In his speech he made 7 distinct remarks, that l will comment after each one!
My first remark is inspired by the very title of this session. In advanced countries, the average public debt to GNP ratio is 100%. In emerging countries, the figure is 30%. This is a very wide gap, and it represents one of the global economy’s largest imbalances. And one of the least mentioned. It also represents a complete reversal of the situation compared with just over twenty years ago. At that time, I remember well, I was chairman of the Paris Club, and emerging countries came to ask for the rescheduling of their debt.
The part of this remark l found most of interest was simply 20 years ago emerging countries asked to reschedule their debt, this has now led to their figure being 30% of GNP ratio! Whereas at the time and we are talking 1992 a time of high interest rates and collapse of the property market and massive property portfolio losses, has a debt ratio of 100%! Now this can lead very easily to an assumption l will not make,but safe to say, that when interest rates were high and banks, insurance companies and finance houses were losing money, due to massive repossessions! Nobody was aware that in fact they were coining it in offshore domains by building portfolios of property assets themselves. So for the lender on the face of it they were losing ,in fact they were losing to gain.
This was the first time the borrowers of this country were taken for a ride and it enabled the ability using these massive portfolios,to get asset ownership transferred to an offshore domain! Also this allowed the raising of capital to build hedge funds that one day would eventually lead to the next financial crisis in 2008!
Second remark, global demand is still fairly concentrated on the advanced countries. Not only is their debt higher, but their savings (as a ratio of GNP) are lower. The G7 countries alone still account for 56% of global consumption. The problem is clear. How can we hope to raise our level of consumption if we need to reduce our level of debt and increase our
savings? And if the advanced countries’ consumption stops growing, what will happen to global economic growth and particularly that of emerging countries with entirely export-oriented economies?
This has a hidden meaning of ” Debt Ratios ” is not clearly sign-posted for most people, but reveals itself,in what is not being said! Not so much by the speaker but the wording! In so much as we all know that debt causes a lack of income for purchasing power, leaving the economy of any country in a lack lustre state of growth! As any country is reliant on the ability to grow by borrowing!,In the late 1990’s most people had a savings account! This was called a ” rainy day fund ” but gradually this became eroded by ever-increasing consumerism! So now we have the lowest amount of savers in ” real terms ” ever as people’s views on saving, moved from safe havens of respectability, to evermore riskier investments! Of course hoping for the ever larger returns of scale, enter bankers and especially the greedy ones! Now with burgeoning hedge funds as their property portfolios had grown with rising house prices, they were forever on the look out for that ever-growing band of risk takers! So with their especially designed products they entered the investment market, using those people wanting a great return on their hard-earned cash!
This l called ” O P M ” or ” Other Peoples Money” as it was just like a drug to the investment bankers and their products were designed, for a win win situation! In their favor of course and just like shearing sheep they went to the slaughter, but with the economy on the up ,their wool would grow back and they could be sheared again!
We know the upshot and of course we know the winners and losers and also we know as is stated in the second remark! We need to raise our level of savings and reduce our indebtedness? How of course exports but not us exporting to emerging countries and making the profits! No! They export and we pay the prices that will eventually move higher and higher as they amass wealth like the other rich countries have done for years.
This l have called the “cleft stick syndrome” as there is no way out as savers have nothing to save as they live in a world of ” Buy Now Pay Later ” or payday loans! So to fuel the economy all we do is print more money as in Quantitative Easing and inject it into the community to repay debt! You get the picture!
Which brings me to my third remark: we need the emerging countries to continue investing their savings in advanced countries. We therefore need properly functioning international financial markets. In a world where the savings and financing needs are so geographically dislocated, properly functioning financial markets are a prerequisite for economic growth.
But, today the capital markets appear very unsettled and full of anomalies, and not just in Europe.
For example, certain sovereigns (the USA and UK for example) borrow today at historically very low nominal interest rates and at negative real interest rates despite the fact that their deficits are around 10% of GNP and that doubts exist regarding the future evolution of their debt levels.
Another anomaly: large corporations have accumulated unprecedented cash
reserves (several trillions of dollars) despite numerous highly profitable and
unexploited investment opportunities around the world, unsatisfied infrastructure needs and investment bottlenecks in commodities production.
This remark l find the most interesting and requires a little consideration of ” All that goes around comes around ” or my favourite ” We Reap What We Sow” and when it comes to wanting help, countries remember! The first paragraph says it all and we are asking a question ” We Need ” emerging countries to invest into advanced countries! There reply is evermore evident as swathes of London is now owned not by Londoner’s but by wealthier Chinese and our emerging countries cousins!
Why do they have to invest in our failing economies when they can acquire numbers of assets, by just waiting in the wings until we collapse! Why do they need to invest their money into our country when they can pick it up for a song when we can no longer keep our triple A ratings! Finally why do they need to lend us money when we cannot afford to repay what we owe, other than to control us and get us to do their bidding!
My personal feeling is if they need money from people we called second-rate citizens and we would provide contracts at best profitability for ourselves, are they now going to say ” Whatever you need ” just ask! No they are going to make us pay and pay to prove they can!
We can identify two reasons for this situation:
The first is the general and exceptional uncertainty weighing on the global economy. Uncertainty makes liquid and safe assets more attractive. It makes investment less attractive. It can therefore partly explain the phenomena that I have mentioned.
The second reason is more structural: a malfunctioning of our financial
intermediation mechanisms. There are doubts about the solidity of banks in
numerous countries. Debt markets are profoundly disrupted and International movements of capital have been highly volatile over the last two years.
This is quite self-explanatory but hides one vital piece of information and the reason why we cannot ever return to boom or bust! The reason is hidden in the text of what is not said and that is the word ” liquid” or as l prefer to call them ” fluid assets” meaning ever-changing! The actual fact that liquid has three states of wet, solid and in between has elude scientists for generations! The actual point of change is as vital to the asset as it is to the freezing and liquid state, but in financial terms this is not as clear! When you acquire an asset you acquire a version of itself in frozen or liquid form and are not aware of when its state will change! As in financial terms a frozen asset is a solid investment ” as in banking assets ” and a liquid asset is termed as changing and not as safe, even though we rely on liquid assets as we rely on solid! They are not the same because they are ever-changing making it impossible to quantify their true worth!
So the second paragraph only bear’s out the fact of how this liquid asset form has led to malfunctioning of financial markets, debt and borrowing ratios being out of alignment and capital markets unable to function as once they did! Due to undue pressure of the volatile markets!
The intervention capacities of central banks are of course limited. They can remedy temporary market disruptions and situations of liquidity caused by uncertainty.Recently they have intervened to an unprecedented extent, as reflected in their balance sheets. But they cannot permanently substitute financial markets and banks when financial inter-mediation malfunctions. Likewise, low or zero interest rates can contribute to stabilising the economy in periods of crisis, but if maintained over a protracted period, they can create distortions, encourage the formation of bubbles and create risk for long-term investors.
Indeed, on this topic, I would like to make one observation. The question of monetary financing of deficits was raised by David Thesmar. Such financing cannot in any way resolve the problem of the dislocation between savings and investment, either at the national level or at the global level. Some central banks have developed large-scale public debt acquisition programmes. They have done so for reasons relating to immediate macroeconomic stabilisation… to go beyond the zero-interest rate limit. The Euro-system as well intervened on a much smaller scale when malfunctioning debt markets prevented the effective transmission of monetary policy impulses. There is not a single central bank that is seriously considering
the monetisation of deficits with the more or less declared intention of reducing the weight of debt via inflation. In my view, this notion is nothing more than a financial analyst’s fantasy. In fact, over the last six months, we have seen constant confirmation of the anti-inflationary stance of monetary policy with, for example, the FED actually establishing a quantitative definition of price stability for the first time (in fact, identical to the one used by the (Euro-system).
This remark has a small number of areas that need exploring and relate to the how we got into the present situation? As we know high interest rates provide good savers returns and low-interests the reverse! So given the present global situation, should we be looking at higher or lower interest rates? Also remember with higher interest rates we fuel inflation as borrowing is lower and people need higher wages, so they borrow even more! Whereby lower interest rates make us more content and we still borrow but can afford the repayments, until austerity measures are imposed! Then people want to borrow even more and when lending becomes risky to banks after a crisis, they like the stock market pull in their horns in and ride out the storm!
So we have a dislocation between savings and investment and we cannot rectify ,one without the other as they need to be in balance! The ideal situation would be low debt, higher savings to lending ratios and affordable public services! Of course we can only achieve one of the three ,can you guess which one?
Well it is higher savings and the government will lead us very soon down the savings path by the means of investment into government bonds! Until now the sole domain of the public purse and these are now dwindling as tax receipts are down and investment into the country is at an all time low! So one avenue remains the ” tax payer ” they are now ready for shearing not by the banking fraternity but by our ” trusted government ” but with one problem ” How do they get us to part with our cash ” ? Simple by applying another scheme lost in translation ” Save As You Earn” to your pay-slip and telling all you ” Pay As You Earn ” people it is for the good of your country! Remember ” Patriotism” and we all stand together and help each other!
So close all tax loop holes [ except those that are not able to be seen] and show they can be trusted and then apply the cou de grat and we are sheared and paying to save our own money!
Our immediate priority is therefore to construct or reconstruct the mechanisms and structures of a sound and efficient financial inter-mediation framework. That is why, at the euro area level, the financial union project is fundamental. At the global level, the FSB’s role is crucial in developing a robust technical, regulatory and prudential architecture, adapted to the interconnection of our economies.
This is a remark that sends a chill into anyone who understands the sheer consequence of this strategy! The fact that the Euro Zone now wants a fiscal policy has not l am sure passed anyone by! The fact that this would control all countries finances under one roof and who can be trusted to control this huge pot of money? Well not a single one, is eligible as all countries shouting for this job have huge debts and massive lending! And one thing you never give any debtor is more money!
The last part of this remark is about the FSB acting as a control mechanism! Even though it is a paper tiger with no teeth and even less knowledge of the market they police!
So personally ” We do not need a fiscal union or policy or any other document ” we need ” GOOD FINANCIAL MANAGEMENT OF THEIR DEBTS” and nothing more!
Seventh and last remark: fiscal policy and debt management. Here, I would say that we are all guilty of a certain degree of ambiguity, both at the market level and at the political level:
On the one hand we want public debt markets that are broad, deep and liquid,
because they form the base on which our entire financial system is built. In
particular, government bonds are the safest and the most liquid assets. They act as reserves of value for a large number of investors, starting with the central banks themselves which hold them as foreign currency reserves or as monetary policy collateral.
And on the other hand we want solvent States, i.e. with perfectly controlled deficits and levels of public debt, which logically places limits on the growth of public debt markets.
This remark on the face of it seems a little like an analogy! As did ” Social Media ” sites all under that word ” free” account, sharing and widgets! All that was riddled with lies as all they wanted was your information! So it could be used and abused for financial gain! So why should fiscal and debt management work on the face of it? As we already have proof it does not – witness Libor and Euribor!
This contradiction is known by economists as the “Triffin dilemma”. It was first identified in relation to the U.S. balance of payments deficits and the value of the dollar, but it can also be applied to fiscal equilibrium. The economy needs a growing volume of risk-free assets, but the more they are issued, the more risky they become.We cannot totally side-step this dilemma, but we can avoid making it worse. It is clearly not good for major developed countries to find themselves in a situation where their solvency is put into question, or to allow markets to think that under certain circumstances, they may be unable to honour all their commitments. But this is what we have done in Europe, against the better judgement of the ECB, by introducing the principle of private sector involvement. The idea is attractive in theory. However, its consequences for financial stability are extremely negative. There has never been any doubt about whether the United Kingdom or the United States would honour their debts. Today they are enjoying very favourable interest rates compared with Spain and Italy even though the latters’ fiscal fundamentals are better. I know that some attribute this difference in borrowing conditions to the actions of the UK and U.S. central banks. I do not agree. I believe that Europe has a major project ahead of it to recreate a broad, deep and liquid public debt market that is completely and unambiguously free from insolvency risk.
This last part was the conclusion and bears no remarks from me other than to say, whatever we are told was not the truth and what we found out was not the truth and eventually we find out that it is not the truth! So why should we believe those that covered up from the beginning will they not cover up at the end?