FINANCIAL CRISIS in 2020? by L. Mata Mollejas y K. Asker Hasan

FINANCIAL CRISIS in 2020? by L. Mata Mollejas y K. Asker Hasan

Human societies are, like their members, organisms or systems with the capacity to react, or living organisms; with dynamics subject to four major conditions: a) The learning of past experiences; b) The institutional organization or ontological characterization, with the capacity to make/transform/process non-human entities, for the material sustenance of life, or real economy; c) The exchange of what is produced, between individuals and their groups, through the different modalities of money, obtaining relative valuations or prices; and d) Decision-making, linking desires and will (psychic acts), which allow and explain the emergence of trust between in individuals and collectives; or political processes, to coordinate actions in pursuit of achieving common purposes.

In this context, the minimum of interactions to which we must refer, for the study of the economic-financial consequences in the world political-economic sphere, at a given moment, are: the historical-analytical perspective or understanding (comprehension) of the past, or diagnosis (diagnostic), and the corresponding prognosis, when considering the variations in the determining factors. Therefore, this article, based on the information available to date, presents a brief diagnosis, including substantive changes in the theoretical background, and finally presents an economic prognosis, accompanied by proposals for policy solutions.

 

1.- Recent evolution of the real planetary economy.

There are many reasons why politicians in the world are concerned about the future. The first is the discouraging signs of global economic growth, as it was found that the measures taken for its recovery, after the financial crisis of 2008 – 2011, were not as effective as expected; and, the second, the tendency to external imbalance was enough to induce the political leadership of the United States (2017) to adopt strategies (America First) that deviate from the purposes of seeking freedom of trade and capital movement, previously advocated; creating strong international political tensions; in particular with Russia and China. Being the succinct expression of the changes in the economy, the fact that the Asian Societies have contributed more to the economic welfare of the planet, than the North Atlantic Societies; as it is inferred from the following facts:

  1. a) The continued decline in world GDP growth: 2.8% in 2014; and an expected growth of 2.1% by the end of 2109. This is a variation of -0.4%, and

(b) The equivalent evaluation by continent, which gives the following results: North America, -0.1%; South America, -0.5%; Asia, +0.2%; Australasia, -0.7%; Sub-Saharan Africa, and Western Europe, 0.0%, each; North Africa and the Middle East, -0.6%, and Eastern Europe, -0.8%.

It should be said that the economic achievements of the United States, that do not compensate the economic deterioration of Mexico, are explained because the US financing, occurs in its national currency. Circumstance that they have tirelessly defended, since 1945, when the dollar became an international monetary standard… While, in South America, stagflation is persistent, (by) before the credit strangulation due to the validity of high interest rates; given the persistence of the double commercial-fiscal deficit in all countries; which explains the disruptions of the South American currencies[1].

[1]In this regard, it should be noted that the oil and mining world in general, given that quotations are made on financial markets, there are threats of prices increases … which is inconvenient for importers and exporters, as the volumes traded are reduced.

     In Asia, the leadership in economic growth is taken by India, by reducing the Chinese trade surplus throughout the period 2012-2018, increasing the Chinese fiscal deficit and the

rise in its interest rate, which discourages the private productive sector (56%), also threatened by the autocratic aspirations of Xi Jimping to reduce it.

 

Finally, in Europe, Germany maintains a clear economic leadership; although the revaluation of the euro could bring some clouds to its foreign trade, focused outside the EU 73%. This, and the growing fiscal and foreign trade deficits, in most other EU countries, the mediocre performance of the European economy… With aggravation, whatever the outcome of the Brexit: a knot complicated by tensions within the EU, in the face of a Germany that strongly opposes populism associated with Social Security, in France, Italy and Spain. Let us also note that Russia, although it has let the rouble float widely, has not managed to dilute the depressive threats… increased by its ambition to increase its leadership in the international sphere, which leads to growing fiscal deficits… And how does economic science interpret this?

Let us say then that despite the different approaches to economic policy, nobody doubts the claim that makes productive investment today, the necessary condition to provide increases in production and employment in the future … The problem is the extent of the waiting period to meet the needs, real or imaginary, that are glimpsed from the present … Thus, potential investors, after the experience of global economic political crisis: 2008-2011; and, in the face of failed hopes, they must be cautious.

Can the theoretical arsenal of Economic Science help us by immersing us in macroeconomic situation or clinical analysis?

 

  1. Economic Science: balance between rationality and political pragmatism.

The history of economic science tells us that, among the most debatable and discussed aspects are the theoretical subtleties related to the presence of money… And that the contemporary macroeconomic theory sustains that the relevant information, comes from the arms of the expenses made, of the perceived income and of the necessary balance that equalizes income and expenses in the pockets of the agents, in the different markets; including the stock market/speculative and the one conformed by the banking credit and its cost: the interest rate. This is the risk assessment of debtors and creditors.

In short, it is based on information regarding credit needs and the conditions of its supply, associated with the consideration of whether the planned expenditure is likely to generate an ex-post facto balance of the borrower with a surplus, to enable the debt to be settled with the lender. This criterion imposes that it should be possible to expand supply in line with demand: if this is not the case, interest rates and prices would rise. That is why the monetary system based on gold had to be changed; and it is absolutely stupid to think that the current world can return to it or rely on another natural physical resource… since everyone has a limited existence on the planet.

The above-mentioned requirement corresponds to what we call Third Generation Banking[2]; an option to face the evoked crises, by modifying the banking administrative characteristics of the Second Generation Banking, derived from the Bretton Wood Agreement and tending to limit the expansion of banking credit; according to debatable criteria… Subject to which we will refer below.

 

 

2.1 – Incidence of the Psychological Factor in the Theoretical Understanding.

During the first half of the XX century, the International Monetary System accepted the need to have convertible trust currency deposits to control the credit offer by means of a multiplicative calculation or Old View, upon assuming that the cause of inflation was the expansion of the monetary offer; mixing, in a single item, the liquidity for the exchange in the cash operations, and the requirements of the cash operations, and the requirements of

[1] Mata Mollejas, L. y K. Asker Hasam (2018)

of the reproductive investment (credit), which need the passage of time to reach maturity.

Such confusion is very serious, as it omits the fact that reproductive investment increases the supply of goods… In addition to forgetting the reasoning related to the so-called Liquidity Trap; whose central argument is the opportunity cost of conserving money, when there is a possibility of earning income, or New View, by acquiring government bonds (sovereign securities) or any other security (or debt) offered on the stock markets[3]. That is, forgetting the speculative factor; since the benefit of retaining money for the service it provides in the current exchange (Tobin 1965) decreases with the increase of inflation.

In very simple terms, the use of the multiplicative algorithm concept in Second Generation banking to limit credit expansion has the vice of accepting, as truths, fallacious arguments that lead to the so-called financial restriction and repression, or a priori limitation of bank credit.

While the consideration, from the seventh decade of the XX century, of the fact that the credits granted appear as assets in the bank balances, with formal counterpart in the deposits, gave rise to the calculation of the operating reserves as a result of a divisive algorithm, which replaced the previously used multiplier[4].

3 Keynes (1936/1951, pp. 167-168).

4 Note here that the rules for establishing reservations follow the Old View approach, under the idea of providing protection to the saver; the implicit assumption being that such deposits are essential (not marginal). While the reality is that most banking operations are intermediated to facilitate the real investment through credit in concurrence with stock market operations, or speculative Condition that gives intrinsic fragility to the financial system.

 

2.2 Substantive changes in the theoretical background.

Let us recall that the macroeconomic justification required, to avoid the error and harmful governmental abuse of using the criterion of limiting a priori the creation of bank money, will come from M. Allais (1981) and J. P. Benassy (1984) who emphasize the compensation of real financial transactions; because all income of somebody is the expenditure of someone else…distinguishing between the incidence of financing through credit and the consequence of using national and foreign securities (stock exchanges), including the purchase and sale of foreign currency, since the productive and speculative activities of any country present three options for profit and risk: the differential in bank interest rates; the stock market yield (a reflection of marginal productive efficiency) and the exchange rate differential.

It should be noted that, in small and open economies, speculation and credit escalation can be associated with the persistence of the fiscal deficit and that the stock market plays a minor role, due to the narrowness of the productive apparatus; at the same time that the variations of the exchange rate come from the situation of foreign trade (Mata Mollejas 1999)[5]. For this reason, the routine operation should focus on attending to the critical instrumental variable: the interest rate, in countries with internationally accepted currencies, and the exchange rate in countries where the national currency does not facilitate international exchange: Mata Mollejas, 2017 pp. 41-42.

That is, in the usual circumstances of small economies, necessarily open to foreign trade… and consequently, with welfare dependent on a trade balance with a surplus… not wasted fiscally. Thus, the compromising situations[6] mentioned above stem from the delays in drawing up and applying administrative rules adapted to the New View framework.

[1] Therefore, the fiscal authorities should be parsimonious in the contracting of external credits and the central bank should provide timely assistance to the credit market; distinguishing credit in foreign currency for the promotion of exports and letting the exchange rate float to avoid falling into the excesses of exchange speculation.

[1] Circumstances associated with short-sighted monetary policy aimed at pursuing an illusory stability in the relationship between domestic purchasing power and exchange rate stability (external stability) despite the warnings of real impossibility issued by Mundell in 1962.

3.- Economic Prognosis and Political Solutions.

In view of the depressive diagnosis of the world economy, it is understandable that the large industrial and financial corporations resort to speculative investment; given the possibility of the central bank to raise interest rates, to mitigate inflationary threats, when it acts on the basis of the theoretical imaginary of the Old View; without considering the opposite relationship between the movements of the interest rate and the exchange rate and the decreases in international trade due to political causes. In synthesis, we must say that the economic performance of the economies can be evaluated observing the following relations:

1) Productivity, depending on the incorporation of technological innovations, or long-term dynamics;

2º) The timely supply of working capital, with short term credit or commercial credit, related to the dynamics of national consumption; and

3º) The support of the central bank to the intermediation banking, with variable returns (risky)

In relation to such indicators it can be said:

  1. a) That the US stock market values (SyP,500) have quadrupled between 2009 and 2018; which is more than double the European values (Eurostoxx,50) and the values of the emerging countries (MSCI) according to J.O’Sullivan, in his article Convergence Theory (The Economist, The World in 2019), and
  2. b) That the search for high interest differentials implies, as a corollary, to seek low working capital costs; which induces a slow growth of national consumption.

Hence, in the stock markets, it is only possible to expect marginal changes in the stocks held; while, in the banking markets, short-term credits in the industrialized countries are limited by the expected increases in interest rates, since the real rates are negative today; while in the emerging countries they are high; their reduction is not foreseeable, due to the devaluation of the external debt that this would imply.

Thus, it only remains to emphasize that, with the end of the Quantitative Facilities, and in general of the cheap public money, the world-wide economic growth for the rest of 2019 and 2020, will be inferior to the one obtained in 2018… and that the depressive tendency, plausibly, extends until year 2021; including the industrialized and emergent countries.

Consequently, it seems sensible to conclude that the occurrence of a new and deep crisis is possible… Therefore, without a doubt, not paying attention to the symptoms evoked and the arguments presented in the previous chapters, ignoring the possible preventive action to be tried with the THIRD GENERATION BANK, would be an expression of an unpleasantly irrational political behavior.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MINIMUM REFERENCE BIBLIOGRAPHY

 

Allais, M. (1981) Théorie General des Surplus. PUG. Grenoble.

Benassy, J.P. (1984) Théorie du déséquilibre et fondements microéconomiques de la macroéconomie. Revue Economique.

De Bernis, G and A. Cordova. (2000) La Situation actual de la Economia Mundial, Año, no. 15.

Friedman, M. (1963) Inflation, Causes and Consequences Edit. Asia Publishing House. Bombay.

Galbraith, J.K. (1991) Breve Historia de la Euforia Financiera. Edit. Ariel Barcelona.

Keynes, J.M. (1936/75) Teoría General de la Ocupación, el interés y el Dinero, Edit. FCE, Mexico.

Mata Mollejas, L. (2017) Tres tesis radicals, Edit. Fundación Alberto Adriani, Caracas.

————- (1999) Essay on the Economic Synthesis and Financial Hegemony in The Current State of Economic Science (vol III) Spellbound Publications, Rohtak.

[1]In this regard, it should be noted that the oil and mining world in general, given that quotations are made on financial markets, there are threats of prices increases … which is inconvenient for importers and exporters, as the volumes traded are reduced.

 

[2] Mata Mollejas, L. y K. Asker Hasam (2018)

3 Keynes (1936/1951, pp. 167-168).

4 Note here that the rules for establishing reservations follow the Old View approach, under the idea of providing protection to the saver; the implicit assumption being that such deposits are essential (not marginal). While the reality is that most banking operations are intermediated to facilitate the real investment through credit in concurrence with stock market operations, or speculative Condition that gives intrinsic fragility to the financial system.

 

Financial Crisis in 2020 docx.docx

 

[5] Therefore, the fiscal authorities should be parsimonious in the contracting of external credits and the central bank should provide timely assistance to the credit market; distinguishing credit in foreign currency for the promotion of exports and letting the exchange rate float to avoid falling into the excesses of exchange speculation.

[6] Circumstances associated with short-sighted monetary policy aimed at pursuing an illusory stability in the relationship between domestic purchasing power and exchange rate stability (external stability) despite the warnings of real impossibility issued by Mundell in 1962.

Ana Teresa Delgado de Marin

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