Monday, July 20, 2015

Beyond Greece

Questions around the parasitic nature of financial markets and debt.

It’s not just about Greece. At one time or another the focus will have to include serious reflection on financial markets, austerity and debt. There are already signs of a significant change in global response to what is the most critical financial issue of our time.

It was fascinating to follow the media and the hysterical zeal in trying to cover and dissect the latest Greek events while offering all kinds of interpretations, views and even advice. It gave birth to a number of new financial opinionistas, especially on social media. This is a good thing in spreading the debate about financial concerns to a much wider participation, even though most followed the partly justifiable yet oversimplified euro refrain of blaming the Greeks for chronic overspending and indolence, not fully acknowledging the fact that there was an explosion of sovereign debt globally, including Europe since the 2008 crisis. Not even the podium occupying and now seemingly victorious neo-coloniser Germany was immune, far exceeding the accepted guidelines of 60% of GDP.

In all the discussion, there has been a failure to recognise fully the shift after the 2008 crisis, of private debt to sovereign debt in the form of banking bail-outs. A substantial part of government debt has not been because of citizens “living beyond their means”, but simply loading on tax-payers the fruits of reckless lending by those institutions deemed “too big to fail”.

Creditors adopt an audaciously sanctimonious posture when they face a debtor in default, forgetting their eagerness to harvest as many IOU’s as they could, and their responsibility to fully assess the risk in the first place. We know the story all too well in South Africa with the African Bank debacle and the cavalier behaviour of some micro-lenders.


The article related to the above chart underscores the self-evident folly of imposing a one-size-fits-all currency system on nations with divergent economies. Outspoken economist Stephen Keen at Kingston University calls it “an insanely badly designed currency system”. An exchange rate is a country’s ultimate “international price” and removing its cushioning and balancing role completely eliminates the capacity for smooth adjustments to circumstances.

But by far the more ominous message of Greece is one that is confronting the globe. It’s a moot point how many other advanced economies are heading that way. According to Keen: “It is ignorance about money creation that has led to this catastrophe.” (For a video series on money creation follow this link)

It is this ignorance too that seriously questions austerity where economies can simply no longer grow out of debt through creating tangible value, trade and production; where faltering growth strangles the incomes of debt ridden ordinary folk; where money gets increasingly diverted into non-productive capital assets profiting a select few; and where huge injections of debt are neutered by decelerating money velocity or broad mobility.

With this in mind, it is perhaps not all that surprising that one of the biggest global lenders, the International Monetary Fund, has broken ranks with the Europeans in the “troika” in condemning the austerity proposals and demanding that at least part of the Greek debt must be written off. With all of its extensive and often bad experience with austerity programmes over decades, the IMF stance represents a significant shift in authoritative global institutional thinking on current levels of sovereign debt. It certainly goes much deeper than the geo-political reasons conspiracy theorists are now offering. There clearly is a point at which austerity simply becomes devastatingly counter-productive.

The failure of increasing debt levels to encourage economic growth, indeed perhaps even stifle it, has led to French Economist, Thomas Piketty calling for a global conference on debt. In a Moneyweb article earlier this year, I noted (on the strength of a McKinsey Analysis) that a 40% or $57-trillion increase in global debt to $200 trillion had largely failed to significantly revive economic growth since 2008. Total global debt (government and private) is approaching 300% of global GDP.

A discussion on the state of global finances cannot be complete without an examination of the financial services industry itself. Have we not created a huge parasitic monster? It is no longer “fringe” or outrageous to question not only whether the sector adds value, but whether it may indeed be destroying it.

Adding value has three dimensions: transforming something or a situation; the measurable difference in value before and after transformation and, above all, the underlying behaviour or contribution to society as a whole. We too often forget the latter. If it had no significance, drug pushers or extortionists could argue that they add value. (Britain not so long ago added proceeds from drug deals and prostitution to their GDP figure, boosting it by 0.7 %.)

Most of us readily accept the value of the financial sector on the conventional understanding that it mobilises savings, promotes greater information sharing, improves resource allocation, facilitates diversification and management of risk, and promotes financial stability. But a recent International Monetary fund staff paper has questioned whether this is always so. They point out that “there are costs as well, particularly at high levels of financial development. In fact, there can be instances where there is ‘too much finance’, that is, instances where the costs outweigh the benefits.”

The authors have distinguished between a broadening of financial services and a deepening of it. The former relates to expanding services to a growing market, innovation, technology and improved efficiencies of those factors mentioned. The latter, however refers to the growth of complex trading instruments and (my addition) debt expansion.

On the strength of this they have developed a Financial Development index which shows a tipping point at which financial services no longer contribute to economic growth, but can start being counter-productive. This largely corresponds with the state of the economy itself, where the trends are negative in advanced economies but mostly positive in emerging economies. This may be a source of comfort for countries like South Africa, which by and large has a well-regulated and still “broadening” financial sector. But the sheer size and impact of financial services on a global scale make no-one immune to its destructive effects.


The nature of the industry and technology means that it is not a large source of employment, especially in its deepening. Yet it forms a significant share of GDP (20% globally). Financial trading itself can add to a country’s measured Gross Domestic product, but it clearly has very little impact on employment, production and a multiplier effect.

It’s long been an accepted hypothesis that “where enterprise leads, finance follows”.

Much like the real driver of sustainable business is (or should be) customers’ needs and not profit, financial services and debt should be facilitators of economic development, not the driver; the slave and not the master.

The last three or so decades have seen a significant shift in this position. We may look back in time and recognise its devastatingly parasitic nature.

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