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Alain Boublil Blog


Is the worst sure ?

For several weeks, we don’t count the number of pessimistic forecasts or even catastrophic ones made by economists. That has started at the end of last year with Alain Minc who thought that “the financial markets fall was unavoidable”. We saw during 2019 first half their strongest rise for more than ten years. The origin of this pessimism results both in the situation of the major countries as it is presented and the observed rebound of international tensions which is affecting trust in the future. It is also the consequence of what the Queen of England said one day:”nobody saw the coming crisis”. At least this time, everybody will be able to affirm “I told you”. But it is not enough to avoid a new crisis.

There is first the American economy, whose growth cycle duration has exceeded ten years, which has never happened for a century and half. The sub-prime crisis which started during the 2007 summer provoked Lehmann Brothers bank bankruptcy in September 2008 and the deepest recession the U.S. endured since the 1929 crisis. The country has regained a high growth rhythm, superior to European countries one. This duration is abnormally long, the economists are thinking and so the cycle will interrupt itself and a recession will come. But the country is financially weak. American households carry heavy debts and have a low saving rate. Public accounts deficit is increasing every year. As current accounts balance is also highly in deficit, the financial balance of the U.S. depends on foreigners. The end of the growth cycle could then affect these investors trust and add to the recession a financial crisis which would have consequences on the world economy.

There is also China, about which, it is said everyday it is slowing. Regarding statistics, it is a fact. Growth, as an average, was fluctuating for ten years around 8% but Authorities objective for 2019 is now between 6 and 6.5%. But as far as absolute value is concerned, the reality of this slowdown is still to be proved. A 6% increase of the volume of the production in 2019 is superior to previous years increase because it is applied to a GDP which is much more important. Trade tensions observed with the U.S. has not had until now a significant impact. The dominant factor of the Chinese economy is the transformation of its growth model. Based during the past years on industrialization and exports, it is moving toward household consumption and the development of foreign investments, mainly located in neighboring countries under the famous New Silk Roads project. Internal financial crisis risks are limited, even if the indebtedness in some sectors has reached critical levels. The structural Chinese balance of payments surplus is feeding gold and foreign currencies reserves which are now above 3000 billion dollars and which gives to the Middle Empire its monetary and financial sovereignty.

There is at last Europe and at a lower level Japan about which it is feared the Old Continent follows the way, the one of “secular stagnation” and massive public indebtedness. The risks caused by its excessive level are put forward. But it is ignored that in these countries, household financial savings is high and that the eurozone, as Japan, has an external balance of payments surplus. These countries, to the difference of the American State, don’t need to have recourse to foreign capitals. It is also put forward in France the threat of an interest rates increase, as the Cour des Comptes has put it forward in its last report. But it is not more credible. French debt carries fixed rates and its duration as an average is above eight years. The rise would only affect new issuances which represent every year 10% of the debt. And, above that, it would be necessary that the new bonds carry a higher rate than these which are amortized. This is even less likely. It is necessary to remind that the level observed during last June was near zero and that today issuance, with for the first time in French history, was carrying negative interest: -0.1% along with more than 1 billion euro issuance premiums The worry about secular stagnation which would undermine the bases of our societies is justified but it results from the un-achievements of traditional economic policies which are not any more adapted to today world and economists have not been able to reinvent new ones.

Budget deficits and public debts being high, it would not be possible to increase them to make the economy rebounding. Monetary policies are already ultra accommodating. They are not going to go further. So States are deprived of their usual tools. It constitutes a additional risk. The mistake, in these economic reasoning, lays in the fact they don’t take into account the deep change occurred in the world for twenty years with a wealth accumulation without any precedent. These ways of thinking are only regarding production and exchanges of goods and services, which are measured in the GDP and its components. The new point is that it exists along with “the real economy” the financial sphere whose size is the result of this wealth accumulation, even if it has been poorly shared and has profited, as many studies have shown it, to a small part of the population. Traditional economic tools have now much more impact on the value of these financial or real estate assets than on the evolution of the production and the exchanges of goods and services.

In the U.S., the tax advantages offered to companies which repatriated their financial assets from outside the country has more been used to share buybacks than to finance productive investments, which has generated a strong rise at Wall Street which has mainly profited to shareholders and not to economic activity. It was then necessary to support it through costly measures for public finances. Moves on interest rates are mainly acting on the level of currencies or on real estate prices instead of, once more, to give rise to some more activity. To the opposite, when an effort is made to reduce public expenditures through social transfers, it weights on purchasing power and a non-confidence climate is being established, precautious saving increases to the detriment of consumption and growth, as it has happened in France for six years.

Today, it is not the risk which is sure, it is the lack of appropriate economic answers brought to cope with unbalances which are observed in many countries. International tensions contribute to worsen them. It will not be possible to exit from this dead-end without adapting economic reasoning to the “new world” which is much wealthier and open than at the time of Adam Smith, John Maynard Keynes and Milton Friedman. Good behavior rules which had been adopted in the past regarding public finance in Europe or to the monetary policy in the U.S will have to be modernized and transformed due to this new environment. So the worst can be avoided.


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