage of potential solutions — from extending capital requirements to shadow banks, to regulating their relationships with traditional banks, to limiting the amount they can borrow.

But unless democratic governments are able to tame the power of financial systems, financial institutions — shadow and traditional — will undermine their best attempts to bring the sector under control. It is not legal tender like ordinary money, and it is not a legal contract as a normal financial instrument would be. The US dollar price of these tokens has skyrocketed over the years and many observers see Bitcoin as a speculative frenzy.

Bitcoin is particularly susceptible to wild swings because it is not anchored into any real-world economy. Financial instruments like shares or mortgage-backed securities can go through prolonged speculative bubbles, but they eventually have to crash when people realize the prices do not match the underlying reality that the instrument references. Would a crash in the price of Bitcoin pose a threat to financial stability? Probably not. The market value of all Bitcoin tokens is only a sixth of the value of a single major US company. So, while individual people will lose their money if it crashes, it is unlikely to bring whole economies down.

The financialization of everything

Indeed, while many regulators are concerned by various issues that cryptocurrency poses — from its use within dark markets, to consumer protection — they are not in general concerned that it poses a systemic threat to financial stability. In other words, they have bigger fish to fry.

Cryptocurrency could be a useful alternative to our bank-controlled payment systems; groups like Wikileaks have used it to circumvent attempts by payments corporations to choke off their donations. On the other hand, cryptocurrency is seeing a big uptake by far-right neo-fascist users, and many are concerned about the massive energy consumption of the Bitcoin mining system.

Behind the scenes, the Bitcoin developer community is in the midst of a civil war.

Venezuela: US sanctions hurt, but the economic crisis is home grown

They believe that, in the context of another crisis, there could be a mass flight to cryptocurrency. This seems like wishful thinking. Gold is in extremely constrained supply and only the wealthiest really have access to it. Where might the next crisis come from?

There are several possibilities. In truth, though, speculating about the precise cause might not be productive.

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He shows that for 63 countries between and the average forecast made in the April before a recession year a year in which real GDP fell was for growth of three per cent. Crises occur when the values of assets fall unexpectedly — be they share prices, bond prices, the value of bank loans or factories, credit derivatives or whatever. Such falls are always possible for a reason pointed out by Keynes in This means asset prices are prone to fall — sometimes sharply — as expectations or sentiment change.

But the very same lack of knowledge of the future, which causes asset prices to be so fragile, also means that people are unable to predict such falls.


Because this lack is an inherent feature of the human condition, crises are inevitable. Instead, of asking when or why the next crisis will happen, we should ask: is the economic system resilient to sudden changes in expectations? Sometimes it is. In the early s share prices fell sharply. And yet the early s saw only a mild recession while the losses triggered the worst recession since the s. Why the difference? Instead of just trying to predict and prevent crises, policymakers should also ensure that economies can cope with them when they happen. This requires strong welfare states, a financial system that ensures that good projects can acquire financing even in bad times, and a willingness and ability of policymakers to take strong counter-cyclical policy actions via expansionary government spending, tax and interest rate policies.

Rather than engage in futurology, we should ask whether such institutions are in place now. I fear the answer is: not sufficiently so. Chris Dillow is economics editor at Investors Chronicle. He blogs at Stumbling and Mumbling. This article is from the July-August issue of New Internationalist. You can access the entire archive of over issues with a digital subscription.