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Economist Mikhail Khazin: The second wave of economic crisis will hit Lithuania in autumn 2014

Michailas Chazinas
Aurimo Šrubėno nuotr. / Mikhail Khazin
Šaltinis: 15min
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One of Russia's most renowned economists Mikhail Khazin is credited with having predicted the 2008 economic meltdown. During his visit in Lithuania, Khazin spoke to 15min and warned that the period of consumption stimulated by credit would soon come to an end. The world should brace itself for a fresh round of bankruptcies and record-breaking unemployment.

– We keep hearing that the economic crisis is over. What do you think?

– Our modern political system does not allow politicians to say that life is going to be worse tomorrow than it is today. They can say that life is difficult today, but always add that it will be better tomorrow or the day after.  Especially if they are voted into power. Every politician sees a threat in someone who says that it will get worse tomorrow. Therefore such people are few.

Our modern political system does not allow politicians to say that life is going to be worse tomorrow than it is today.

Most politicians and even international institutions consciously eschew the very term “crisis.” The International Monetary Fund, the World Bank, scholars at Harvard and other universities rather speak of economic cycles, fluctuations, temporary problems.

– Why do you oppose their views?

– It is a false opinion. Since 1981, the global economic growth was fuelled by credit-stimulated consumption. For that end, for the first time in history they employed the mechanism of refinancing debt. Before that, the prevailing belief had been that if a person wanted to borrow, he had to pay back his previous debts first. The system has changed.

Between 1981 and 2008, the US Federal Reserve lowered interest rates for banks from 19 percent to zero. One must realize that the global economy is still the economy of the US dollar. Since 2008, this mechanism for stimulating consumption does not work any more.

And that has set in motion processes that will eventually return consumption to its natural level. At the moment, the average salary in the US, adjusted to inflation, is what it was in 1957-1958.

Imagine yourself leading a normal life and, one day, you receive a letter informing about the death of your uncle in Australia; from now on, you'll be getting monthly checks of one thousand dollars paid by his estate. With additional income, your consumption habits change considerably. But the money runs out. And that is what's happening right now. The US Federal Reserve system was the world's inheritance from the rich uncle.

– How will we repay the debt?

Between 1981 and 2008, the US Federal Reserve lowered interest rates for banks from 19 percent to zero. Since 2008, this mechanism for stimulating consumption does not work any more.

– In theory, one must pay back one's debts, but in practice, everyone knows that this is impossible. The economy does not generate sufficient financial flows. Greece is an excellent case in point. But it does not all come down to sovereign debts. In the aftermath of the crisis, the European Union chose to save – it started cutting expenses. It is only natural, but then the question to ask is how come national budgets were so inflated in the first place? Because the states had been borrowing and spending money on their needs, including paying public employees, pensions, welfare.

– But Lithuania's debt is relatively small.

– Money come to Lithuania in the form of EU support, thus raising living standards. Austerity always means lowering standards of living for parts of the population – people lose their jobs, consumption contracts, pensions and benefits get cut. One can estimate how much people's standards of living will go down with a degree of accuracy.

One year ago, they held a discussion in Astana, Kazakhstan, with Nobel Prize-winning economist,s famous politicians, including former president of the European Commission, Italian Prime Minister Roman Prodi, former leader of the United Kingdom Tony Blair. State leaders were unequivocally told that household spending in their respective countries exceeded income by 20-25 percent. No one contradicted.

The crisis will continue until household spending equals income. The sources for financing consumption have dried up. The US Federal Reserve system has halted, opportunities for states to borrow are very limited. People will have to cut their consumption – and not by one fourth but much more, because as consumption contracts, so will income.

In theory, one must pay back one's debts, but in practice, everyone knows that this is impossible.

– You are saying that one can predict rather accurately what effects the crisis will have. What are people to expect?

– Your spending will have to be cut in half. Let's recall history lessons. The income-spending gap that caused the Great Depression in the US was 12 to 15 percent. Back then, unemployment soared to 40 percent. Today, unemployment in Greece or Spain stands at 20 percent. That means that the worst is still ahead.

– Unemployment among the youth is about the figure you quote from the Great Depression. Can we speak of a new lost generation?

– A person can develop only in a certain social milieu. Between the ages of 14 and 30, a person grows out of childhood and starts independent life, supports him or herself, forms a family. And he or she must have income when that happens.

If people do not begin taking care of themselves by the time they are 30, they remain dependent for the rest of their lives. And that is a dangerous situation to be in. If they are denied what they want, such a person will look for scapegoats. And that is a biological problem that cannot be helped.

People will have to cut their consumption – and not by one fourth but much more, because as consumption contracts, so will income.

– We are already seeing protests – and not only by the young. Retired and unemployed middle-class people are also hitting the streets.

– The middle class is defined by property and interest to protect it; they are not, however, rich enough to do it on their own. A truly rich man has no need for state help, while the poor hate any authority; so the middle class is the main pillar of the state.

These are the people who stick to certain norms of behaviour. They want a house, a car, to travel. All that's being advertised on TV. The poor do not care for advertising, they have no money, while the rich have other purchasing mechanisms at their disposal. You won't see yacht commercials on TV.

Not only do middle-class people choose typical commodities, but also typical political services. They need very particular things – that the streets are safe, that supermarkets are replenished, that healthcare and education systems operate smoothly. If the contracting economy takes away what people are used to, the crowd can get very dangerous.

A pauper understands that the state is his enemy, but he feels to small and weak. Any police officer can hit him with a baton and there is little he can do about it. Whereas if you come from the middle class, you know your rights, you know the law, you know how to use these mechanisms and are not afraid to stand up for yourself.

And there lies a great danger to those in power. A loser can be one in a hundred. Perhaps one in ten. But when eight out of ten people become losers, they start thinking that perhaps it is not their fault. Perhaps the rest are simply duping them. And so political confrontation ensues, rallies and everything else that we are currently witnessing in Bulgaria, Spain, or Greece. Middle-class people, who find themselves in real danger of poverty, are going out to the streets.

– What is the situation in Russia, which is Lithuania's biggest export market?

I think that the next dip will have something to do with the US stock exchange crash. The world, including Lithuania, will feel the effect in autumn 2014. We will see massive bankruptcies.

– The government in Russia currently admits that economic growth is stalling, even though contractions already started last October, albeit very slowly.

You must understand that the customs union currently in place will react very sensitively to imports from other countries. The World Trade Organization will hardly be of any help here, because there are many non-tariff ways to protect one's domestic market. They will say, for instance, that Belarusian sour cream is good, while Lithuanian is not, even though the cows graze just across the fence. Imports will be reduced slowly, but inexorably. I can tell you that with certainty.

– What you're saying is that the crisis is just beginning. What awaits Lithuania?

– We will not see any radical change in 2013. I think that the next dip will have something to do with the US stock exchange crash. The world, including Lithuania, will feel the effect in autumn 2014. We will see massive bankruptcies. But until then, the general situation in the world will deteriorate very gradually.

– The Lithuanian economy is growing faster than anywhere else in the EU. Are we to believe that this is about to turn 180 degrees?

– Small countries suffer more from crises. In the short run, they can make use of relatively small financial loans and expenditure cuts. When big countries fall, the fall is long and slow. Small countries can experience contraction one year, then grow the next, and then fall even deeper. These things are hard to predict, because small countries are affected by more accidental factors. What is clear, though, is that we cannot claim that Lithuania has dealt with the economic crisis.

– What provisions do you personally make for these changes in world economy?

– I have a consulting business. We draw expansion plans for business companies. And if a crisis is approaching, what expansion can we possibly talk about? On the other hand, we also advise on crisis management, so one kind of clients will be replaced by another. We must realize that, unlike the financial crises in Russia in 1998 and 2008, this one will be prolonged. Typical measures that they give in textbooks will not work here.

A future retiree will have barely enough for a small place to live and to feed themselves. Forget any extra needs. And such will be the situation throughout the globe. There will simply be not enough money to support old people.

– If your forecasts prove to be correct, what future awaits today's workers? What kind of retirement can they expect for themselves?

– The system of retirement plans is dead. In the US, it is turning into a catastrophe. The money that pension funds must pay is practically gone. It is invested into securities that have lost most of their value and will devalue even more in the future. The system was created and operated under a growing economy.

State pensions will contract drastically. A future retiree will have barely enough for a small place to live and to feed themselves. Forget any extra needs. And such will be the situation throughout the globe. There will simply be not enough money to support old people.

– How can you imagine this happening in the US?

– Easily. Even now, 50 million Americans are receiving food aid.

– But we cannot go down all the time.

– Indeed, we can't. After the fall, we will find ourselves in a situation worse than the Great Depression. I do not know what solutions they will come up with. I think that the world will be divided into separate currency zones. Each one of them will operate on their own rules.

– The EU and the US have launched negotiations on a free trade agreement. Has the process of division already started?

– If the agreement is signed, Western Europe will turn into a Bulgaria or a Lithuania. All production would move to the US. The European Union is now very efficient at protecting its market with non-tariff measures.

The US wants these restrictions removed. Their production costs are much lower, therefore Europe will be flooded with American goods, while German or French factories will have to close. European manufacturers realize that, that's why Edward Snowden's scandal erupted once the US and the EU launched talks.

– You warn about dropping consumption, but perhaps that would not be such a bad thing? World demography being what it is, even today the planet could not support a global population of Western-like consumers.

– There are voices proposing to construe an economy of rational consumption. But what will major manufacturers like Coca Cola or McDonald's do? They say: “No, eat and drink more, otherwise our revenues will dwindle.” The entire economic system is build on consumption. In order to change that, we have to change our political system – and the government will never allow that.

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