Recently, the managing director of the International Monetary Fund, Kristalina Georgieva, said, “that the global economy risks returning to the era of the Great Depression.” Georgieva referred to IMF experts, according to whom the current economic trends resemble the end of the 1920s, “which ultimately led to the collapse of the financial market in 1929.” Among the main reasons for the growing threat to global economic stability, the head of the IMF called “the spread of inequality and instability of the financial sector.”
Let us recall that the Great Depression is the deep recession of the world economy that took place from the late 1920s to the end of the 1930s. The formal point was the stock market crash in the United States in October 1929. The peak of the crisis was in the period from 1929 to 1933. The deep recession hit the United States as well as Canada, Britain, Germany and France, “but was felt in other states.” Industry, construction, and agriculture fell by tens of percent. The crisis continued throughout almost the entire 1930s, and the first signs of economic recovery appeared only in 1939. All this was accompanied by deep and dramatic social upheavals, which to a large extent were the cause of the Second World War.
The debate about the root causes of the Great Depression continues to this day. In general, according to some economists, it was a general crisis of capitalism associated with insufficient state intervention, as well as with commodity overproduction. According to others, the crisis was caused by an excess of money due to excessive emission by central banks. Money poured into the capital markets, the super-cheap loan caught the eye of a business that did not think about the profitability of investments.
Stocks soaring to heaven did not allow “to assess the real situation on the market.” In such a situation, the collapse was only a matter of time. What the proponents of different approaches agree on is the assessment of the negative role that financial speculation played in the development of the crisis. The “inflating” of the financial bubble, and then the collapse of stock exchanges, undoubtedly played the role of a “fuse” in the context of the already emerging economic crisis.
Nowadays, a growing number of international experts reiterate concerns about the prospects of a new global crisis that could fall on the global financial and economic system in the near future. Some believe that “the global economic crisis is a kind of” sleeping reality “, which is still weakly manifested in the economic activity itself.” According to others, central banks and governments may “lose control of the situation in the world” almost this year.
Both macroeconomic and geopolitical factors are alarming. International trade is slowing. It remains unclear how durable and long-lasting the “truce” will be, which has been outlined in the ongoing trade war of the United States and China. The work of the WTO is almost blocked. The economy of most EU countries balances between stagnation and recession. Finally, the Chinese economy is slowing down, which, among other things, negatively affects the demand for export products of many countries, and also threatens to lower prices on commodity markets.
In the financial sector, imbalances of the “unipolar model of globalization” are intensifying, in which capital continues to accumulate mainly in countries issuing world reserve currencies. In August 2019, HSE experts predicted that the global economic crisis “will come in one and a half years.” Among other things, they indicated a drop in indices, as well as an excess of the yield of short-term bonds over the yield of long-term ones, the so-called “Inversion” of the US government debt market. Inflation in leading economies is almost everywhere kept stably below the target of 2%. Interest rates either already fluctuate around zero, or tend to decrease. Instability of the financial sector was named among the primary threats and the head of the IMF.
Another factor that could provoke a collapse in the current conditions, Georgieva considers the problem of inequality “between different groups of the population.” So, “in many countries” of the OECD “income inequality has already reached record levels.” According to Georgieva, “this alarming trend resembles the situation of the beginning of the 20th century”, when the technological boom and the growth of global ties at first led to two decades of rapid economic growth in the United States, but then followed by a financial disaster. Last October, Credit Suisse Bank estimated the distribution of world wealth as follows: 45% belong to 1% of “super-rich people”, and 1% to 10% of the “poorest people”.
The problem of inequality worries more and more politicians and economists. Thus, UN Secretary General Antonio Guterres, during a speech at the General Assembly, called one of the “four horsemen” threatening peace “a growing global mistrust” of “political institutions”. And one of the reasons for the growth of such mistrust is that two-thirds of the world’s population live in countries where the “income gap between rich and poor” is growing.
“Ordinary people” are less and less trusted by elites, agrees Foreign Policy. Among the reasons, the magazine also calls “growing economic and social inequality,” along with “a lack of prospects for a brighter future.” In the case of inaction of the world ruling circles, the publication believes, they face “anti-elite rebellion.”
The question is, is the problem of inequality more political? Or is it turning into an independent macroeconomic factor that determines the situation and prospects of the world economy?
Natalia Orlova, chief economist at Alfa Bank, noted in an interview with Business FM: “Inequality is a concern for everyone, it really is the main economic problem in the world now.” And it is precisely the unsolved problem of inequality that can become a leading factor in a new deterioration in the situation in the global economy. “The problems of inequality were not formed in one day, and we do not know how long it will take to transform this problem into the prerequisites for the economic crisis and the economic crisis itself.”
The crisis of social trust, caused by the growth of inequality, negatively affects the mood in business circles. The psychological atmosphere and the views of millions of people on the state of affairs play a crucial role in the economy, as J. M. Keynes wrote about. When the mood in society is far from optimistic, this inevitably affects the “state of mind” of businessmen and financiers. All that is needed is an average “push” or a combination of several weak “shocks” for the economy to begin to “sink”. How this happened, for example, in the early 1990s.
Today, the head of PwC international consulting company Bob Moritz notes, the mood of top managers around the world is much more pessimistic than in 2018. And the point is not so much that the world economy is facing new problems. “The scale and speed of the escalation of some of these problems has become new.”
But there are other opinions – there are optimists who are convinced that “there will be no Great Depression, of course,” although it is still worth preparing for a possible recession. There are no objective prerequisites for the collapse of the world economy, since the growth, especially in the stock markets over the past 20 years, is primarily associated with a leap in the development of technologies, due to which the release of previous volumes of production requires “ever less production capacity.” As for the problem of inequality, according to critics, it is unnecessarily demonized by left-wing political forces around the world, playing on the fears of voters.
Meanwhile, the problem of inequality is more complicated than it seems to the “left”. The “level of inequality” directly depends on the measurement methodology. For example, inequality “in consumption”, as a rule, is several times smaller than the measured “in income”. The challenge for society is undoubtedly gross poverty. The relationship between inequality and the dynamics of social conflicts is not so clear. According to a number of studies, the cause of social conflicts is not so much the objective indicators of the ratio of incomes of the poor to the rich as the subjective perception of the situation by society, which regulates the dynamics of “demand for redistribution”.
Nevertheless, there are still more economists in the world who are confident that economic growth directly affects inequality indicators, and redistribution mechanisms can reduce it. A similar point of view is shared by some international economic organizations. As for technology development, according to UN experts, it not only stimulates economic growth “and creates new opportunities”, but also strengthens inequality due to the uneven “access to technology in different countries”.
Finally, it is impossible to discount the fact that, as in the late 1920s, imbalances do indeed accumulate in the stock markets today, a “breakthrough” of which can trigger a short-term crisis, for example, towards the end of this year, the beginning of next year. For example, after the presidential election in the United States.
The experts at the HSE Center for Market Studies recall the existence of the so-called Juglar cycles, “the phenomenon of the average cyclic wave, followed by a crisis.” “In 2021, there will be 12 years after the crisis of 2008-2009, namely, these 12 years are considered the middle wave and are the harbingers of the crisis. It is in these 12 years that all financial bubbles are inflated.”
At the same time, there is always hope: most experts admit that modern economic science is still not able to predict the exact timing and depth of the next global crisis.
Based on material from the journal of the Ministry of Foreign Affairs of the Russian Federation “International Life”
Andrei Kadomtsev, political scientist, adviser to the Commissioner for Human Rights in the Russian Federation on international issues