World Facing 'Crisis of Capitalism': Economist

Following the economic and market "bungee jump" out of the 2009 abyss, one economist is warning that we face a "once-in-a-lifetime crisis of capitalism" and "Deficit Attention Disorder."


“The private sector has no choice but to deleverage, exacerbating the economic impact of the loss of past growth drivers. Untimely financial attrition in the public sector, therefore, is going to add to the economic predicament,” said George Magnus, a senior economic advisor at UBS, in a research report this week.

With growth still low or depressed from the last peak in growth in early 2008, Magnus said a new recession or "double dip" would in fact be the continuation of a recession that started three years ago following the collapse of Lehman Brothers.

Magnus believes, therefore, that focusing solely on austerity measures is not going to produce economic stability and a return to sustainable growth.

“The problem needs to be considered more widely, encompassing our system’s lack of capacity to create jobs and strengthen income formation," he said.

“And several major governments retain the ability to structure public finance in ways that can help both, while preserving a credible long-run program to lower the public debt burden” Short-term measures to support growth and a long-term plan to cut spending are what is required in Magnus view, but few have managed to balance both.

“President Obama recently proposed the former but the U.S. lacks the latter, while the UK and others have the emphasis the other way round,” said Magnus, who describes this condition as "Deficit Attention Disorder."

The sheer scale of the bust following the boom years from the 1980’s to 2008, and the subsequent financial crisis, have in Magnus’ view “bequeathed a once-in-a-generation crisis of capitalism, the footprints of which can be found in widespread challenges to the political order, and not just in developed economies.”

With stocks under pressure and bond markets turning Japanese— meaning low yields — in Magnus’ view, financial markets may have realized this is the case.

“It is not fashionable to say so, not least in policy circles. Recognition would be a good start, and it was refreshing that the new head of the International Monetary Fund, Christine Lagarde, recently called for co-ordinated macro policies to support economic growth, and the mandatory and substantial recapitalization of European banks," Magnus said.

Lagarde’s call was largely ignored and actually sparked anger from a number of EU finance ministers, who refused to accept that action was needed.

“It is a crisis of capitalism because our economic model and policy settings can’t produce sustainable growth, adequate income formation or employment creation,” Magnus said.

“We have lost the housing, financial services and credit creation growth drivers and been left with excessive levels of personal and government debt to unwind, a dysfunctional financial system, and weak labor markets,” said Magnus.

With consumers now unable to keep up with the production of goods and services as they rebuild their balance sheets, Magnus believes economies are facing a crisis of aggregate demand.

“The latest U.S. employment data, for example, showed that the level of employment in the U.S. is no higher than it was in 2004," he said.

"The proportion of the population aged over 16 in work is the same as in the 1950s.” With the politicians following austerity, only the central banks are being seen as credible players in the battle against recession, but this will not work, according to Magnus.

“The litmus test of policy should be its relevance to employment creation, and the embracing of fiscal, lending, investment and infrastructure initiatives, as well as measures to facilitate household deleveraging,” he said.

The first action that Magnus believes need to be taken is a major recapitalization of the European banking system before attempting to tackle major structural issues.

Fiscal union is unlikely to offer the solution to that problem, according to Magnus.

"Creditors are becoming increasingly powerful and assertive and debtors too are at serious risk of becoming austerity-weary, while already anxious about ceding more sovereignty to creditors and European institutions," he said.

"The political limits to fiscal integration have not yet been reached, but if there are further moves towards but not reaching this goal, they will most certainly be on German, and therefore, limited, terms. We may conclude that while the Euro system is not about to break up, its viability as it stands is far from assured," said Magnus.