On the 15th April, this year, I visited New Zealand at the invitation of the Institute of Directors, to address 600 CEOs at their annual meeting. This is an interview given to the journalist Rob Stock in which he asked about the possibility of another financial crisis.
“Ann Pettifor predicted the global financial crisis, and now she’s predicting another.
When Pettifor, an advisor to British Labour party leader Jeremy Corbyn, anticipated the global financial crisis (GFC), she was “the little girl on the side saying the emperor had no clothes” and orthodox economists did not listen.
But Pettifor believes all the signs are there that the cure for the GFC has set the world up for another.
“I would say there is going to be a crisis, and it’s looking quite a lot nearer than it has for some time,” Pettifor said, before speaking on Brexit at the Institute of Directors’ Leadership Conference in Auckland on Tuesday.
After the GFC, central banks injected somewhere in the region of US$11 trillion (NZ$15 trillion) into the banking system, she said.
Global debt levels spiralled from around 125 per cent of global gross domestic product (GDP) to over 400 per cent.
All the cheap debt led to high asset prices, and yet, she said: “GDP growth in 2017/2018 is predicted to be less than it was in 2010.
“Incomes have been falling and asset prices have gone through the roof.
“There’s something like US$293t of assets and liabilities out there, and there’s US$76t of global income,” she said.
“What economists argue is don’t worry about the fact there’s not a lot of income, because we have got all these valuable assets, for example, Auckland property prices.”
Pettifor said all that needed to happen to create a new crisis was for people to lose confidence in the value of those assets against which all the debt was secured.
But it appears that interest rates were going to start to rise, and trust in asset prices had fallen, leading to falls in property prices in places like London and New York.
Prices were also falling in Auckland, which had higher rises post-GFC than the United Kingdom, Australia, Canada, or the United States.
The London interbank lending rate (Libor) has reached a level not seen since just before the GFC.
“What is happening to Libor is fear,” Pettifor said.
The cause of the GFC 10 years ago was that people no longer trusted the value of assets against which they had lent money, or borrowed money, she said.
“When the value of assets begins to be doubted is when all that exposure becomes dodgy.”
While many households had taken on too much debt (“People have borrowed crazy money”), it wouldn’t be US mortgages that triggered the next GFC.
“I don’t think household debt is the trigger of the next crisis. It’s corporate debt.”
But people, and countries, with high household debt would be especially vulnerable in a crisis, especially if they saw their incomes decline, she said
While regulators around the world knew a lot about regulated banking, there was a giant “shadow banking” system of lending between banks and other financial institutions, and little was known in aggregate about it.
“The central banks don’t know. Nobody knows,” Pettifor said.
“We don’t know what the deal is. Nobody is overlooking it.
“Nothing has been done to fix, or constrain the shadow banking system.”
Central banks had been signalling that they would soon begin raising interest rates, which is another warning sign for Pettifor.
“The really ironic thing is the Federal Reserve and other central banks really believe they have to tighten [monetary policy] to provide what they call ‘headroom’ to deal with the next crisis,” she said.
Jerome Powell, the Fed’s chairman, said on Friday he expected there to be four interest rate rises in the US this year.
“He is … playing a part in triggering the next crisis by raising rates. I find it bizarre.”
She has no advice to give to Kiwi households on how to protect themselves.
“The only thing we can do, and this is my mission, which is to spread knowledge of how the system works, and challenge the orthodoxy.
”I don’t want us to be in the position we were in 2009, where we were standing there stunned.”
In Britain, incomes fell, jobs were lost, and hundreds of billions of pounds of new money was created. The government opted for “austerity”, cutting government spending, which, she said, made things worse by contracting the economy.
“The crowd looked and said ‘bloody hell’, I’m being messed around. The rich are doing really well. The banks have been bailed out. Nobody went to jail.”
“The public is now wiser, but it is not wise enough,” and that is why nothing really changed.
When the next GFC happens, Pettifor believes the world’s central bankers would not be able to repeat the measures they took after 2009.
“I don’t think we have the headroom or monetary tools to deal with the [next] crisis. It is just grim.”
And yet, New Zealand may end up ducking a second GFC.
China may save New Zealand again, she said.”