Global imbalances between savings and investment are presented as a hidden problem that needs to be corrected. In the last two decades, the collapse of the fixed exchange rate system and the decision to open financial markets in developing countries generated avid demand in these countries to channel international trade and capital flows. This was a cheap mechanism to finance development, but dangerous and responsible for the main economic crises of recent years.
These crises of the 90’s were resolved by imposing the pragmatism preached by neoliberalism and the Washington consensus. But these measures, which were designed to stabilise the economy through tight fiscal and monetary discipline, do not constitute a real solution. In order to resolve the problem, both excess savings and investment patterns must be corrected. If only one of the above is corrected, the imbalance is moved to another country.
The current economic crisis in Europe is a replica of these discrepancies of savings and investment, but combined with free movement of capital within the EMU and fixed exchange rates that accelerate the transfer of abundant and cheap money. Wage restraint and the reforms at the beginning of the century in Germany caused a change in the current and savings accounts. Since then, the German economy has grown due to foreign demand and stagnant domestic wages, not really by an increase in productivity. This German imbalance generated an excess of money that soon flowed into the countries of southern Europe. The number of productive investments in a country is limited, but with cheap and abundant funding, inefficient projects and the revaluation of assets also find it, resulting in: a growth of wages above productivity, an oversized public sector and a real estate bubble. The problem is that the measures imposed on Spain, Greece and Portugal have managed to reduce the deficit and part of the imbalances, but Germany maintains a savings glut which has not been corrected, and therefore may cause new problems in other economies.
Figure 1: Labour productivity (% yearly), 1996-2013 – 2007-2013
Unlike what it is intended to reflect, it is not a problem of economic virtue in Germany and irresponsibility in Greece or Spain, but simply a matter of excess savings and investment. Therefore, the negotiation on the future of countries with high deficits should not only be unidirectional but should also impose limits and constraints on Germany and other surplus countries.
Figure 2: Current account PIIGS and Germany
(% s/GDP), I 2002 – II 2014
In recent years, this line of argument has transcended to international organisations (G20), with the aim of raising China’s awareness, and at European level, through the implementation of the macroeconomic imbalances procedures. However, while the obligation to correct the deficit is easy to impose (cutting the funding of the country as in Greece), countries with a high level of external financing capacity can hardly be forced to change.
The problem of global savings imbalances is not new but it is true that has gained in importance. If we analyze the balance sheets of the major international central banks, we realise that they have tripled since 2007, to a total of $16 trillion. These expansionary monetary policies, with the aim of stimulating growth and fighting deflation, have inflated the financial assets’ value and fostered cheap and unproductive funding.
Figure 3: Main global Central Banks balance sheets (trillions $), jan 2007 – dec 2014
As a result, and according to McKinsey’s estimates, global debt has increased by $57 trillion between 4Q07 to 2Q14, which a total of 289 per cent of global GDP. This growth is due to an increasing demand for financing, especially from the government, whose debt has gone from 33 to $58 trillion with an annual growth rate of 9.3 per cent during this period.
The restrictions imposed by the economists Rogoff and Reinhart on the growth of debt have become obsolete. Developed countries grow by borrowing rather than by productivity. The optimal leverage of a country varies and depends on investor sentiment. The US case, with high debt levels, but also with a high-quality rating grade, is a great example.
As a consequence of the reduction in interest rates and the increased money supply, the price of all financial assets have grown in recent years with one exception, the price of raw materials, which indicates that this value increase is related to speculation and liquidity rather than to growth.
Figure 4: Return on assets in USA (%) jan 2002 – dec 2006 vs jan 2012 – dec 2014
However, this degree of leverage does not mean we inevitably go toward a new worldwide economic contraction. Money growth is leading to an inflation of financial assets, but if this level of supply is maintained and is not reduced abruptly in the long term, we will contemplate higher global prices above targets, low interest rates and not necessarily growth. The global bubble is a reality but the imbalances in international savings are the real global time bomb that can trigger another perfect storm, with the Greek crisis being the first of many others and not just an isolated case of irresponsibility.
Figure 5: Global financial assets growth (Trillions $), 1980 – 2013(Trillions $), 1980 – 2013