Geneva: Former Reserve Bank of India (RBI) governor Y.V. Reddy on Friday warned that fragilities in the global financial system could trigger off another major economic crisis unless there is thorough “rebalancing” on several fronts. “Rebalancing has to be between national and global economy, state and market, finance and real,” he said.
Speaking at a meeting convened by the Geneva-based South Centre on G7 policies and their implications for global stability and growth, Reddy said “policymakers cannot base their policies on hope or assumptions, but they should be based on the assessments of the rebalancing that occurs from time to time.” Reddy spoke against adopting a “single model for all countries or for the global economy as a whole” given the emerging complexities in the global economy.
Reddy said he would agree with the findings of a report by Hervé Hannoun, a former deputy general manager, and Peter Dittus, former secretary general of the Bank for International Settlements that the G7 are sleepwalking towards war because of their flawed fiscal and monetary policies.
The report, which was released ahead of the spring meetings of the International Monetary Fund and the World Bank next week, argued that central banks in the G7 countries, particularly the US followed by the European Central Bank, “have become the facilitators of unfettered debt accumulation” at near zero or negative nominal interest rates. The interest rate “is the price of leverage in an economy” with non-bank corporations routinely using ultra-low interest rate to buy back their own shares, the authors argued.
Consequently, the total debt held by the G7 in the third quarter of last year stands at round $100 trillion, with the US, UK, Canada, Japan and the Eurozone accounting for 64% of total world debt. The US Federal Reserve, according to Hanoun and Ditter, “has dealt with the bursting of every asset bubble of the last 20 years by creating another larger bubble.”
The G7 represents the seven major industrialized countries—the US, Japan, Germany, France, Britain, Canada, and Italy.
In effect, the extreme monetary policies adopted by the seven industrialized countries since 2012 are severely undermining “the foundations of the market economy,” and the policies adopted by the central banks of the G7 are ready to burst. “An unprecedented asset prices bubble has resulted from seven years (since 2008) of near zero or negative interest rates,” said Hanoun and Ditter, which are fuelling “most of the speculative excesses observed in bonds, stocks, real estate.”
The most scary asset price bubble, said Hanoun and Ditter, is the bond bubble with currently three G7 countries (Japan, Germany and France) having nominal 10 year bond yields between zero and one percent, with 43% of G7 government bonds in major reserve currencies held by central banks and other public entities. Moreover, the “asset price inflation engineered by central banks is a key driver of the rise in inequality, ” they warned.
Commenting on the report, Reddy said he would agree that “G7 monetary policy capture by financial market” as well as “regulatory capture by large banks and financial industry.” The global financial crisis actually became the global economic crisis which was “transformed into a social crisis, and of late it is manifesting itself in political developments which we are unable to understand fully,” Reddy argued. “The attack on multilateralism,” according to Reddy, “is really an off shoot of the global financial crisis and its consequences.”
Reddy said when he was central bank governor he was dissuaded by the highest authorities in New Delhi and Washington from mentioning the “consideration of Tobin Tax” on cross-country financial transactions in a speech. He said Wall Street according to several accounts, including the former International Monetary Fund Chief Economist Simon Johnson, has become the “Wall Street- Treasury corridor.”
As regards the current face-off between the US and China, with China holding more than $1.3 trillion of US treasury bills, Reddy said “while the real economic activity is shifting rapidly to Asia, in particular China, the financial sector continues to be dominated by the West.”
Besides, public sector dominates in China by making public policy more effective, while private sector dominates in the US economy. “While China has significant strength on the current account, the US has significant strength in terms of the return on external assets” which has implications for external sector vulnerabilities, Reddy said.