The global economy seems perplexing today: While all the traditional economic growth factors are in place (the world’s population is increasing, technical progress is huge, available savings are substantial, free trade is greater than ever), growth is slowing globally, save for the United States at this stage. And around the world, even in the United States, real unemployment has risen to record levels, investments are slowing down, inequalities are greater than ever before, especially in the United States. And the recent Baltic Dry Index (BDI) plunge (a number issued daily providing an assessment of the price of moving the major raw materials by sea, and which for a long time now has been a big indicator of impending crises) with its downward trend has caused panic to spread in the small circle of traders.
To deal with this problem, it seems that none of the conventional efforts are working: Interest rates are at their lowest; central banks are pumping an insane amount of money into the banking system; governments are plagued by record high deficits. Nothing is working. Nothing is starting. Everything is slowing down. Even prices.
What is wrong with the way the world has been functioning? How to explain that this incredible potential is not translated into practice? Economists, sociologists, political scientists throughout the world are discussing these issues ad infinitum without any convincing answer being given. And without anybody offering a new solution that is credible. Yet there is a critical need to understand the situation and to find ways to act. Otherwise, the global economy will plunge into a global depression with devastating political consequences. We will start seeing, we already see, those extreme parties taking power and democracy being questioned by the very people who pretend to speak on its behalf.
For me, the answer is obvious, although few people will admit it: The whole world economy is now a single economy. And one cannot understand it by juxtaposing the analysis of national economies and their trade exchanges. We must think of the world as a single economy; as a country. But a country without rule of law or regulatory state.
And such an economy, which was previously unknown in the real world up until today, can only, according to all existing theories, lead to an underutilization of the factors of production, that is to say to a shortfall in demand. And no regulatory state is there to compensate. In other words, the world is suffering from not having a tool able to create demand globally.
The ideal solution would be to create a World Central Bank, with democratic governance, with a world currency, able to pour massive resources on the world. In the form of money or in the form of investments in sustainable economy sectors.
The halfway solution would be to ask the G20 governments to agree to boost public investment massively, with recourse to heavy borrowing, forced if necessary, from large owners of capital.
The solution that is most in the interests of young people and employees would be a dramatic increase of all salaries throughout the world, and the acceptance of inflation. The one that is most in the interests of large owners of capital and seniors would be to make Stock Markets soar in order to create demand through the revaluation of wealth.
None of this will take place, of course. So the most likely scenario is that everybody will keep to oneself, to the point that they will isolate themselves from one another. But those who will create demand only at home, by massively increasing salaries or public expenditure, will quickly become dependent on imports, their currency will collapse. The United States may want to opt for this solution, as may Greece, on the other end of the spectrum. This will lead to protectionism, fragmentation, war.
It has become fashionable to say that we must think of the world as one, when talking about the climate change conference and its success. And yet, if ever there is a global conference that is urgent, it is rather one that would reform the IMF to make it more democratic and give it all its powers. Because if the world does not take action on the economy quickly, the problem of the emission of greenhouse gases will soon be resolved in the simplest way possible: There will be no one left to produce any.
j@attali.com