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Global Finance And The Risk Of A New World War

In a gloomy new book, two French economists argue that the current state of global finance make conditions ripe not just for regional conflicts, but for a new world war.

Unpleasant questions
Unpleasant questions
Eric Le Boucher

PARIS — When our political elite is done dealing with insignificant affairs and finally decides to see beyond the next elections, they will realize the sobering threat of new world wars. At least, that’s how French economists Jean-Hervé Lorenzi and Mickaël Berrebi see it, laying out their arguments in a chilling new book titled Un Monde de Violences(A World of Violence).

There are numerous sources of conflicts worldwide, and if “we hesitate to mention the possibility of war … our incapacity to overcome them will without a doubt drive us there,” they write.

Lorenzi, who describes himself as a former optimist, now appears to have become frighteningly alarmist.

Unfortunately, the book is quite convincing. It is useful to those who want to better understand the sources of conflicts, which the economists characterize as “constraints.”

There are six such constraints: lack of growth, aging of the population, income inequalities, de-industrialization, finance and savings.

First considering finance, the book presents a very clear theory: The financial world has become autonomous, and there is no turning back. Attempts to regulate it are a joke, “an utopia.” This was demonstrated by the “weakness of the U.S. government, unable to regain any independence from Wall Street.”

More importantly, the legislation that was supposed to rein in the banks is instead causing money to be pushed towards unregulated finance. “Shadow banking was in no way hindered,” the authors write. “On the contrary, it reached $13,000 billion in assets in 2013, half of the total managed by traditional banks.”

This unstoppable speculative finance only works for itself. “Finance is now the world’s biggest industry, so be it,” they write. The authors believe it is an unfortunate state of affairs, but it is not too bad as long as it is possible to find the appropriate funding for future investments. This, they argue, is what really matters.

Investing is the answer

The heart of the book deals with the huge need for investments in innovation, infrastructure and in what economies need long-term to regain growth potential. The authors complain that in developed countries, these investments have evaporated. Rich countries allocated just 20% of GDP in 2013 to investments, compared with 23% in 1990. The difference might seem minimal to most people, but the economists regard it as gigantic.

During the same period of time, developing countries did the opposite. Their share of GDP dedicated to investments grew from 23% to 33%. Therefore, the two writers argue that rich countries will have to “choose the future” — that is to say, invest — if they are serious about resuming economic growth. The problem is that money will be scarce.

The planet will lack savings in part because China, South Africa and Brazil set up social welfare programs. The figures are striking. “China accomplished the feat of increasing the proportion of population covered by health insurance from 24% to 94% in five years, between 2005 and 2010,” the book says.

While Obama struggles with “Obamacare,” China is going one step further. Beijing created a five-branch system covering health care, elderly care, unemployment, maternity and work accidents. Welfare spending rose in China, India and South Africa, between 5% and 8% of GDP. The number is Brazil has already reached 16%, compared with an average of 19% in OECD countries.

This shift from a savings economy towards a welfare economy will translate, according to the authors, into the loss of 2.3% of savings globally, even as the need for investments will rise by 2.6%. This means a 5% “squeeze” of the world’s GDP. And according to Lorenzi and Berrebi’s theory, this is why the world will enter a war over money, which could eventually become an actual war.

Because of this squeeze, interest rates will rise, leading to a “currency war” as each continent will try to recover savings, a “rare resource,” or a war between generations. The elderly who own these savings will naturally not be very much inclined to investing it in a future they will not live to see. Not to mention the fact that other sources of conflicts, such as terrorism or climate change, will encourage them to make safer investments.

The authors thus conclude that the main task of modern states will be to defeat risk aversion. They will need to create investors with “investment-friendly” tax systems by putting large sums of money into fundamental research and infrastructure where private capital cannot go.

The book also points to other paths to recovery. Among them is that of “perpetual debt,” in which governments will need to indefinitely push back the deadlines to repay public debt, since those monopolize savings. Other hypotheses include the unavoidable opening of borders to immigration and revision of education policies.

“No conflict is insurmountable, and none is easy to circumvent,” Lorenzi and Berrebi warn. On the contrary, these challenges offer a call to political action to rise to the occasion. Which brings us back to our political elite. The cause for concern is there, and there only.

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