Caracas, May 2020

Contemporary crises

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The 2008 global financial crisis was the epilogue to a long chain of crisis since the late 19th century. Issues addressed and discussed in Bretton Woods (1944) during the creation of the International Monetary Fund (IMF) as a mechanism for international cooperation, in view of the need to restrict gold deliveries, allowed only for payments from international trade, while, before the verification that commercial banks granted credits and recorded deposits in compensation, a mechanism we call Second Generation Banking, where governments place their debts as negotiable instruments; This option has been accepted as a lower risk and guaranteed return operation, which blatantly competes in the short term with the adventure of reproductive investment, creating goods and jobs … in the long term; with the result of generalizing financial / speculative investment; that reaches the exchange rates.

In such context, the minimum of the interactions to which we must refer, for the study of the economic-financial consequences in the world political-economic environment, at a given moment, are: the historical-analytical perspective or understanding of the past or diagnoses and the corresponding prognosis, taking into account the variations in the determining factors.

Hence, this article, based on the information available to date, presents a brief diagnosis; of the real economy and then consider the substantive changes in the theoretical heritage, and, finally, present an economic prognosis, accompanied by proposals for political solutions.

1. Recent developments in the global economy

There are many reasons why the end of the second decade of the 21st century finds analysts of the world economy concerned about the next development. The first of them are the discouraging signs that show the global economic behavior, when it was verified that the measures taken for the recovery of the growth, after the financial crisis of 2008 – 20111, were not all the effective thing that was expected; and, on the contrary, the initial growth in the coastal economies of the North Atlantic, was followed by the decrease of the production, of the employment, and of the deviation of the credit resources towards speculative activities, stimulating the permanence of the inflation; which induced the political leadership of the United States (2017) to adopt strategies (America First) that deviated from the purpose of seeking freedom of trade and capital movement previously advocated; creating strong political tensions; in particular with Russia and China. Being the succinct expression of the changes that the Societies of the South have contributed more to the economic well-being of the planet, than the Societies of the North; as it is inferred from the following facts:

a) A sharp 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 assessment by continent shows the following results: North America -0.1%, South America -0.5%, Asia +0.2%, Australasia -0.7%, Sub-Saharan Africa and Europe


1The concept of crisis has various meanings; and, in economy it is often associated with the Theories of Cycles, which describe perturbations (expansions – contractions) by diverse causes. The explanations given, related to the evolution of the productive systems, have selected, first exogenous and then endogenous variables. In all of them the transition from the expansion phase to the contraction phase represents the critical moment. Among the various theories, it is worth recalling, among the former, those of Juglar (1862) which emphasize price variation, and that of Kondratiev (1926) referring to the association innovation investment and, among the more recent, those of Abraham-Frois (1995) and Dumenil (2000), which differ from the former in the abandonment of the hypothesis of temporal regularity and in the emphasis on endogenous variables related to financial activity.

Western, 0.0%, each. North Africa and the Middle East, -0.6%, and Eastern Europe, -0.8%.

It should be said that: in the United States, the increase in its interest rate, which is around 3%, exceeds the rate of growth of the GDP; its decrease is predictable for 2020, and that its economic achievements are explained because the American financing occurs in its national currency. This is a circumstance that they have tirelessly defended since 1945, when the dollar became the international monetary standard… while in South America, stagflation persists, due to the credit strangulation caused by high interest rates, given the persistence of the double trade and fiscal deficit in all the countries, which explains the failures of the South American currencies2.

In Asia, the leadership in economic growth is taken by India, as the Chinese trade surplus decreases throughout the period 2012 – 2018; the fiscal deficit increases and the interest rate rises, which discourages the private productive sector (56%); it is also threatened by the autocratic aspirations of Xi Jimping to reduce it.

In the European case, Germany maintains a clear economic leadership, although the revaluation of the euro could bring some clouds to its foreign trade, focused outside the European Union (73%); while the negative real banking rate, opens field to financial speculation. This and the growing fiscal and foreign trade deficits in most EU countries, have sustained or growing trade balance deficits that hit the European economy … With aggravation, whatever the outcome of the Brexit, in addition to the tensions in the


2In 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 price increases, which is inconvenient for importers and exporters, as the volumes traded are reduced.

within the European Union, in the face of a Germany that is strongly opposed to the populism associated with social security.

Finally, let us say 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 arena, which leads to higher fiscal deficits.

From what has been said, it can be inferred that behind the casuistry of the specific crises in the different countries3 there is a depressive tendency, which allows us to infer that the ultimate cause is in the malfunctioning of the Second Generation Monetary Financial System. It seems indispensable to introduce changes to achieve a better economic-financial functionality. A mutation that we will call Third Generation Banking/Finance; through which the population will find the essential employment to reach with their income the subsistence with minimum risk.

That is, in political terms, the enforcement of the employment clause; explicitly, or implicitly, incorporated in contemporary constitutions or social contracts.

Consequently, in the study of the monetary systems, the characteristics of the internal socio-political order, or domestic order, and the conditions of exchange with other societies must be considered, which are related by means of commercial-monetary-financial-international traffic, or conditions or external order; following the described financial-monetary evolutionary guidelines. (balls of wood)


3Described by, among others, Galbraith (1991)

2. Substantive changes in the theoretical background

No one doubts the statement that makes today’s productive investment the necessary condition to offer increases in production and employment in the future… The problem is the length of the waiting period to satisfy the needs, real or imaginary, that can be seen from the present… Thus, potential investors, after the experience of the economic crisis – world politics: 2008 – 2011; and, in the face of failed hopes, must be cautious.

¿Can the theoretical arsenal of Economic Science and its capacity of abstraction of the random determining factors of the short term help us, when we immerse ourselves in the situational or clinical analysis, conditioned by the deep changes reported by economic history?

2.1 Economic science: balance between rationality and political pragmatism.

The history of Economic Science tells us that, from the political decisions put into practice and the reaction of the community, among the most debatable and discussed aspects are the theoretical subtleties related to the presence of money…And that contemporary theory sustains that relevant information comes from the arms of the expenses made, the income received and the necessary balance that equalizes income and expenses in the pockets of the economic agents, when they act in the different markets, including the one conformed by bank credit and its cost: the interest rate. This is the generalization of the banking activity and the evaluation of the risk of debtors and creditors.

In short, it is from macroeconomic information4, in relation to credit needs, that a central component of the evolution of reproductive activity can be determined, considering that if the planned expenditure is for investment, the maximum probability of success in the selection of the good to be produced, or the service to be provided, will be required so that the borrower’s ex-post facto balance shows a surplus between expenditure and income, to enable the debt to be settled with the lender.

In summary, in the case of investment, the rate of return is the focus of attention of real economic and financial activity; and when this does not happen, diverting the credit flow towards speculative and consumer activities, as occurred between the end of the 19th century and the beginning of the 21st century, bank failures and the corresponding political crises appear. It is then convenient to put an end to the emergence of such events; focusing the success of the banking operation on the supervision and control of the processes that will allow the borrower to obtain a surplus…

The aforementioned requirement corresponds to what we call Third Generation Banking5; an option to face the evoked crises, by modifying the administrative characteristics inherited from the processes followed by Second Generation Banking during the 20th century: concerned with limiting the expansion of bank credit, according to debatable criteria. Subject to which we will refer below…


4Data on the results of collective action, where it is not a trivial circumstance that money and relative prices allow desires for certain goods to be quantified.

5Mata Mollejas, L. and K. Asker Hasam (2018)

2.2 Impact of the psychological factor on theoretical understanding

During the first half of the 20th century, the International Monetary System of Bretton Woods, accepted the need to have deposits of convertible fiduciary currency, to control the credit offer by means of a multiplicative calculation6, when 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 financing requirements of the reproductive investment (credit), that need the passage of time to reach its 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 the possibility of earning income, by acquiring government bonds (sovereign titles) or any other title (or debt) offered in the stock markets7.

That is, forgetting the speculative factor, which affects the dynamics of credit and the interest rate…and that the benefit of retaining money for the service it provides in the current exchange (Tobin, 1965) decreases with the increase in inflation.

In very simple terms, the use of the multiplicative algorithm concept in Second Generation banking, to limit credit expansion, it has the of accepting vice as truth, fallacious arguments8 that lead to the so-called financial restriction and repression, or a priori limitation of bank credit.


6This criterion means that supply must be able to expand at the same rate as demand: if this is not the case, prices will rise. For that reason the monetary system based on gold had to be changed; and it i sabsolutely stupid to think that the present world can return to it or rely on another natural physical resource… of limited existence on the planet.7Keynes (1936/1951, pp. 167-168)8Fallacy of composition.

And only the further consideration, from the seventh decade of the 20th century onwards, of the fact that loans granted appear as assets on bank balance sheets, with a formal counterpart in the deposits, led to operating reserves being calculated as a result of a divisive algorithm, which replaced the multiplier previously used9. The new system was logically called New View and the previous practice Old View10.

Thus, 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 the hand of M. Allais (1981) and from the requirements to carry out the clinical diagnosis of compromising situations far from or desirable normal behavior was obtained from the contributions of J. P. Benassy (1984). The contributions mentioned are summarized in the compensation of real and financial transactions; since every income of someone is an expense of another.

A distinction can be made 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: bank interest rates, stock market returns (reflecting marginal productive efficiency) and the exchange rate differential.

It should be noted that, in small and open economies, speculation and the escalation of credits can be associated with the persistence of the fiscal deficit and that the stock market


9Let us note here that the rules for establishing reserves obey the Old View approach, under the idea of providing protection to those who save; the implicit assumption being that such deposits are essential (not marginal) and that the banking operation is one of intermediation to facilitate real investment through credit: operations that would give the banking system intrinsic fragility. Hypotheses that seem to be typical of the nineteenth century.

10It is important to remember that, in 1973, critical works such as those of R. McKinnon and E. Shaw appeared, in which it was argued that the a priori financial restriction was being intentional financial repression in small and open economies, with the government’s purpose of increasing the flow of resources from the private economy to the government, without resorting to openly increasing the tax

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 Molleja (1999)11. In accounting terms, the substantive part of the central bank’s liabilities will be constituted with the International Reserves (NIR) and with the foreign exchange equivalent of private banking reserves. «The routine operation should be centered in attending the critical instrumental variable; which will be the interest rate in countries with internationally accepted currency, or at least with a domestic market of greater importance than the external one; and the exchange rate will be the critical variable when the conditions before mentioned are not met» (Mata Molleja, 2017, p. 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 … or, at least that does not lead, steadily, to the devaluation of the national currency.

Finally, it should be noted that the compromising situations12 evoked stem from delays in drawing up and implementing administrative rules adapted to the framework of the New View, and that the crises of the late 20th and early 21st centuries are associated with the consequences of using the fallacies of the Old View, resulting in the inadequacy of reactive measures taken in fits and starts; such as the so-called quantitative crisis coping facilities 2008 – 2011 … given the subsequent persistence of the depression.

11That is why the fiscal authorities must be parsimonious in contracting external credit and the central bank must provide timely assistance to the credit market; distinguishing foreign currency credit to promote exports and floating the exchange rate to avoid falling into the excesses of exchange rate speculation.

12Circumstances 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.


3. Towards a new monetary banking order

In view of the depressive behavior of the world economy, as we saw before, it is understandable that large industrial and financial corporations resort to speculative investment, given the possibility of central banks to raise interest rates, frightened by inflationary threats, when they act on the basis of the theoretical imaginary of the Old View; transformed into credit repression (see ANCE Bulletin No. 22) by not considering, with careful attention, the opposite relationship between movements in interest rates and exchange rates; in addition to the decreases in international trade due to geopolitical tensions and conflicts. In short, it must be said that the economic performance of the economies can be evaluated by observing the following relationships:

1) Productivity, which depends 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) Central bank support for private banking. Main source of reproductive investment or goods and employment.

In relation to such indicators, very synthetically, it can be said:

  • That US stock market values (S&P, 500) have quadrupled between 2009 and 2018; this is more than double that of European values (Eurostoxx, 50) and the values of emerging countries (MSCI) according to J. O’Sullivan, in his article Convergence Theory (The Economist, The World in 2019),

    • That seeking high interest differentials, entails, as a corollary, seeking low working capital costs; which induces a slow growth of domestic consumption.

    In terms of the productivity/performance ratio, the United States is one step ahead of Europe and two steps ahead of China, according to R. Dalio in Back to the Future (The Economist, The World in 2017);

    Therefore, in the stock markets, it is only possible to expect marginal changes in the stocks held; at the same time, in the banking markets, the short-term credits in the industrialized countries, such as the United States, the European Union, Great Britain and Japan, are limited by the expected increases in the interest rates, since the real rates are today negative, before the inflationary average; while in the emerging countries they are high; not being foreseeable their reduction, because of the devaluation of the external debt that this would imply13.

    Thus, it only remains to emphasize that, with the end of the Quantitative Facilities, and in general of the cheap public money, disbursed to face the crisis 2008 – 2011, the world economic growth for the rest of 2019 and for 2020, will be lower than the one obtained in 2018… and that the depressive tendency, plausibly, will extend beyond 2021; covering the industrialized and emerging countries.

    Consequently, it seems sensible to conclude:

    1st) That, it is possible the occurrence of a new and deep crisisFor which, without a doubt, not being attentive, to the evoked symptoms and to the arguments presented in the acapites it seems more than justified to seek, everywhere, the urgent implementation of the THIRD GENERATION BANK: whose management monitors the use of

3In the case of China, the balance sheet of its Central Bank is negatively affected

credit, to ensure the projected return on reproductive investments that generate goods (with anti-inflationary consequences) and employment (the real basis of distributive justice) and

2ª) That to persist in the financial order in the manner of Second-Generation Banking is to engage in political conduct that is clearly irrational.


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

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

Bernacer. (1922) La Teoría de las Disponibilidades como interpretación de la Crisis. Revista nacional de Economía (España).

De Bernis, G y A. Cordova. (2000) La Situación actual de la Economía Mundial. Nueva Economía, 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.

Kindelberger (1991) Manías, Pánico y Crack edit. Ariel, Barcelona.

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

Mata Mollejas, L. (2017) Tres tesis radicales, 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

Wicksell, K (1898/1962) Interest and Prices Edit. A. Kelley. New York

Annex Nº2: Variation in GDP

Space Environment




Situation 08-2019

Variation 08-2019/2017

América del Norte






América del Sur






Europa Occidental






Europa del Este






Asia (sin Japón)
























Medio Oriente






Sources: Own calculations from The Economist: The World in 2019, 2017 y 2014; de Informe CEPAL (2019); from

CEPII (2005) y The Economist 03-08-2019).


Ana Teresa Delgado de Marin

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