Print money or stagnate forever

There is no other way out from the debt trap, the seemingly stable stagnancy than creating money artificially. This is the most defined standpoint of Adair Turner, ex-president of Financial Services Authority and ex-member of Financial Policy Committee. In our exclusive interview, the specialist who is a member of the House of Lords pictures a dreadful future: Europe is not only doomed with decades-long stagnancy, just like Japan was in the past quarter century, but also with confrontations due to nationalism gaining upper hand. He also calls attention to the deepening of deflation, the lack of stimulation resulting in increasing unemployment rates, and the abiding global debt trap.
According to Lord Turner, it is not too late to ward off all these if Europe guarantees the steady inflation of budget, the significant rise of deficits. Those deficits would be paid by the banks – by artificially creating money, while following the American example, simply paying off debts.

Péter Zentai: You are getting more and more pessimistic. I have been following your recent publications: you are presenting western economy as more or less hopeless. Whereas the latest macrodata that suggests a dynamic rise for the United Kingdom and the United States, and that Japan is starting to flourish as well, should make people feel confident. The countries of the EU zone are pulling themselves together…

Lord Turner: This is just the surface. Globally, the process of recuperation is extremely fragile and vulnerable. Also, developed countries are still lagging behind their pre-crisis production with 10-15 percent. We see no sign of the recuperation getting any faster.

Is everything going to stay at the current level? Is the situation going to be the same in the western countries as it was in Japan for the last 20-25 years; in other words, are the next years are going to pass by with stagnancy?

Yes. We are expecting and preparing for a steady stagnancy; certainly in Europe. The unmanageable debts and the continuous growth of indebtedness of leading countries are behind this. The world’s leading countries are all crawling in a debt trap.

In the last 3-4 years, the most distinctive economic trend was the debt reduction. If anything dominated the everyday economy, it was ‘loan-disgust’.

Debts did not disappeared, they have transformed. There were no debt reduction, but they moved from the private and corporate sector to the public sector. Apparently, the rate of this transition is dramatic. Even in the United States, households’ and families’ GDP correlated debts have decreased with 15 percent. In Europe, there has been a more significant decrease of credit exposure – breaking down to people and families. However, debt reduction in the private sector has caused immense damages in national budgets. It ruled out any possibility for flourish, because revenue tariffs are diving, and due to the growing impoverishment, governments’ social expenditures are increasing sharply. It is a proved fact that every percent of private (and corporate) debt reduction increases the national debt (correlated to GDP).
The story is exactly the same as it was in Japan in the last quarter century. There, the credit bubble exploded at the end of the 1980s, which was followed by quick private debt reductions and after that the growing – and in the end – unmanageable indebtedness of central budget. The national debt correlated to GDP rose from 100-150 percent to 245 percent.

In some European countries the national debt has decreased in the last years; in Spain and Ireland indeed.

However, the whole euro-zone is on the way to the ‘Japan-story’ – unstoppably. Also, our era’s characteristic is not only the transition of debt from private and corporate sectors to governmental sector, but the relocation of debts to other countries.
While China was able to keep its GDP-correlated total indebtedness under 150 percent between 2002 and 2008, after the following years this rate increased to 250 percent. The same effect can be observed in whole Asia and in developing countries that do not belong to the western ones, where to counter the virus of recession-stagnancy-unemployment of the west they began to stimulate demand internally.
However, from China and the other countries amassing debts in both private and national sector mainly Germany profits. Now China and not Germany is in debt for buying German goods and services. This (stimulation based on internal indebtedness) cannot be continued for too long. The rate of China’s economic growth is inevitably decelerating. And it leads back to the not significant German economic growth which feeds primarily on increasing Chinese debts.

While Germany demands strictness and maintaining a disciplined budgeting from every other European country…

That is right. Europe is in a vicious circle. I do respect Germany and its political and economic achievements of the past decades, but what they are doing now is absurdity. They are enforcing such restrictions on other European countries that make economic growth impossible and this way, European citizens cannot become meaningful consumers. The current German politics sentence Europe to abiding stagnancy.

But the example of Japan proves that it is possible to live in abiding stagnancy. They survived without any major trauma almost zero growth of the last quarter century.

Europe will certainly not be able to do the same. At the beginning of the 1990s, Japan was one of the wealthiest countries and that level is far higher than the current European one. Furthermore, Japan – unlike Europe – is a culturally and ethnically homogenous country. Its political traditions are different as well. It’s an island – in every way.
However, Europe will be flooded with millions of people from Africa, Middle East, and the third world due to the economic stagnancy of the coming years. Europe is already made up of many nation-state traditions and cultures. Stagnancy, the imminent deflation is likely to polarize nation-states and strengthen nationalism. This environment – I emphasise – is not temporary, but permanent.
I think this is playing with fire – the future of Europe is at stake. And its base is nothing else, but the unmanageable indebtedness: debt reduction, internal and external debt-relocation.

So is it a useless struggle what the European Central Bank does? Do you think it leads to nowhere that it zeroed interests, and it seems it is willing to start buying nation-state bonds? Moreover it successfully pushed down the exchange rate of euro against the dollar.

The only evident result of the zero-interest is the price explosion of the stock shares and real estates. These ‘bubbles’ do not aid real economic growth and their consequences are unpredictable. And it is obviously a dead-end, a process turning into nonsense when everyone – Japan, China, and Europe are devaluing their currency at the same time. If everyone but the United States devalues then at the end the American economy will be under deflationary pressure.

Is the situation hopeless, or more punctually, unresolvable?

It is, and it is not. If we accept that another global indebtedness can lead to a financial-economic crisis bigger than the one in 2008, it must be prevented. Germany is right about it. However, the restriction which they proposed aborts any chance for economic growth. But without economic growth we must face social and geopolitical problems.
I do believe there is no other way but letting the inflation of national budgets happen. To enable – or at least to allow – central banks to prepare and settle in for this in the long run and finance the rising deficits. In other words, money creation must be set free, and by supporting central bank budgets they can pump money into the economy. In the meantime debts should be paid off; just like they did in the United States.
This is the only way of creating inflation and economic growth and preventing the indebtedness of private and public sectors.