January 25, 2009 (the date of publication in Russian)
Andrey Kobyakov: the current global crisis is going to be one of the hardest for the last 150-200 years
The Literaturnaya Gazeta commentator and the host of “The Imperative” talk-show on the Russian News Service radio station Alexander Kondrashov interviews RPMonitor’s Director Andrey Kobyakov on the roots of the current economic crisis, the future of the dollar and some guidelines for effective anti-crisis policy regarding Russia’s economy
SWEPT AWAY BY THE “GRAND WAVE”
Alexander Kondrashov: Five years ago, you and Mikhail Khazin jointly wrote and published a book entitled “The Decline of the Dollar Empire, and the End of Pax Americana”. Was this study read by any of Russian decision-makers? In fact, you foretold the current developments in the US and global economy.
Andrey Kobyakov: I’ve been raising the issues, discussed in this book, at least since 1996. Independently, Mikhail Khazin warned since 1998 about a highly probable global financial turbulence. We presented our analytical results at a number of international conferences and financial forums and eventually decided to prepare a joint research. In fact, we summarized the ideas and forecasts formulated in earlier years. Unfortunately, the current developments were irreversible already by that time.
The development of the global financial system was based on the paradigm adopted approximately in 1971-72, i.e. from the time when the US dollar was decoupled from any hard assets, including gold, and when US Treasury and Federal Reserve became a printing machine for unsecured currency.
The 1971 reform was followed with financial liberalization, predominantly in the United States and Great Britain. Abandoning the ideas of J.M. Keynes, financial strategists chose the model of deregulation. Not surprisingly, relevant practice resulted in massive wrongdoings in the financial sphere. The dominating paradigm was correctly described as jackpot economy, or casino economy. Some losers in this gamble, among them leading crediting and saving institutions of the United States, went bankrupt, then there were stock market crashes.
It is noteworthy that this destabilization was taking place on the background of a spectacular increase of number of financial crises in the world, increasing in scale one after another.
Following this tendency, one could arrive at particular conclusions. Studying US economy in details, it was possible to foresee where the next bubble is going to emerge.
It was clear that the US mortgage market was likely to collapse. It was similarly obvious that the market of derivatives, involving very complicated and non-transparent financial instruments. It was evident that this combination could trigger practically unpredictable and fairly unprecedented implications for the whole system of global finance.
Was our book noticed? It certainly was. The book was completely sold out. Some of our readers published the whole text in the Internet.
Q: Thus, your research was available for everyone, wasn’t it?
A.K.: Sure. And it is widely known in Russia. Strangely enough, recently, Komsomolskaya Pravda Publishing House proposed to republish it as a mass edition, as they believe the book would be a best-seller now. However, I don’t think it should be republished as it is, with 2002-2003 statistical data and with all these old forecasts which came true. I think it should be completely re-written – and it is a great work to be done. So we rejected this proposal for now.
Q: Do you think the book was read in Russia’s Ministry of Economic Development and the Ministry of Finance?
A.K.: I’m convinced of that.
Q: But I heard Finance Minister [Alexei] Kudrin say that a year ago nobody foresaw the crisis of the American economy.
A.K.: Bullshit! Our officials often disavow their own recent statements, and I wouldn’t like to comment on Mr. Kudrin’s statements. But I have to remind that in March 2008, the same subject was in the center of a major TV discussion on Russian Channel 1. That was Maxim Shevchenko’s “Judge for Yourself” talk-show, where ideas are debated by two teams of four-five persons each. The team that warned of the oncoming crisis included Mikhail Khazin, Valery Fadeyev, Leonid Paidiyev and me.
The opposite team was represented by top specialists in finances from the establishment, like one Deputy Chairman of Russia’s Central Bank and Gareghin Tosunyan, chair of the Association of Russian Banks. Those people seemed to reside in another reality. They insisted that Russia is going to become an island of stability, staying utterly unaffected by the global turmoil. Moreover, they accused us of fear-mongering. These persons were responsible for the state of affairs in the national financial system.
Q: What is going to happen next? Is it true that the crisis is going to die away in a matter of one or two years?
A.K.: I don’t think so. I believe we are facing one of the hardest crises in the history of the past 150-200 years. Prof. Nikolai Kondratiev’s “grand cycles” or “major cycles” concept, also known as “long waves” theory, admits that the economic history tends to produce major crises with a gap of around 50 years. During these grand cycles there are approximately 25 years of growth and approximately the same time of decline. These crises should not be confused with temporary turbulences that happen every five years.
HYPER-CONSUMPTION AGGRAVATES CRISES
Q: Some analysts suggest that the current crisis reflects the collapse of the “consumer society “. That the “philosophy of consumption” is among the main roots of the crisis. Nowadays everybody has a desire to live better, but nobody wants to be better, to improve one’s own nature. May be there are some socio-philosophic waves similar to Kondratiev “long waves”?
A.K.: I believe that such interrelations do exist – complicated and systemic. Though, it is hard to say what is the cause (or precondition) of what. This is the very case when the phenomena are interrelated, they mutually condition each other. A crisis of normal economic behavior – I mean the destruction of certain moral norms and values – results in financial crimes, frauds, unmerited earnings and undeserved income and all this in its turn corrupts people, intensifies a crisis in human mind and soul.
Q: Thus, the era of hyper-consumption of the elites is going to come to a halt?
A.K.: I don’t think hyper-consumption of elites to be the only point of the agenda. This is not an isolated, stand-alone phenomenon. To a far greater extent, crises are predetermined by the thinking of the majority. What is the majority focused on – immediate consumption, or creative life? Do they want to create and construct to leave a trace for the successors, or not?
Q: TV shapes the pattern of consumption in a simple way: laugh your head off, have sex without limits, stuff your face and, excuse me, all that follows after the digestion process. And forget everything else. It imposes a pattern of indifference and cynicism towards your neighbors, your job, your nation.
A.K.: I believe this is a global phenomenon. In fact, that is not something specific for Russia. The whole Eurasia is already infected with all that – I don’t know about Zimbabwe or Congo. This problem exists even in India and Vietnam. It is expressed in everyday life. Earlier, a mother would tell her daughter: “I’d like you to find a beautiful prince as your future husband”. Since 1990s a mother wishes her daughter to marry an investment banker. This is a universally spread set of mind, pleasing the sphere of financial alchemy where money is made from nothing, and is not invested in anything useful for the people. Becoming a part of this world of fictitious values has become a generally accepted ideal. This guy is successful – therefore, you should adopt his standards.
Aristotle has once distinguished economy from chrematistics. These are two different qualities. We govern cities, lands, and the globe in the same way as we manage our household. In case we are focused only on accumulation of money, we become indifferent not only to neighbors but to our own posterity.
THE DOLLAR WILL DEVALUE
Q: Is the current situation a reflection of some objective economic process or is it more a result of wrong decisions made back in 1990s?
A.K.: No. That is an objective regularity. Still, in the social environment, no regularity is absolute. We also deal with a subjective factor. Being aware of cyclical rules of global economic development, we could have got prepared to the crisis. This descending curve could be grasped by undertaking particular measures. A rule is a rule, but it does not mean that we can relax, put the hands on the table and say: “We are not to blame. This is a Kondratiev cycle”. Despite the objective regularity, the subjective factor is dominating. That means, in particular, that we have to decide what to do in this situation, and to correctly evaluate the prospects of crisis. I fear some officials still have illusions that the crisis will last long and the end of the crisis is around the corner.
To my mind, what we require today is serious brainstorms, involving non-government experts, as the circle of persons involved in the discussion should be expanded. We have to grasp this objective reality and coordinate a correct plan of activities which will finally become pro-active, and not reactive. The government’s actions of the latest period are unfortunately reactive: officials react to the situation they already face. However, the situation could and should be foreseen in advance, in order to introduce measures enabling to overtake the initiative, thus making the government not an object but a subject of circumstances – certainly, to the extent available in the midst of the crisis.
Q: Many people wonder what is going to happen to the US currency. What are the US powers are going to do to get rid of the foreign and domestic debt to save their financial system?
A.K.: The dollar issue is a complicated matter. On the one hand, the US economy is an economy of debt to an extent that makes redemption, in a traditional way, practically impossible. On the other hand, the US dollar is still a means of international payments. Most of deals in global trade, most of accumulation of national reserves is still made in US dollars. Besides, Washington has got a printing machine. It is not necessarily a physical printing machine. It may be virtual. Money may be non-cash. The United States may issue a new type of bonds enabling to redeem old debts etc.
Starting with the Paulson plan, the tactics of the US Treasury is focused on flooding of economy with money. The Federal Reserve has already initiated direct purchase of bonds, direct monetary emission etc. This is becoming a tendency, and we see that in this way, they are going to save their economy.
Q: Is that possible?
A.K.: We remember that in the times of the Great Depression, the Federal Reserve erroneously increased the interest rate, reducing monetary supply, which is now supposed to be a mistake. Today, they decided to act in a reverse way, launching a monetary shower. Ben Bernanke, the current chief of the Federal Reserve, once claimed that the financial market shouldn’t worry as in case of necessity, sacks of cash will be dropped from a helicopter. Since that time, he is nicknamed Mr. Helicopter, and he is doing what he is taught to do.
The next question: why aren’t we facing global inflation? The only explanation is that the newly-issued monetary mass is absorbed by the banking system itself, and used for covering its own losses, for replenishing the capital base etc. As soon as the processes in the financial system normalize – and this requires trillions of dollars – the money will flow out to the global market, triggering hyperinflation.
Q: Which currency will then devalue?
A.K.: Certainly, the US dollar. And as soon as it gets scores cheaper, it will be possible for the US to pay the debts.
THE AMERICANS DON’T HAVE “SECRET MODELS”
Q: What is going to happen with the USA next?
A.K.: A tree, cankered by termites to rock bottom, still does not fall by itself. The fall of America can happen only if a strong wind starts to blow, if a new power of a required scale with claims to a world leadership emerges. This power will then push the tree empty inside. In case China now were about to crush the United States, it would need only to throw to the market trillion of dollars in US treasury bonds –contained only in its currency reserves. This is not to mention of other Chinese funds – governmental and non-governmental –with comparable amounts.
So, the US dollar could be scores dumped already now. The question is whether the Chinese are prepared for this venture. Are they going to overtake the burden of global leadership now? Are they preparing to do that? We can hardly give an answer on behalf of the Chinese comrades, and I don’t think they will sincerely tell you about their intentions. But there are certain signs that they are preparing. Today, the “day X” hasn’t yet arrived, but in a matter of three or five years it is likely to happen.
Q: Some analysts believe that the US financial powers are controlling the situation, possessing a kind of a mathematical model enabling to guarantee stabilization of their economy.
A.K.: I am well acquainted with mathematical modeling, and I can tell you that workable models are few, and those which work – are simple. The social tissue, and such a complicated thing as economy, is a multi-factor entity involving a lot of random factors – and therefore, it generally does not directly conform to mathematical modeling and forecasting. Particular models, well grasping the surface of economic processes, some major factors and trends, do work. But I don’t think that Washington has developed a secretive strategic panel of mathematicians possessing a salutary model.
You know that the attempts to replace human mind with artificial intellect have never been implemented. Human brains in the United States are certainly dealing with the mounting problems. There are a lot of so-called brain trusts, or think tanks, that are formally independent but actually function on state contracts. I wonder why the Russian government does not spawn similar think tanks. This is a kind of model that deserves to be adopted from America. Non-governmental institutions, as well as interrelated expert groups, would be of great use.
Q: There are some highly controversial or even “conspirological” explanations of the origins of the crisis. According to some versions, Americans intentionally punctured the bubble and provoked the world crisis just to take the initiative like in chess – to gain the first-move advantage. Can you comment on this?
A.K.: As for an artificially provoked crisis – well, you know, any crisis always have some starting point, some push. In this case a policy of higher interest rates that was implemented by the Fed certainly played a fatal role. But the truth is that it was unavoidable. Sooner or later it would have happened anyway. It could not be delayed any longer. We now see the colossal and grave consequences. But in case this bubble-blowing had been prolonged, let us say, for some two more years, I fear the situation would have become absolutely unmanageable. Though, honestly, you hardly can say that now the situation is contained or controlled as well.
Q: Do you envisage the possibility of a new US currency with a gold equivalent?
A.K.: The question is whether the United States can allow that to itself. To a certain extent, it is possible, as US banks have got the world’s largest official gold reserves. If statistics don’t lie, they have got at least 8.5 thousand tons of gold in bullion – more than any other country in the world, as the total global reserves of gold, possessed by central banks, does not exceed 31 thousand tons.
However, the United States has once decoupled its currency from gold not in order to re-couple it back. This decoupling enabled the financial establishment, especially the faction not strongly constrained with regulatory functions – like investment banks, all kinds of entities like hedge funds, private equity funds, asset management firms etc. – to reap money from thin air. The Americans have in fact introduced a machine of financial alchemy that will cease existence in case the US currency is again pegged to gold.
In any case, a responsible decision of that kind requires a person who would be enough courageous to confront the huge financial clique. This new F.D. Roosevelt should have sufficient political will, and a sufficient number of smart and devoted collaborates around him. There is also one more, merely technical aspect. When we modeled this situation with Mikhail Khazin, we came to the conclusion that in case the US leadership collects courage for this move, it will be implemented after devaluation. The United States has first to initiate a health-improving shock for the economy, cleaning itself from the earlier debts and flood the world with a wild amount of dollars. They have to dump the currency, creating certain possibilities for domestic producers, and only after that they can perform a sophisticated “cartwheel” trick for steering the economy to a certain stable base. But these financial operations are very complicated dangerous and fraught with all kinds of errors and political complications. Thus, what you are speaking about is rather a political fantasy though theoretically, this measure is available.
SPEAKING ABOUT FREE MARKET
Q: What does the Russian establishment have to do to prevent ingestion of money, accumulated in the Stabilization Fund, into the American vacuum cleaner?
A.K.: First, we should ask ourselves whether we really need these stabilization funds and similar inventions of recent years. Was it really essential to “mothball” the currency returns, or rather use them for modernization of Russia’s economy and undertaking a strategic shift in its structure?
The progress of the crisis in Russia confirms that the second option would be more adequate. The crisis first began with the collapse of the stock market The stock market was overheated and depended on prices of fuel, particularly oil, and therefore, capitalization of Russia’s largest companies was about to shrink in any case. Then the problem of stability of the banking system came to the surface because of the rapidly shrinking capital compared to the accumulated, especially foreign liabilities. All this could have been prevented, if the economy had been more diversified by that time and if money instead of being frozen in stabilization fund had been used as a primary credit source for banks and they had not been forced to borrow on international credit markets. That is why I am convinced that it had been unnecessary to establish this Stabilization Fund. Still, we already have it. Under the current conditions – approaching hyperinflation, the sooner we extract this money, transform them into cash and invest them in re-equipment of our industry and renovation of our infrastructure, the better. It is essential, because the money is going to devalue not with a monthly but with a weekly pace.
Q: You mean that while we are keeping our money in the Stabilization Fund in foreign bonds we are just saving the US economy?
A.K.: To a certain extent, we are also saving ourselves, delaying devaluation of these papers. But these papers are going to devalue in any case, and therefore, I don’t see any reason for playing up to this actor. Therefore, it is also a matter of political will. It is a matter of our readiness to do this, as this money is immobilized. We can’t even sell them, as the consequences for the same US currency are hardly predictable and it will threaten our currency reserves.
Q: What particular measures should be undertaken to guarantee optimal anti-crisis regulation? Is this regulation compatible with the so-called free market philosophy?
A.K.: Free market as an economic reality should not be confused with free market as an ideological concept. These things are diverse. In some cases, free market provides a lot of positive options. Still, every free market system has to be regulated.
Q: Does free market exist in Russia?
A.K.: In case we had a real free market, we would not face such a mysterious situation with gasoline trade. Gasoline prices have been rising along with the oil prices. As soon as oil prices collapsed from 150 to 35 dollars per barrel, gasoline also devaluated at the US markets. In Russia, the decline was symbolic. The reasons are clear: a typical quasi-monopolist behavior. But the behavior of the Anti-Monopolist Agency is unclear. If this office is so inefficient, why doesn’t the Government directly control this situation? After all, that is a social issue.
Free market may serve as an instrument of economic balance, economic equilibrium, and as an instrument of manipulation. It is a two-edged sword. Realizing that this process is double-ended, we should encourage the positive effects of free market and minimize its negative implications – like parasitic kinds of behavior ranging from reckless disregard to sophisticated swindle. This is the task of state policy.
See also: “WE ARE DRAWN INTO A MAELSTROM OF RECESSION”
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