Only lowering our living standards will achieve sustainable growth. That’s the message from Satyajit Das, a former financier who anticipated the GFC. Debt, energy consumption, housing affordability or superannuation – it’s all based on a financial system that’s in fact a completely fictional model. This model was always doomed to fail – eventually.
Beyond growth as we know it – How can we stop consuming our future?
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Das concluded previously, nothing has really changed since the 2008-09 crisis. Low interest rates encourage borrowing. Artificially low capital costs have allowed unsustainable businesses to continue, generating sub-standard returns. Companies seek glib solutions to the complex problem of earning adequate returns by re-engineering their finances, rather than improve their operations.
Governments have increased their debt levels, in some cases resorting to forcing purchases of bonds by central banks, domestic banks, and captive institutions such as state pension funds. Governments also are increasingly borrowing and adopting private-sector financial engineering techniques to deal with economic problems.
Conventional and innovative monetary policies have supported aggregate demand and helped maintain economic activity to prevent prevented even deeper recessions. Policies that have sent both real and nominal interest rates to ultra-low levels have resulted in re-distribution of income and wealth.
According to a 2013 report from the McKinsey Global Institute, between 2007 and 2012, governments in the U.S., Europe and the U.K. collectively benefited by $1.6 trillion, primarily through reduced debt-service costs and increased profits remitted from central banks. Most of this wealth transfer came from households, pension plans, insurers, and foreign investors, mainly through lower interest earnings on savings.
time that businesses and governments focus on helping the real economy to solve large problems including debt, lack of growth, industrial stagnation, slowing innovation and productivity, aging demographics, income inequality, resource scarcity, and environmental threats.
Financial engineering masks the true performance and health of companies and nations. But the damage goes much deeper, deluding decision-makers into thinking that things are better than they are, and that solutions to problems can be deferred.
And worse still, the mispricing of assets across world markets has
reached epidemic proportions.
Stock prices have made strong advances over the past several years, yet market analysts see further gains, arguing that the selloffs of August 2015 and early 2016 represent a healthy correction.
But this rise in stock values has been underpinned by financial engineering and liquidity — setting the stage for a global financial crisis rivaling 2008 and early 2009.
The conditions for a crisis are now firmly established: overvaluation of financial assets; significant leverage; persistent low-growth and deflation; excessive risk taking reliant on central banks for liquidity, and the suppression of volatility.