Jan Kregel

1. Financial Globalisation and InstabilityTheCrisis of International CapitalismIDEAS International CONFERENCE on Financial Instability and Inequality in an Economically Integrated World Jan Kregel

2. Minsky and Heinz Pickles:57 Varieties of Capitalism • Evolution of Capitalist Realisation Crisis: • Rosa Luxemburg extended Marx to International realization of surplus value: • Dos Santos, Gunder Frank, Wallerstein: • Dependency, Centre Periphery, World Systems • Minsky’s Stages (Heinz 57 Varieties) of Capitalism: • Commercial to Finance to Managerial to Money Manager to Global Financial Capitalism • Characterised by Evolving Financial Structure • Post-War Evolution from National to Global • Characterized by shift from Concentration to Dispersion

3. Divide and Conquer: From Concentration to Dispersion • Global Financial Capitalism: From concentration to dispersion • of production and investment decisions • Of global design and global supply chains • increased global labour supply, • Reduced bargaining power of labour • Reduced productions costs • Reduced labour incomes • Increased and more concentrated profits • Real labour incomes declining or stagnant • Marxian Realisation Crisis or Keynesian Global Demand Crisis • Demand only supported by Persistent Creation of Financial Asset Price Inflation • Consumption sustained only by capital gains and/or increased household debt

4. Dispersion in Financial Innovation and Extensive Exploitation • Financial Engineering • Unbundling the valuation of cash flows: Bond stripping • Unbundling and Recombination of risk • Securitisation and Credit Default Swaps • Unification of characteristics of idiosyncratic assets • To allow dispersion across global markets • mortgages go from local to global assets • Shift to Global Dispersion of Risks • Dispersion of Asset ownership; Institutional Investors • Concentration of control over Assets: Money Managers • Share holder value, Incentive remuneration, Stock Options • Drive Financial Asset Appreciation and shift in incomes to Corporate Managers and Money Managers

5. From UPS to UFS • Developed country capital markets’ financial cycles determine cyclical behavior in the periphery • End of 19th century, end of 20th-beginning of 21st century • Developing countries constraint is capital account, not current account • The Constraints are not in the structure of production, but in financial structure • Not Prebisch/Singer/Myrdal Terms of Trade, or Diamand Unbalanced Productive Structure • It is the Unbalanced Financial Structure determined by capital flows from Developed country capital markets • Pettis: Correlated v. Inverted financial balance sheets • It is Global Financial Flows that determines the UPS • Current example: Reprimarisation and deindustrialization that impedes/reverses domestic industrialization • And Produce an Unbalanced Financial Structure that magnifies UPS instability and financial crises

6. Marx-Minsky Global Centre-Periphery Debt Cycles • Traditional View: Efficient Global Allocation of National Savings • In free and open international capital markets • National treatment of financial service providers (financial intermediaries) • Bernanke and the Global Savings Glut – Parsimonious Asians drive capital flows • Structuralist View: Prebisch/Dimand: Colonial structure of production: (primary commodity/Terms of Trade dependent) • But: Schumpeter-Keynes-Minsky view: • Financial Institutions Create Liquidity • Savings cannot limit Investment • Savings Cannot be “intermediated” • Savings Glut is an Oxymoron • There is no limit to the creation of Liquidity • Liquidity Glut Determines Interest Rates and Gross International Capital Flows • Keynes (Treatise on Money), Pettis (The Volatility Machine), BIS (Borio, C and P Disyatat (2011): “Global imbalances and the financial crisis: Link or no link?”, BIS Working Papers, no 346, June.)

7. Marx-Minsky Global Centre-Periphery Debt Cycles • In the Current Stage of Global Capitalism, it is Developed country Monetary policy to support demand sets liquidity growth • And flows to Developing Countries • And sets their UFS • Since 1980s Developed country expansions: Financial Asset Driven Growth • Excess leverage, excess liquidity creation: • Asset inflation (booms-bubbles) replace wage price spiral and generate global liquidity flows • Produce distortions in Emerging Market Economies (post-Washington Consensus) • Increased capital inflows • Exchange rate appreciation • Current Account Imbalances • Unbalanced structure of production: Deindustrialisation • Unbalanced financial structure: High Debt/GDP ratios, currency mismatch • Crisis: Capital flow reversal, exchange rate reversal

8. The Modern Financial Direction of Causation • The problem facing developing economies It is not primarily the external constraint, • or primary commodity dependence and the evolution of the terms of trade • Recent sharp improvements in the terms of trade have also had negative impact • it is the excess liquidity creation in developed countries to support their deficient domestic demand growth • that produces the global capital flows to Developing countries • that generate the external deficits in Developing Countries • And induce UPS unbalanced productive structures • And UFS unbalanced financial structures • And exacerbate the negative impact of the collapse of the Developed country liquidity boom on growth and employment in developing countries

9. Example: Developed Country Monetary Policy: ZIRP and QEProduces UFS in Developing Countries • No Direct liquidity flow from US Financial Institutions to Periphery • The bail out was a simple swap on Fed’s balance sheet • “US financial institutions or US-sourced funds do not play a dominant role in dollar credit extended to borrowers outside the US. Shifting to data for the end of 2013, only $2.3 trillion ($2.1 trillion) out of the $8.6 ($7.6 trillion) in dollar claims on non-banks (non-financials) outside the US were held in the US. • BUT: “offshore holdings represent almost three-quarters of the dollar credit extended to non-financial borrowers outside the US. This is possible because non-US banks operating outside the US have trillions of dollars of deposits, and can swap other currencies into dollars. • Similarly, asset managers located outside the US have large dollar assets under management. Thus, depositors and investors outside the US can and do provide most of the dollar credit to non-US borrowers.” BIS Working Papers No 483 Global dollar credit: links to US monetary policy and leverage by Robert N McCauley, Patrick McGuire and VladyslavSushko

10. US Banks Marginal Lenders to Non-financial non-US borrowers

11. Brazil: off shore $ bond issuance,China and India: $ borrowing

12. Banks were not big Investors

13. Developed Country Monetary Policy Produced UFS in EMEs • Accommodative US monetary policy and cheap leverage promote growth in this credit, • First, dollar credit has flowed since the global financial crisis to an unusual extent to emerging markets and to advanced economies that were not hit by it. … • Second, non-bank investors have extended an unusual share of dollar credit to non-US residents since the crisis. Such credit flowed through the international bond market to an unprecedented extent, while banks have stepped back as holders (and issuers) of bonds. Non-bank investors have not only bought all the net increase in bonds outstanding but taken up the bonds that have come out of bank portfolios. • Third, prior to the crisis, the familiar drivers of international bank credit played a predominant role in offshore US dollar credit growth. Bank leverage or low-cost leverage set the pace for offshore dollar lending, as measured by quarterly growth rates. • Fourth, since the crisis, the Federal Reserve’s compression of term premia via its bond buying has led to a surge in US dollar borrowing through bond markets. … inflows into bond mutual funds played a significant role in transmitting monetary ease, …In particular, given the low expected returns of holding US Treasury bonds (in relation to expected short-term rates), investors have sought out and found dollar bond issuers outside the US, many rated BBB and thus offering a welcome credit spread.

14. And Increased short-term borrowing linked to Carry Trade Flows to EMEs • Reach for Yield led to Global Portfolio Rebalancing • And mispricing out the yield curve through QE • And massive issues of fixed interest obligations by non-US non-financials • USED TO FUND CARRY TRADE ACCORDING TO BIS Study • “When the availability of external financing from international capital markets varies with global liquidity conditions, the surrogate financial intermediation activity of nonfinancial firms in emerging economies will reflect (at least in part) the ebb and flow of global liquidity conditions themselves. Consistent with this hypothesis, we find that the extent of the intermediation activity of non-financial firms is closely linked with their borrowing in US dollars. In particular, with emerging economy firms being more susceptible to carry trades and the associated surrogate financial intermediation activities.” • And the associated production of unbalanced financial structures • “Global dollar credit and carry trades: a firm-level analysis” by Valentina Bruno and Hyun Song Shin, BIS Working Papers No 510 August 2015

15. Impact of US Financial Flows and Monetary Policy on UPS and UFS • Liquidity creation after 2000 dot-com bubble collapse produced mortgage bubble and investment in commodities as an asset class • Rise in Commodity prices • Exchange rate Appreciation • De-Industrialisation – Recommoditisation of production structure • Extraordinary Monetary Policy after the 2008 crisis • Rise in non-financial sector issuance of $ liabilities • Fuelled Carry trade to developing countries • Supported overvalued exchange rates • Created currency mismatch and translation risks throughout the developing world • The new UPS and UFS magnify the impact of the slow recovery on developing countries • Highlight the problem in • 1 Lack of global demand • 2 Failure of Developed country crisis policies to generate global demand

16. Thank You www.levyinstitute.org