Date: Fri, 1 Aug 2014 12:31:49 +0200
The US Dollar and the Search for a "Reasonable" Capitalist - Heiner
Flassbeck on RAI (3/5)
On Reality Asserts Itself, Mr. Flassbeck says the stock market bubble can
burst at any moment because everybody knows there is no real growth behind
it; then we are really in trouble as the whole effect of stabilization will
disappear in one moment
- July 31, 14
Bio
Professor Dr. Heiner Flassbeck
Graduated in April 1976 in economics from Saarland University, Germany,
concentrating on money and credit, business cycle theory and general
philosophy of science; obtained a Ph.D. in Economics from the Free
University, Berlin, Germany in July 1987. 2005 he was appointed honorary
professor at the University of Hamburg.
Employment started at the German Council of Economic Experts, Wiesbaden
between 1976 and 1980, followed by the Federal Ministry of Economics, Bonn
until January 1986; chief macroeconomist in the German Institute for
Economic Research (DIW) in Berlin between 1988 and 1998, and State Secretary
(Vice Minister) from October 1998 to April 1999 at the Federal Ministry of
Finance, Bonn, responsible for international affairs, the EU and IMF.
Worked at UNCTAD since 2000; from 2003 to December 2012 he was Director of
the Division on Globalisation and Development Strategies. He was the
principal author of the team preparing UNCTAD's Trade and Development
Report, with specialization in macroeconomics, exchange rate policies, and
international finance. Since January 2013 he is Director of
Flassbeck-Economics, a consultancy for global macroeconomic questions
(www.flassbeck-economics.de).
Transcript
The US Dollar and the Search for a PAUL JAY, SENIOR EDITOR, TRNN: Welcome
back to The Real News Network. I'm Paul Jay. And this is Reality Asserts
Itself with Heiner Flassbeck. He joins us again in the studio.
Thanks for joining us.
Heiner worked at UNCTAD since 2000, and from 2003 to 2012 he was the
director of the Division on Globalization and Development Strategies. Since
January 2013, he's now the director of Flassbeck-Economics, a consultancy
for global macroeconomic questions. And from 1988 to '98 he worked at the
German Institute for Economic Research, and from '98 to '99 at the Federal
Ministry of Finance in Bonn, where he was a vice minister responsible for
international affairs, the E.U., and the IMF.
Thanks for joining us.
DR. HEINER FLASSBECK, FMR. DIRECTOR, UNCTAD DIVISION ON GLOBALIZATION AND
DEVELOPMENT STRATEGIES: Thank you for having me.
JAY: So we're continuing our discussion about whether or not there's any
rationality or reasonableness left in capitalism. You've used the phrase
several times in the earlier segments if there were any reasonable
capitalist, they would. And I'm questioning whether there are such things.
But let's dig in further to the crisis and unpack it a little bit. In an
interview in 2008, you were asked whether you were surprised by the crisis
at, and you said you were not surprised by the crisis; you were surprised
how intense it was. But you also said you were surprised that the American
dollar--you were expecting in the crisis the American dollar would go down
significantly. And in fact it not only didn't go down; it went up. Everybody
started buying American T-bills. So there's been prediction after prediction
of the collapse of the American dollar and the American dollar isn't going
to be the reserve system anymore. And I remember from '08 there was this
really out-there prediction there. There was something--they were going to
call it the amero or something. The whole American currency was going to
collapse. I mean, none of that's happened. The opposite happened.
FLASSBECK: Yeah, that's right, and so far I was wrong. But the point is what
I didn't expect is the weakness of Europe. Well, I predicted that something
like the crisis would happen in Europe, because the reason for the crisis
that led down in the beginning of the currency union in '99 already, --but
nevertheless it was not clear in 2008 that Europe would fall into such a
deep hole. And--and this is the most important thing--and this explains the
weakness of the euro compared to the dollar, that European politics would be
so weak and European politics would misunderstand the crisis, would
mishandle the crisis, would mismanage the crisis in a way as it has
happened, with austerity in the midst of a recession and things like that.
So that was clearly beyond my imagination. I couldn't imagine that something
like that would happen, that the German finance minister would say in the
middle of the crisis, we need austerity, everybody needs austerity. This is
really absurd.
But what we see now is a sortcertain of weakness of the dollar. But you're
right,: it will never be so strong that the dollar will fall to levels that
are no longer acceptable politically. And if it would, then there would be
intervention by the central banks. We have seen it wentwhen the euro once
touched 1.60 or so. Then there was really intervention, verbal intervention
first, and then physical intervention, so to say, later on. So for the world
currencies, the scenario cannot be such that there are big movements. And
even if there are sometimes irrational and big movements, then the central
banks will step in. We have seen it with the Swiss franc. Swiss franc was
rising, rising, rising against the euro and the dollar, and then the Swiss
central bank at a certain point stopped it just by intervening and by
intervening up to today. It's now more than two years that they keep the
Swiss franc at a rate of 1.20 to the euro. So they're-- and among the big
currencies, these things do not happen anymore in a way that they would have
happened, say, in the '80s--they still happened like that.
What we have seen, nevertheless, is we have seen huge movements in
currencies that are absolutely irrational, namely, in emerging markets. If
you look at the BRICS countries--Brazil, South Africa, Russia, even, and
India--we have seen perverse movements of capital flowing into these
countries, appreciating the currency, the so-called carry trades, where
people are--.
JAY: This is where people can get money--big banks get money from the Fed at
practically zero and then can loan it at four,4 or 5five--in Turkey right
now you can get 12 percent for that money.
FLASSBECK: Well, 10 percent, 12 percent in an emerging economy, which is
absolutely absurd, because the losses are in the countries that are
receiving the money, so to say. You're getting a lot of capital, but you pay
for that a very high price because nobody can earn this [at this pace
(?)][crosstalk]
JAY: But isn't this part of the reason, that in times of crisis, money heads
to the American dollar?
FLASSBECK: That's right.
JAY: Just to finish, the point is that over the last few decades, the United
States always finds a way to shift thea crisis somewhere else. A, and
whether it's shifting it into Latin America, where it's giving these loans
that were floating in the '70s that then went into crazy 20 percent interest
rates. But one way or the other, are not all the economies now, or most of
the economies in the world, they're in that American basket, and this global
capitalism is managed by the United States, and they have to buy into it.?
And I know there's talk about other kinds of currencies and the Chinese
trading with Latin America and using their own currencies, and there's
little bits of that, but the system seems so now dependent on American
management that there just isn't another basket.
FLASSBECK: Yeah, but, you see, thise silly point, so to say, the silly point
that I have to make is that the American management of the crisis was much
better than the European management. So this was besides the point.
JAY: But it's also easier for them to do, too, given that it's their
currency.
FLASSBECK: Well, no, Europe could do the same kind of policies. The euro has
been a strong currency, despite it was not really competing [with] the
dollar in terms of reserve currency. But it was strong enough to do
autonomous policy in Europe.
JAY: In fact, the Fed helped European banks.
FLASSBECK: Yeah, but for a time. But the management, the overall management
of the U.S. was superior to the euro management. That's absolutely sure,
because, well, Europe, it's difficult to find decisions for among 28
countries and things like that, and the German leadership was not very good,
and so on. So there were many reasons for that. But tThis was not a natural
thing, from in my view; i. In my view, it was not a natural thing. Iin 2008,
with the crisis originating in the United States, with most of the trouble
originating here in this country and not in Europe or elsewhere or in
emerging markets, it was not natural that the United States would, so to
say, be able to distribute part of the burden to the rest of the world. But
the management was quite good, despite all the criticism. They had a huge
program to stabilize the economy in the first round, and the Fed was
incredibly pragmatic in overcoming all the dogmas of monetarism and things
like that and going into the fight against deflation, which was, in the end,
not successful in the way that I would say you are back on a sustainable
growth path--that is not the point--but at least in avoiding a further
slowdown and avoiding a big slump and avoiding a depression.
JAY: And so the Fed has been--what they call quantitative easing--shoveling
trillions of dollars into the banks and making them look solvent and giving
them practically free money. Although I don't think anywhere near as much
got invested into the real economy as supposedly was the objective here, it
did seem to create a kind of bottom on the fall in the recession. You know,
the Great Recession didn't become the great depression, as people say. But
how long can that mechanism work? I mean, essentially, creating money and
making the banks look way more solvent than they really are, according to
most people. But how long does this mechanism keep working?
FLASSBECK: Well, it can--you see it. You can see it in the stock markets.
What the main effect that the Fed did was a bit in the housing market in the
United States. It stabilized the housing markets, because people are buying
houses again and because mortgages are very cheap. But the major effect was,
so to say, a wealth effect, creating wealth, perceived wealth in equities.
JAY: The stock market bubble.
FLASSBECK: The stock market bubble. And this stock market bubble is the big
burden, so to say, for this whole kind of policies. If it is going to
burst--and it can burst every moment, so to say, because everybody knows
that it is a bubble and that there is no real growth behind it--if that is
going to happen, then we are really in trouble, because then the whole
effect, so to say, will disappear in one moment, the whole effect of the
stabilization. And then a quickthe question comes again.: Sso what is really
stabilizing these economies--? Aand then I have to come back to my point,
namely, to say you need incomes policy, you need wage stabilization. You
cannot go on with this imbalance in the labor market.
JAY: And we're going to dig into that more, but just to get this one point
nailed, 'cause if the market does crash and people don't believe this bubble
any longer, the Fed's kind of out of tools. I mean, they've already got
interest rates at historic--how much lower can interest rates go?
FLASSBECK: No, then it's over. Then it's over. They cannot do any more. That
was the last instrument, so to say, the last weapon that they had. The last
[trap (?)] that they have is to create wealth, perceived wealth, and in the
hope that the people who own the equities feel richer, and feeling richer
would incentivize them to spend more. But, well, we know the rich people are
not the main spenders in the economy, but the mass of the people has to
spend. And so it has very limited effect at this moment in of time. The only
thing that it has done is people have reduced a bit their savings ratio.
Income growth is not back on a growth trajectory.
So there is really--in my opinion, we're still on a stagnative mode. We have
a little bit of growth, which is not self-sustaining, which is not
automatically coming, coming into quarter-to-quarter increases. We have a
kind of stagnation still even in the United States.
JAY: So if this is kind of smoke and mirrors--China looks at this, India
looks at this, I mean, I think all the countries of the world look at
this--why isn't there a more serious attempt to get off the U.S. dollar as
the reserve system and create something else? If everyone--I mean, wouldn't
all these places think that this crash is coming sooner than later and
they're looking at this American stock market bubble and such?
FLASSBECK: Yeah, but you see, Europe was a chance to overcome this kind of
thinking in national compartments, so to say. But with the failure of
Europe, the developing countries--look at Latin America. There were attempts
to think about monetary coordination. In Asia they were starting to think
about monetary coordination, thinking about an Asian monetary fund and
things like that. This all has gone, because [of] the failure of Europe. I
think this is the--if you don't have that model anymore, if it's shown that
this model does not work politically, for, in my view, purely political
reasons it does not work, then how could you convince people in Latin
America, very diverse governments, to come together and talk about monetary
coordination? I've been working on that. I have done a report on monetary
coordination in Latin America, . bBut it all failed in the end. Nothing came
of it.
JAY: You couldn't find your reasonable capitalists.
FLASSBECK: No, and not even reasonable politicians. That is sometimes--for
that you need politicians who are reasonable and sit together and really
discuss seriously a kind of coordination of monetary policies. But that's
very difficult now. No, tThey don't.
JAY: Okay. In the next segment of our interview, we're going to dig more and
this issue of the need for higher wages and the relationship of wages to the
crisis. So please join us on Reality Asserts Itself on The Real News Network
with Heiner Flassbeck.
End
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