The global economy is in for a “synchronized slowdown,” according to a joint study compiled by The Financial Times business publication and the Brookings think tank. Although it is too early to talk about recession yet, the pace of global economic growth has clearly begun to decline. A number of experts have been issuing warnings of a recurrence of the 2008 financial apocalypse. Director of the Institute of Economic Policy and Economic Security Problems of the Russian Government’s Financial University, Merited Economist of Russia Sergei Silvestrov predicted a new global financial apocalypse in 2020 in an interview with Invest Foresight: the next crisis can come from the US or southern Europe, provoked by toxic securities unsupported by the real economy.
Black holes in global economy
– According to analysts, the world may face another global economic crisis this year or the next. What is the likelihood of this scenario?
– Crises are cyclical in nature. Their cycles have shortened over the past century though: while earlier, they occurred every 12-14 years, now this happens much more often – every 6-8 years. Over the post-war period, the world has faced more than 40 crises. Many attempts have been made to analyze them and learn to foresee them, none of them particularly successful. The longest cycle ended 10 years ago with the crisis of 2007–2008: it had lasted 119 months.
There are all the signs out there that the current business cycle is coming to a close – an even longer one than the previous – so the likelihood of a new global crisis is increasing. The main reasons that caused the economic crisis of 2007–2008 in the US have not gone anywhere – on the contrary, they have multiplied. The only difference from 2007 is that additional risks have appeared. There are even more frozen toxic stocks in the US and Europe, and the overuse of currency swap transactions continues to grow. Sovereign debts have grown in all developed economies, while servicing of those debts is not covered by budget revenues. A period of deflation has begun: deflation is spreading around the world with the exception of Asia.
– Is there anything that can be done to prevent a new crisis?
– The first thing to be done is to reevaluate gold; secondly, there is a need to introduce new commodity resources; thirdly, to increase the transparency and sustainability of financial institutions; and fourthly, to strengthen the role of international institutions in regulating and eliminating global imbalances. It is necessary to limit the circulation of toxic stocks – junkbonds. There is a variety of tools now available for dealing with toxic assets that form a financial bubble – now is the time to use them. The financial bubble is about $1 quadrillion – many times the size of the gross global product, which is a sum of the real production and trade.
Everybody stopped in their tracks expecting a new financial crisis which, according to different sources, may happen this or next year. Some experts talk about 2021. One thing is obvious: the financial bubble will be inevitably squeezed, as a general rule. The financial system, that has drifted away from the real economy, must change and become more tightly bound to actual reserves – not only and not so much to gold but to commodity resources that have their own currency value and form a basis for the real economy. These valuables could be metals, including copper, nickel, aluminum, food products such as grain, coffee, soy, and energy resources.
– The 2007 crisis began in the United States. Where will the next global crisis begin? Also there?
– Nobody can say. The world is caught in uncertainty. Yes, the US economy is one of the most risk-laden ones. But it is based on the US dollar, the fundamental currency unit, the currency of the global financial system, which helps Americans overcome difficult situations. Moreover, Donald Trump’s recent decisions revived the economy: US GDP grows by 3% to 3.5% per year. Compared to Europe’s 2% it is not too bad. Of course, China is way ahead but Chinese economic growth is about to slow down.
But despite its growth and increasing employment, the US economy could also break down. The US national debt is growing and now exceeds $20 trln. The total US debt is around $100 trln. The economy is burdened with debt. States live on loans, local governments, students and households live on loans. All these loans need to be secured by something. For now, the Americans manage to balance it, maintain the stability but it’s hard to predict how long it will continue.
Before 2007 everybody knew that mortgages that are not secured by respective collaterals will lead to a crisis. Nobody bothered to solve this problem. Financiers wanted more revenues. This greediness brought on the economic collapse.
– Will the new crisis be stronger or, on the contrary, weaker?
– It will be deeper, with its costs higher and consequences more difficult. Everybody is expecting it, some even want to trigger it in order to strengthen global governance institutions. Some powers want to make the global governance system even more dirigist.
– The global financial crisis started with the mortgage crisis in the United States. How will the next crisis begin?
– I don’t know. We need to know whose winnings are not secured by material resources, not hedged. I think there may be difficulties concerning state credits of the United States and a number of European countries. This is where there could be a risk of defaulting on sovereign debts.
Risks to the economies of South European countries are obvious: the economies of Italy, Spain and Greece are unbalanced, ineffective and have unjustified sovereign debts. It is possible that production facilities and banking structures will shut down there. In order to prevent these negative scenarios, the resources of all European countries might be needed.
Various financial institutions are another weak point. For instance, Deutsche Bank: it has €43 trln worth of toxic assets. This is a bomb waiting to explode and ruin the stability of Europe. The bank got carried away with price gouging during the fat years, like Americans did, after seeing what kind of profits can be received from investment banking. But operations carry big risk, and the history knows examples of that: let us recall, for instance, the crash of the Austrian Creditanstalt bank in 1931, which caused the collapse of the entire European banking system.
Noose on the Russian economy
– How can the financial crisis affect the Russian economy, which is currently under sanctions?
– This is not about sanctions. If the Western financial system collapses, the Russian economy will naturally suffer a great deal. We are way too much open in the financial sense. First, venture capital will immediately leave Russia. Large part of foreign capital is in federal bonds, its share is over 30%, over RUR 2 trln ($31 bln). If hedge funds, legal entities and even individual businesspeople feel danger, they will immediately leave our market. Second, banks will be forced to purchase Russian government bonds, which might cause a financial crisis, a growing state debt and increased cost of its management. It does not bode well for Russia. Therefore it is already necessary to think about how to protect the country’s monetary and financial system.
– What about the Reserve Fund, which in 2008 helped counteract the crisis? Will it save us again?
– In fact, even in 2008 it did not help much. Russia’s economy suffered the most, capitals left the country and we faced stagnation. It took us a lot of time to remedy the situation, and in 2013 there was another recession. Investment activity in Russia stopped in 2012. The Reserve Fund (now the National Wealth Fund) can help the country for two-three years, but crises last longer than that. It takes 4-5 years to overcome a complex economic crisis, when stock prices are falling and loans are decreased. Given that there are also sanctions imposed against us and that we need to modernize the economy recreate investment activity, well, think about how long it will take. And still, no resources are allocated to these areas; all of them go to the sovereign wealth fund and international reserves.
Many experts believe that the fiscal rule threshold of 7% of Russia’s GDP is too high. The National Wealth Fund and other reserves are based on proceeds from sales of no more than ten of main Russian products which are popular outside. And what is going to happen in case the demand decreases? Stagnation?
I think that the current condition of Russia’s economy very much reminds that of a sick organism that goes through recurring remissions.
– Could a social and economic strategy help in developing the national economy and for what period should it be drawn up?
– I believe that the strategy should work through 2025, as the President mentioned initially. The country cannot exist without our awareness of the basic areas of its social and economic development: we should see risks, assess them and be able to see various possible scenarios. We have to create top companies and develop new technologies; we need to understand that our competitors – Japanese, Chinese and Americans – are developing strategies intended to last at least until 2035-2040. We should have such strategy, otherwise we will be affected by spontaneous effects of various obscure facts as well as global turbulence.
– Can you say which major risks will Russia’s economy face this year?
– Our economy will remain stagnant, with pro-inflation process to take place. The main risk is the lack of investment activity; this, along with the blocking financial policy, is linked to poorly-adjusted relations between businesses and the government.
– And the last question. The World Economic Forum in Davos has a tradition: each year, experts are asked the same question as to whether the world is becoming a better or a worse place and people becoming happier or less happy. What would be your answer?
– It all depends on what part of the world you live in. There are different approaches: some think that a simpler and more primitive life is a happier life. A US researcher once asked a question as to who is more happy – a prosperous resident of New York living in a penthouse on the highest floor of a multi-storey apartment building, or a pigmy person living in a forest. It appeared that a pygmy will die if he relocates to New York, while a NY resident will not survive in the jungle. Who is happier then? The pygmy, who lives in total balance with the nature, believes it is him. Residents in big cities live in a state of permanent conflict with themselves: while being prosperous, they feel emotionally drained and exhausted on an everyday basis. I am confident that actually each person has the opportunity for a happy life on this planet, but not everyone uses it.
By Aleksandr Stolyarov