Leverhulme Globalisation Lecture Series 28 th March 2012 Nottingham

1. The shift and the shocksMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Leverhulme Globalisation Lecture Series 28th March 2012 Nottingham

2. The shift and the shocks

3. The shift and the shocks • Shift • Shocks • Prospects

4. 1. The shift • The 19th century saw the “great divergence” • The second half of the 20th century saw the beginning of convergence, with Japan and the east Asian “tiger economies” • The late 20th and early 21st centuries saw convergence spread to the Asian giants • Divergent growth is a mirror image of converging incomes

5. 1. The shift EMERGING COUNTRIES OUTPERFORM HUGELY

6. 1. The shift EMERGING COUNTRIES OUTPERFORM HUGELY

7. 1. The shift • The shift helped cause the shocks, via: • A “labour-supply shock”, which lowered relative wages of the relatively unskilled in high-income countries and encouraged household borrowing; • A “dis-inflationary shock”, as China lowered world prices for manufactures, which encouraged loose monetary policy; • Finally, an “inflationary shock”, as demand for raw materials soared, which made it more difficult to manage the crisis; • Above all, a “savings shock”, which lowered the real rate of interest and caused a huge rise in global imbalances.

8. 2. The shift THE SAVINGS GLUT?

9. 1. The shift RISE OF IMBALANCES

10. 1. The shift RISE OF FOREIGN CURRENCY RESERVES

11. 2. The shocks • The economic collapse was large and enduring • The rescue was also dramatic: • Liabilities of core financial system were nationalised; • Fiscal policy put on a war-time footing; and • Monetary policy extraordinarily aggressive; • We are now living in a “contained depression”. There are big risks with this, but it is better than the alternative • According to Carmen Reinhart and Kenneth Rogoff, This Time is Different, it could take another three years, to return to “normality”. Given the scale of affected economies, it could be far longer.

12. 2. The shocks: global THE LONG SLUMP

13. 2. The shocks: global THE LEVERAGE CYCLE

14. 2. The shocks: global THE US LEVERAGE CYCLE

15. 2. The shocks: global THE US LEVERAGE CYCLE

16. 2. The shocks: global MONETARY EXPANSION

17. 2. The shocks: global THE ARRIVAL OF ULTRA-CHEAP MONEY

18. 2. The shocks: global THE SOVEREIGN DEBT IMPACT

19. 2. The shocks: global FISCAL ROOM? YES - FOR SOME

20. 2. The shocks - eurozone • The core of the eurozone financial crisis is not fiscal • The fiscal crisis is more a symptom of the financial crisis than a cause of that crisis • The crisis is largely the result of divergences accumulated in the years of excess: what made everything seem so good was in fact creating an acute long-term crisis • External imbalances played a bigger role than fiscal imbalances: it mattered less whether the private or public sectors were being financed than how big the external finance was

21. 2. The shocks - eurozone THE GOOD, THE BAD AND THE UGLY

22. 2. The shocks - eurozone LOST COMPETITIVENESS

23. 2. The shocks - eurozone ROAD TO THE EUROZONE FISCAL CRISES

24. 2. The shocks - eurozone ROAD TO THE EUROZONE FISCAL CRISES

25. 2. The shocks - eurozone TRIUMPH OF THE EUROPEAN CENTRAL BANK

26. 2. The shocks - eurozone TRIUMPH OF THE EUROPEAN CENTRAL BANK

27. 2. The shocks - eurozone TRIUMPH OF THE EUROPEAN CENTRAL BANK

28. 3. Prospects • At the broadest level, we are watching the interaction of two huge events: • A secular shift in the location of economic activity; and • The collapse of a generational expansion in private and, to a lesser extent, public sector leverage in high-income countries • The eurozone crisis falls at the intersection of these processes • So how might it all play out?

29. 2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012

30. 2. The prospects: global GROWTH PROSPECTS POOR FOR 2013

31. 2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012

32. 2. The prospects: global GROWTH PROSPECTS DWINDLE FOR 2012

33. 3. Prospects: global • Here are salient elements of global challenges : • Accelerating de-leveraging in the private sectors of overleveraged countries; • Rebalancing the world economy, to give over-leveraged economies export-led growth; • Reducing fiscal deficits in high-income countries, without killing the recovery; and • Avoiding excesses in emerging countries, despite the easy financial and monetary conditions.

34. 3. Prospects: eurozone • Here are salient elements of eurozone challenges : • Financing with adjustment, which will take at least 5 years and possibly 10 years; • By “adjustment”, I mean structural reforms and divergent inflation across the eurozone, with high inflation in core countries; • The big danger is premature fiscal tightening in the periphery together with absence of adjustment in the core, which would generate prolonged recessions; • And risks a collapse in political support for the project.

35. 3. Prospects • Some guesses about the future: • The US will be much the most dynamic of big economies; • Growth in high-income countries will remain weak; • Inflation will remain contained; • Short-term official interest rates will remain low; • Countries with their own central banks will have low long-term bond rates; many eurozone countries will not; • Eurozone break-up risk is significant; • Emerging countries should continue to grow quickly, but there is a chance of crises there, too, now that finance is flowing towards them.