Is the game up for China’s much emulated growth model?

Jayati Ghosh in The Guardian



Illustration by Robert G Fresson



Whatever happened to emerging markets? Brics, Mints, whatever global investors call them: For a while it appeared as if countries such as Brazil, India and Turkey had secure and buoyant futures, regardless of the travails of advanced economies. There was much trumpeting of their advantages, such as the demographic bulges producing young populations. Few asked about the nature of the growth, or whether it could last. The euphoria spread, leading to large private-capital inflows that pushed up asset prices in these countries.

That already seems a long time ago, as investor opinion has done yet another volte face. Investors who were slow to read the tea leaves during the boom times have now taken fright. In just 13 months, capital outflows from these countries have crossed $1tn. Stock markets have tanked across countries as distant and diverse as Malaysia, India, South Africa and Brazil; currencies have depreciated; and bond issues are slowing down, with fewer takers.

For a change, this is not being driven by policy in the developed world. Unlike the “taper tantrum” unleashed in mid-2013 by Ben Bernanke, the then US Federal Reserve chairman – when he simply announced the possibility of reducing the massive liquidity stimulus that was being provided in the US – the current skittishness in emerging markets is the fallout of what is happening in China. This is hugely important, not just because of China’s major role in global trade, but because it signifies the end of a particular growth strategy that many other countries were trying to emulate.

The recent travails of China’s economy are well known by now: falling real estate prices put paid to the construction boom, and the subsequent bursting of the stock market bubble was hamfistedly controlled through official measures. But these current difficulties are the outcome of earlier economic strategies that were widely celebrated, when the going was good.

From the early 1990s China adopted an export-led strategy that delivered continuously increasing shares of the world market, fed by relatively low wages and very high rates of investment, enabling massive increases in infrastructure. It led to big increases in inequality and even bigger environmental problems, but the strategy seemed to work – until 2008-09, when exports were hit by the global financial crisis.

Yet even then, China, India and other large emerging markets continued to grow. The talk at the time was that they were already “decoupled” from the west. In reality, China (and much of developing Asia) had simply shifted to a different engine of growth without abandoning the focus on exports. The Chinese authorities could have generated more domestic demand by stimulating consumption through rising wage shares of national income, but this would have threatened their export-driven model. Instead they put their faith in even more accumulation to keep growth rates buoyant.

So the “recovery package” in China essentially encouraged more investment, which was already nearly half of GDP. Provincial governments and public sector enterprises were encouraged to borrow heavily and invest in infrastructure, construction and more production capacity. To utilise the excess capacity, a real estate and construction boom was instigated, fed by lending from public sector banks as well as “shadow banking” activities winked at by regulators. Total debt in China increased fourfold between 2007 and 2014, and the debt-GDP ratio nearly doubled to more than over 280%.

We now know that these debt-driven bubbles end in tears. The property boom began to subside in early 2014, and real estate prices have been stagnant or falling ever since. Chinese investors then shifted to the stock market, which began to sizzle – once again actively encouraged by the Chinese government. The crash that followed has been contained only because the government pulled out all the stops to prevent further falls.

All this comes in the midst of an overall slowdown in China’s economy. Exports fell by around 8% in the year to July. Manufacturing output is falling, and jobs are being shed. Construction activity has almost halted, especially in the proliferating “ghost towns” dotted around the country. Stimulus measures such as interest rate cuts don’t seem to be working. So the recent devaluation of the yuan– which has been dressed up as a “market-friendly” measure – is clearly intended to help revive the economy.

But it will not really help. Demand from the advanced countries – still the driver of Chinese exports and indirectly of exports of other developing countries – will stay sluggish. Meanwhile, China’s slowdown infects other emerging markets across the world as its imports fall even faster than its exports and its currency moves translate into capital outflows in other countries.

The pain is felt by commodity producers and intermediate manufacturers from Brazil to Nigeria and Thailand, with the worst impacts in Asia, where China was the hub of an export-oriented production network. Many of these economies are experiencing collapses of their own property and financial asset bubbles, with negative effects on domestic demand. The febrile behaviour of global finance is making things worse.

This is not the end of the emerging markets, but is – or should be – the end of this growth model. Relying only on exports or debt-driven bubbles to deliver rapid growth cannot work for long. And when the game is finally up, there can be severe political fallout. For developing countries to truly “emerge”, a more inclusive strategy is essential.

Doomsday clock for global market crash strikes one minute to midnight as central banks lose control

China currency devaluation signals endgame leaving equity markets free to collapse under the weight of impossible expectations

 

It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations. Photo: Reuters

By John Ficenec in The Telegraph
 

When the banking crisis crippled global markets seven years ago, central bankers stepped in as lenders of last resort. Profligate private-sector loans were moved on to the public-sector balance sheet and vast money-printing gave the global economy room to heal.


Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.


The FTSE 100 has now erased its gains for the year, but there are signs things could get a whole lot worse.



1 - China slowdown


China was the great saviour of the world economy in 2008. The launching of an unprecedented stimulus package sparked an infrastructure investment boom. The voracious demand for commodities to fuel its construction boom dragged along oil- and resource-rich emerging markets.


The Chinese economy has now hit a brick wall. Economic growth has dipped below 7pc for the first time in a quarter of a century, according to official data. That probably means the real economy is far weaker.


The People’s Bank of China has pursued several measures to boost the flagging economy. The rate of borrowing has been slashed during the past 12 months from 6pc to 4.85pc. Opting to devalue the currency was a last resort and signalled the great era of Chinese growth is rapidly approaching its endgame.

Data for exports showed an 8.9pc slump in July from the same period a year before. Analysts expected exports to fall only 0.3pc, so this was a huge miss.

The Chinese housing market is also in a perilous state. House prices have fallen sharply after decades of steady growth. For the millions who stored their wealth in property, it makes for unsettling times.


2 - Commodity collapse

The China slowdown has sent shock waves through commodity markets. The Bloomberg Global Commodity index, which tracks the prices of 22 commodity prices, fell to levels last seen at the beginning of this century.


The oil price is the purest barometer of world growth as it is the fuel that drives nearly all industry and production around the globe.

Brent crude, the global benchmark for oil, has begun falling once again after a brief rally earlier in the year. It is now hovering above multi-year lows at about $50 per barrel.


Iron ore is an essential raw material needed to feed China’s steel mills, and as such is a good gauge of the construction boom.

The benchmark iron ore price has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.


3 - Resource sector credit crisis

Billions of dollars in loans were raised on global capital markets to fund new mines and oil exploration that was only ever profitable at previous elevated prices.

With oil and metals prices having collapsed, many of these projects are now loss-making. The loans raised to back the projects are now under water and investors may never see any returns.



Nowhere has this been felt more acutely than shale oil and gas drilling in the US. Tumbling oil prices have squeezed the finances of US drillers. Two of the biggest issuers of junk bonds in the past five years, Chesapeake and California Resources, have seen the value of their bonds tumble as panic grips capital markets.


As more debt needs refinancing in future years, there is a risk the contagion will spread rapidly.


4 - Dominoes begin to fall

The great props to the world economy are now beginning to fall. China is going into reverse. And the emerging markets that consumed so many of our products are crippled by currency devaluation. The famed Brics of Brazil, Russia, India, China and South Africa, to whom the West was supposed to pass on the torch of economic growth, are in varying states of disarray.

The central banks are rapidly losing control. The Chinese stock market has already crashed and disaster was only averted by the government buying billions of shares. Stock markets in Greece are in turmoil as the economy grinds to a halt and the country flirts with ejection from the eurozone.

Earlier this year, investors flocked to the safe-haven currency of the Swiss franc but as a €1.1 trillion quantitative easing programme devalued the euro, the Swiss central bank was forced to abandon its four-year peg to the euro.


5 - Credit markets roll over

As central banks run out of silver bullets then, credit markets are desperately seeking to reprice risk. The London Interbank Offered Rate (Libor), a guide to how worried UK banks are about lending to each other, has been steadily rising during the past 12 months. Part of this process is a healthy return to normal pricing of risk after six years of extraordinary monetary stimulus. However, as the essential transmission systems of lending between banks begin to take the strain, it is quite possible that six years of reliance on central banks for funds has left the credit system unable to cope.



Credit investors are often far better at pricing risk than optimistic equity investors. In the US while the S&P 500 (orange line) continues to soar, the high yield debt market has already begun to fall sharply (white line).




6 - Interest rate shock

Interest rates have been held at emergency lows in the UK and US for around six years. The US is expected to move first, with rates starting to rise from today’s 0pc-0.25pc around the end of the year. Investors have already starting buying dollars in anticipation of a strengthening US currency. UK rate rises are expected to follow shortly after.




7 - Bull market third longest on record

The UK stock market is in its 77th month of a bull market, which began in March 2009. On only two other occasions in history has the market risen for longer. One is in the lead-up to the Great Crash in 1929 and the other before the bursting of the dotcom bubble in the early 2000s.



UK markets have been a beneficiary of the huge balance-sheet expansion in the US. US monetary base, a measure of notes and coins in circulation plus reserves held at the central bank, has more than quadrupled from around $800m to more than $4 trillion since 2008. The stock market has been a direct beneficiary of this money and will struggle now that QE3 has ended.


8 - Overvalued US market

In the US, Professor Robert Shiller’s cyclically adjusted price earnings ratio – or Shiller CAPE – for the S&P 500 stands at 27.2, some 64pc above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.

This is no recovery, this is a bubble – and it will burst

Stock market bubbles of historic proportions are developing in the US and UK markets. With policymakers unwilling to introduce tough regulation, we're heading for trouble

• 
• • Ha-Joon Chang
  • The Guardian, Monday 24 February 2014 18.00 GMT

'Share prices are high mainly thanks to quantitative easing not because of the strength of the underlying real economy.' Photograph: David Levene for the Guardian

According to the stock market, the UK economy is in a boom. Not just any old boom, but a historic one. On 28 October 2013, the FTSE 100 index hit 6,734, breaching the level achieved at the height of the economic boom before the 2008 global financial crisis (that was 6,730, recorded in October 2007).

Since then, it has had ups and downs, but on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930, recorded in December 1999, during the heady days of the dotcom bubble.

The current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order.

The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period. This is definitely the biggest stock market bubble in modern history.

Even more extraordinary than the inflated prices is that, unlike in the two previous share price booms, no one is offering a plausible narrative explaining why the evidently unsustainable levels of share prices are actually justified.

During the dotcom bubble, the predominant view was that the new information technology was about to completely revolutionise our economies for good. Given this, it was argued, stock markets would keep rising (possibly forever) and reach unprecedented levels. The title of the book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market, published in the autumn of 1999 when the Dow Jones index was not even 10,000, very well sums up the spirit of the time.

Similarly, in the runup to the 2008 crisis, inflated asset prices were justified in terms of the supposed progresses in financial innovation and in the techniques of economic policy.

It was argued that financial innovation – manifested in the alphabet soup of derivatives and structured financial assets, such as MBS, CDO, and CDS – had vastly improved the ability of financial markets to "price" risk correctly, eliminating the possibility of irrational bubbles. On this belief, at the height of the US housing market bubble in 2005, both Alan Greenspan (the then chairman of the Federal Reserve Board) and Ben Bernanke (the then chairman of the Council of Economic Advisers to the President and later Greenspan's successor) publicly denied the existence of a housing market bubble – perhaps except for some "froth" in a few localities, according to Greenspan.

At the same time, better economic theory – and thus better techniques of economic policy – was argued to have allowed policymakers to iron out those few wrinkles that markets themselves cannot eliminate. Robert Lucas, the leading free-market economist and winner of the 1995 Nobel prize in economics, proudly declared in 2003 that "the problem of depression prevention has been solved". In 2004, Ben Bernanke (yes, it's him again) argued that, probably thanks to better theory of monetary policy, the world had entered the era of "great moderation", in which the volatility of prices and outputs is minimised.

This time around, no one is offering a new narrative justifying the new bubbles because, well, there isn't any plausible story. Those stories that are generated to encourage the share price to climb to the next level have been decidedly unambitious in scale and ephemeral in nature: higher-than-expected growth rates or number of new jobs created; brighter-than-expected outlook in Japan, China, or wherever; the arrival of the "super-dove" Janet Yellen as the new chair of the Fed; or, indeed, anything else that may suggest the world is not going to end tomorrow.

Few stock market investors really believe in these stories. Most investors know that current levels of share prices are unsustainable; it is said that George Soros has already started betting against the US stock market. They are aware that share prices are high mainly because of the huge amount of money sloshing around thanks to quantitative easing (QE), not because of the strength of the underlying real economy. This is why they react so nervously to any slight sign that QE may be wound down on a significant scale.

However, stock market investors pretend to believe – or even have to pretend to believe – in those feeble and ephemeral stories because they need those stories to justify (to themselves and their clients) staying in the stock market, given the low returns everywhere else.

The result, unfortunately, is that stock market bubbles of historic proportion are developing in the US and the UK, the two most important stock markets in the world, threatening to create yet another financial crash. One obvious way of dealing with these bubbles is to take the excessive liquidity that is inflating them out of the system through a combination of tighter monetary policy and better financial regulation against stock market speculation (such as a ban on shorting or restrictions on high-frequency trading). Of course, the danger here is that these policies may prick the bubble and create a mess.

In the longer run, however, the best way to deal with these bubbles is to revive the real economy; after all, "bubble" is a relative concept and even a very high price can be justified if it is based on a strong economy. This will require a more sustainable increase in consumption based on rising wages rather than debts, greater productive investments that will expand the economy's ability to produce, and the introduction of financial regulation that will make banks lend more to productive enterprises than to consumers. Unfortunately, these are exactly the things that the current policymakers in the US and the UK don't want to do.

We are heading for trouble.

Another financial crisis looms if rich countries can't kick their addiction to cash injection

Five years on from the last crash, quantitative easing remains the weapon of choice for governments unwilling to challenge the current economic model

• 
• • Ha-Joon Chang
  • The Guardian, Friday 30 August 2013 18.00 BST

Illustration by Matthew Richardson

Just as people started to think that things were getting calmer – if not exactly brighter – in the rich countries, things have become decidedly slower and more volatile in the so-called "emerging market" economies. At the centre of the (unwanted) attention at the moment is India, which is seeing a rapid outflow of capital and thus a rapid fall in the value of its currency, the rupee. But many other emerging market economies, other than China, have also seen similar outflows and weakening of currencies recently.

This is not necessarily a bad development. The currencies of many emerging market economies, especially those of Brazil's real and South Africa's rand, had been significantly over-valued, damaging their export competitiveness. Devaluation could actually help these economies put their growth on a more sustainable path.

However, people are rightly worried that too rapid flows of capital out of these countries may cause excessively fast devaluations, resulting in currency crises and thus financial crises, as happened in eastern Asia back in 1997. Situations like this can arise because the currencies of the emerging countries have been propped up by something that can quickly disappear – that is, the large inflows of speculative capital from the rich countries. Given its nature, such capital is ready to pull out at any moment, as an increasing portion of it has been doing for several months.

This is a stark reminder that things are still not well with the world economy, five years on from the outbreak of the biggest financial crisis in three generations in September 2008.

We have had such huge capital inflows into the emerging economies mainly because of quantitative easing (QE) by the central banks of the US, Britain, and other rich countries, which injected trillions of dollars into the world economy, in a desperate attempt to revive their moribund economies.

In its initial phase, QE may have had acted like an electric shot to someone who just had a cardiac arrest. But subsequently its boosting effects have been largely through the creation of unsustainable asset bubbles – in the stock market, in property markets and in commodity markets – that may burst and generate another round of financial crises. On top of that, it has caused much collateral damage to developing countries, by overvaluing their currencies, helping them generate unsustainable credit booms, and now threatening them with the prospect of currency crises.

If its effects are at best debatable and at worst laying the ground for the next round of financial crises, why has there been so much QE? It is because it has been the only weapon that the rich country governments have been willing to deploy in order to generate an economic recovery.

QE has become the weapon of choice by these governments because it is the only way in which recovery – however slow and anaemic – could be generated without changing the economic model that has served the rich and powerful so well in the past three decades.

This model is propelled by a continuous generation of asset bubbles, fuelled by complex and opaque financial instruments created by highly leveraged banks and other financial institutions. It is a system in which short-term financial profits take precedence over long-term investments in productive capabilities, and over the quality of life of employees. If the rich countries had tried to generate recovery through any other means than QE, they would have to seriously challenge this model.

Recovery driven by fiscal policy would have involved an increase in the shares of public investment and social welfare spending in national income, reducing the share going to the rich. It would have generated new public sector jobs, which would have weakened the bargaining power of capitalists by reducing unemployment.

Recovery based on a "rebalancing" of the economy would have required policies that hurt the financial sector. The financial system would have to be re-engineered to channel more money into long-term investments that raise productivity. Exchange rates would have to be maintained at a competitive level on a permanent basis, rather than at an over-valued level that the financial sector favours. There would have to be greater public investment in the training of scientists and engineers, and greater incentives for them to work in and with the industrial sector, thus shrinking the recruitment pool for the financial industry.

Given all this, it is not a big surprise that those who benefit from the status quo have persisted with QE. What is surprising is that they have actually strengthened the status quo, despite the mess they have caused. They have successfully pushed for cuts in government spending, shrinking the welfare state to the extent that even Margaret Thatcher could not manage. They have used the fear of unemployment in an environment of shrinking social safety nets to force workers to accept more unstable part-time jobs, less-secure contracts (zero-hour contracts being the most extreme example), and poorer working conditions.

But is this maintenance, or even fortification, of the ancient regime likely to continue? It may, but it may not. Greece, Spain, and other eurozone periphery countries could explode any day, given their high unemployment and deepening strains of austerity. In the US, which is considered the home of quiescent workers, the call for living wages is becoming louder, as seen in the current strikes by fast-food restaurant workers. The British are (overly) patient people, but they may change their mind when the full extent of budget cuts unfolds in the coming months.

All of these stirrings may amount to little, especially given the weakened state of trade unions, except in a few countries, and the failure of the parties on the left of centre to come up with a coherent alternative vision. But politics is unpredictable. Five years after the crisis, the real battle for the future of capitalism may be only just beginning.

None of the experts saw India's debt bubble coming. Sound familiar?

India's economic problems reflect a global boom-to-bust pattern. Why do policymakers act surprised?

• 
• • Jayati Ghosh
  • The Guardian, Monday 26 August 2013 20.00 BST

'The Indian economy has been in trouble for quite a while already, and only wilful blindness could have led to ignorance on this.' Illustration: Daniel Pudles

So now India is the latest casualty among emerging economies. Over the past 10 days, the rupee has slid to its lowest-ever rate, and the Indian economy may well be on the verge of a full-blown currency crisis. In this febrile situation, it is open season for rumours and pessimistic predictions, which then become self-fulfilling.

This means that even if there is a slight market rally, investors quickly work themselves into even more gloom. Each hurriedly announced policy measure (raising duties on gold imports, some controls on capital outflows, liberalising rules for capital inflows and so on) has had the opposite of the desired effect. Everything the government does seems to be too little, too late – or even counterproductive.

These are all classic features of the panic phase of a financial market cycle. This doesn't mean that a crash is inevitable, but clearly it is possible. The real surprise in all this is that investors and Indian policymakers are surprised. For some reason, they apparently did not foresee this turn of events, even though the story of every financial crisis of the past, and many in the very recent past, should have caused some nostrils to twitch at least a year or two ago.

The Indian economy has been in trouble for quite a while already, and only wilful blindness could have led to ignorance on this. Output growth has been decelerating for several years, and private investment has fallen for 10 consecutive quarters. Industrial production has declined over the past year. But consumer price inflation is still in double digits, providing all the essential elements of stagflation (rising prices with slowing income growth).

At the moment the external sector is the weakest link. Exports are limping along but imports have ballooned (including all kinds of non-essential imports like gold), so both trade and current account deficits are at historically high levels. They are largely financed by volatile short-term capital. This has already started leaving the country: since June more than $12bn has been withdrawn by portfolio investors alone.

This situation is the result of internal and external imbalances that have been building up for years. The Indian economic boom was based on a debt-driven consumption and investment spree that mainly relied on short-term capital inflows. This generated asset booms in areas such as construction and real estate, rather than in traded goods. And it created a sense of financial euphoria that led to massive over-extension of credit to both companies and households, to compound the problem.

Sadly, this boom was also "wasted" in that it did not lead to significant improvements in the lives of the majority, as public expenditure on basic infrastructure, as well as nutrition, health, sanitation and education did not rise adequately.

We should know by now that such a debt-driven bubble is an unsustainable process that must end in tears, but those who pointed this out were derided as killjoys with no understanding of India's potential. Something similar is occurring in a number of other Asian economies that are also feeling the pain at present, such as Indonesia – while the Brazilian economy shows some similar features. The current Indian problems may be extreme, but they reflect what should now be a familiar process in all major regions of the world.

The typical story, which was elaborated half a century ago by Charles Kindleberger, goes something like this: a country is "discovered" by international investors and therefore receives substantial capital inflows. These contribute to a domestic boom, and also push up the real exchange rate. This reduces the incentives for exporters and producers of import substitutes, so investors look for avenues in the non-tradable sectors, such as construction and real estate. So the boom is marked by rising asset values, of real estate and of stocks. The counterpart of all this is a rising current account deficit, which no one pays much attention to as long as the money keeps flowing in and the economy keeps growing.

But all bubbles must eventually burst. All it takes is some change in perception for the entire process to unravel, and then it can unravel very quickly. The trigger can be a change in global conditions, or a sharp slowdown in domestic income growth, or political instability, or even economic problems in a neighbouring country. In India Ben Bernanke of the US Federal Reserve is being blamed for bringing this on, but it could easily have been some other factor. Once the "revulsion" in markets sets in, the very features that were celebrated during the boom are excoriated – by both investors and the public – as examples of crony capitalism, inefficiency and such like. The resulting financial crisis hits those who did not really benefit so much from the boom, by affecting employment and the incomes of workers.

This is what has just started to happen in India, and is also likely to happen in several other emerging markets. But essentially the same process has already unfolded many times before in different parts of the world: Latin America in the 1980s, Mexico in 1994-95, south-east Asia in 1997-98, Russia in 1999-2000, Argentina in 2001-02, the US in 2008, Ireland and Greece in 2009, and so on.

Why are we so startled each time? And why do we never, ever, see it coming?

George Osborne's description of the economy is near-Orwellian

The fact that even Labour accepts the UK is 'on the mend' shows how low our expectations of economic performance are

• 
• • Ha-Joon Chang
  • The Guardian, Friday 26 July 2013 20.01 BST

George Osborne this week. 'The UK's economic performance since the start of the coalition government … has been so poor that Thursday's announcement of 0.6% growth … was greeted with a collective sigh of relief.' Photograph: Christopher Thomond

If all else fails, they say, you can always lower your standards. This is what we have become used to doing in relation to the UK economy. The UK's economic performance since the start of the coalition government in May 2010 has been so poor that Thursday's announcement of 0.6% growth in the second quarter of 2013 was greeted with a collective sigh of relief.

Having declared the UK economy to be "on the mend" on the strength of this growth figure, George Osborne is said to have regained his swagger. Even the opposition grudgingly acknowledged that the latest figures were good enough news, although it was quick to add that the benefits of the recovery have been almost exclusively concentrated at the top.

But even the opposition's interpretation may be too charitable. Including the last quarter, the UK economy has grown by just 2.1% during the 12 quarters since the current government came to power. This compares very poorly with the 2% growth that the economy had managed in just four quarters between the third quarter of 2009 and the second quarter of 2010. The coalition blames this poor performance on the eurozone crisis. But this argument is not very persuasive when output has more than recovered to pre-crisis level in many eurozone countries, including France and Germany, while UK output is still 3.3% less than what it was at the beginning of 2008.

It gets worse. During the past five years, the UK's population has grown by 3%. This means that, on a per capita basis, the country's income is 6.3%, not just 3.3%, less today than it was five years go. This performance is far worse than what Japan managed during its infamous "lost decade" of the 90s. At the end of that period, Japan had a per capita income 10% higher than at the start.

If the UK is to match this performance during what looks certain to be its own "lost decade", it will have to grow at the rate of 3.9% every year for the next five years (or 3.3% in per capita terms, assuming that the past five years' population growth rate of 0.6% per year continues). Even the most optimistic cheerleaders for the coalition government are not talking such numbers.

Thus seen, describing the UK economy as being "on the mend" is a near-Orwellian redefinition of economic recovery. The fact that most people accept that description, even if with reservations about the uneven distribution of its benefits, shows how low the standard of performance we expect of the UK economy has become.

But even applying this low standard, it is not clear whether we can expect a sustained recovery in the coming years. There are at least two factors that can derail the recovery process, especially given that it is so feeble. The first is the likely evolution of the global economy. The eurozone may be dragging itself out of a recession, but things can turn for the worse at any moment. Especially given the severity of austerity in countries such as Greece, Spain and Portugal, the policy's continuation may result in another bout of political unrest, negatively affecting the economy.

Thanks to its avoidance of the worst form of austerity policy, the US economy has recovered from the 2008 crisis more strongly than the European countries. But with another federal debt ceiling negotiation looming later in the year, it is possible that the US recovery will be set back by another round of budget cuts. The Chinese economy has visibly slowed down. And the Chinese government seems determined to keep it that way for a while. Concerned with financial stability, it has clamped down on credit expansion. Worried about seething public anger against government corruption and extravagance, it has imposed a ban on "wasteful" government spending (lavish buildings, banquets, and foreign trips). These are all good policies in the long run, but they will dampen Chinese demand in the immediate future.

The other two biggest "emerging" economies, Brazil (second largest) and India (third), have both seriously slowed down in the last couple of years. India's growth rate fell from 10.5% in 2010 to 6.3% in 2011, and then to 3.2% in 2012. The equivalent figures for Brazil were 7.5%, 2.7%, and 0.9%. Both these economies suffer from high inequality and social tensions, as shown by the recent protests in Brazil and the resurgence of Maoist guerillas called the Naxalites in the eastern part of India. Therefore there is always a possibility that political unrest may dampen these economies even further.

These global factors are, of course, beyond the UK's control, but there is another factor at least partially within its control that may derail the recovery. It is the asset bubbles that have developed in the stock market and the property market, fuelled by cheap credit (sounds familiar?).

Share prices have reached levels that simply cannot be justified by the state of the economy. In May 2013, the FTSE 100 share price index surpassed the pre-crisis peak of June 2007, although it has come down a bit since then. Given that the pre-crisis peak was supported by a buoyant (albeit unsustainable) economy, current share prices, which have no such support, can only be described as an even bigger asset bubble.

Although the rest of the country is still experiencing a stagnant housing market, property markets in London and the south-east are beginning to look inflated, given the state of the economy. And the government is stoking this property bubble with the Help to Buy scheme.

These asset bubbles have provided important sources of demand in the UK economy in the past few years. But the trouble is that they are quite shaky even for asset bubbles, for they are only sustained by historically low interest rates and the massive indirect subsidies given to banks through the so-called quantitative easing scheme.

The fragile nature of these bubbles is revealed by the nervousness with which financial market participants react to pronouncements by central bankers. They know that the current price levels are viable only with QE, so they are readying themselves to jump as soon as there is a sign that it may come to an end. When the asset bubbles deflate, there is likely to be a serious fall in demand that will derail the recovery.

In the past few years the UK should have found a way to stage a recovery without having to rely on state-sponsored asset bubbles. As it hasn't even tried, it is facing the prospect of having a "lost decade" that is even more "lost" than the original one in Japan. 

Energy pricing: the market is manipulation

As an oil industry whistleblower, I know the energy sector is even more flawed than this week's exposé of gas prices reveals

• Chris Cook
• The Guardian, Tuesday 13 November 2012 20.40 GMT

'The real problem lies not with gas, but crude oil – which is suffering perhaps the greatest market manipulation the world has seen.' Photograph: Getty Images

The Guardian's investigation into the alleged "Libor-like" fixing of UK gas prices was doubly ironic for me. The first irony is that, as director of compliance and market supervision of the International Petroleum Exchange (now ICE Futures Europe) in the 1990s, I was heavily involved in the development and legal architecture of the gas-market contract that has now allegedly been manipulated.

The second painful irony is that in 2000 the Guardian published detailed allegations made by me on very similar micro-manipulation of the International Petroleum Exchange's Brent futures contract-settlement prices. This systemic manipulation was so pervasive that traders referred to the on-exchange profits they made at the expense of the manipulators – who profited "off-exchange" – as "grab a grand".

Unfortunately, I described the manipulation as "systematic" – taken to mean that some of the players were routinely manipulating the price most of the time – rather than "systemic", where most of the players manipulate the market some of the time. On this basis the commissioner appointed to investigate my allegations rejected them, and in finest whistleblower tradition my reputation was destroyed: I lost my livelihood, home and marriage. Had the crude oil market been properly investigated at that time, subsequent oil market history would probably have been very different.

One thing I have come to realise since my failed attempt at whistleblowing is that the short-term trading exposed this week is only part of the problem. The malaise runs much deeper. If you want to find out who really has an interest in rigging the market, ask who benefits from medium- and long-term high commodity prices: it's the producers, stupid. From De Beers' diamond hoarding to coffee-grower cartels, if the history of commodity markets tells us anything it's that if producers can find leverage to support commodity prices, they will.

The real problem in the energy market lies not with gas, but crude oil – which is suffering perhaps the greatest market manipulation the world has seen. This is due to financialisation of markets which began in crude oil about 12 years ago, but only became significant from around 2005 onwards. From the mid-90s, a new type of investor entered the markets as investment banks created new vehicles – index funds, exchange traded funds and so on – which enabled investors to invest directly in equities, precious metals; commodities generally and above all, in energy, with a view to "hedging inflation". Rather than speculatively taking a risk in search of a profit, they sought only the return of their capital, and the preservation of the value of their investment relative to dollars, sterling and so on.

To understand what happened to oil, we just need to look at the Enron scandal. The fundamental scam perpetrated here was based on an ancient financing method known as "prepay". Quite simply, this occurs when producers sell their product at a discount for cash now, with delivery later. So via intermediary banks such as JP Morgan and Citigroup, Enron were able to opaquely obtain "off-balance sheet" financing disguised as commodity trades of which Enron's investors and creditors were blithely unaware.Essentially, Enron was borrowing dollars and lending commodities.

A similarly opaque prepay technique has been responsible since 2005 for the inflation of two oil market bubbles. The first – a private sector bubble – culminated in July 2008 in a spike to $147 a barrel, and then a collapse to $35, causing great pain to producers used to high prices. At this point key producers – facilitated by friendly investment banks – resorted to prepay to finance themselves, and a public sector bubble was rapidly inflated during 2009.

In my analysis, the US and Saudis then hit upon a strategy that loosely "pegged" the oil price against the dollar within an agreed trading range, keeping prices relatively stable. But this trick only worked until early 2011, after which Fukushima and supply shocks in Libya and Iran have caused more turmoil.

I believe that there is now virtually nothing holding the oil market up, and that when (not if) Iran reaches an accommodation with the US on terms similar to those spurned by Dick Cheney in 2003, we will see the oil market price fall, possibly dramatically.

I have been warning for some time that risk-averse investors – whose very presence in the market causes the inflation they wish to avoid – are taking a much higher level of market risk than they appreciate. If I am correct, this will – sooner rather than later – give rise to the next Great Regulatory Disaster.

Perhaps worse than this, and particularly relevant to my work on financial market resilience, there is a significant risk of the sort of discontinuity in market price that took place in the tin market in 1985 when the market price collapsed overnight, from the price level supported by producer cartel stockpiling of $8,000 a tonne to the much lower price of $4000 a tonne, which reflected the influx of new low-cost tin supply.

The presence in the market of middlemen who have an interest in volatility and opacity means that we have now reached a stage where market manipulation is no longer an aberration: the market is the manipulation.

So what can be done? In the long term, crude oil prices can only go up, and many would argue that for the sake of the environment it is essential that carbon fuel prices are set at levels at which demand is low. The problem then is how best to distribute interationally and domestically the surplus value thereby created, in particular in investment in renewable energy, and above all in the cheapest energy of all – energy savings.

This will require a new (in fact very old) – and non-toxic – type of market architecture, and the good news is that this are already emerging as the current market paradigm approaches its end.

A Eurosceptic hero alongside sainted Maggie? It's got to be Gordon Brown

The judgments for which Gordon Brown was mocked look rather different now we've seen David Cameron in action

• 
• • Jonathan Freedland
  • guardian.co.uk, Tuesday 8 November 2011 21.00 GMT
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Gordon Brown and his wife Sarah say farewell to the German chancellor, Angela Merkel, at a meeting at No 10 on the eve of the 2009 G20 summit. Photograph: Dan Kitwood/Getty Images

Few arguments are more unfashionable than the one I am about to make: the case for Gordon Brown. Unfashionable because, 18 months after he left office having led Labour to its second worst result since 1918, Brown still arouses intense loathing. At the Conservative party conference I saw otherwise calm Tories foam with anger at the mention of the former prime minister, furiously tearing away at his every trait, personal and political. That hatred is outdone in some corners of the Labour forest by diehard Blairites still seething at the memory of how Brown thwarted their hero in Downing Street before chasing him out of it.
Illustration by Belle Mellor
With enemies on both sides, that leaves few defenders in the press, a fact compounded by the ex-PM's near-total invisibility, his appearances in the Commons rare. The torrent of memoirs from colleagues, Alistair Darling's the latest, have only damaged his reputation still further.

Not many would attempt to push aside the mountain of anecdotes detailing Brown's impossible behaviour as both colleague and boss. Even his most ardent admirers now accept that Gordon Brown was temperamentally unsuited to the job of prime minister.

And yet posterity's judgment of leaders does not rest solely in their hands. The conduct of their successors matters too: Clinton looked better after George W. History may yet have similar second thoughts about Brown, reviewing his record in the light of what has followed.

Take last week's fiasco of a G20 meeting in Cannes, which did little to solve the crises in Greece and Italy, and whose most enduring legacy may prove to be off-mic comments made by the host, Nicolas Sarkozy. Contrast that with the meeting of the same group chaired by Brown in London in April 2009, which agreed a $5tn stimulus to the world economy and was duly hailed for preventing a global recession tipping over into a global depression. A year later the highly respected Brookings Institution predicted "that in coming years, the London G20 summit will be seen as the most successful summit in history".

Part of that was good fortune on Brown's part: in 2009 the US and Germany were in broad agreement on what needed to be done. But much of it was down to Brown's own actions as chair. The very attributes that infuriated his domestic colleagues were put to their best use: he worked around the clock preparing for that summit, hectoring, manoeuvring and bullying his fellow world leaders until they had buckled to his will. These were the same behind-the-scenes methods he had used a decade earlier as he pushed fellow finance ministers to relieve developing countries' debts. It wasn't pretty, it wasn't telegenic, but it was effective.

How very different it is today. It was ironic to hear George Osborne castigate his European counterparts for simply "waiting on developments", since that's exactly what he and David Cameron do at these international powwows. One veteran of the summit circuit says that the two Brits regularly turn up with no agenda of their own, so unlike Brown and, to be fair, Tony Blair, who almost always arrived with a plan, ensuring, in the tired phrase, that Britain punched above its weight. (I'm told that, rather poignantly, Brown is still the man with a plan: he was ready with detailed proposals on jobs and global finance had Osborne not blocked him for the top post at the IMF.)

What is even harder for the Tories to stomach is that it was Brown who delivered what they themselves long insisted was the critical policy goal of the past two decades: keeping Britain out of the euro. It was Brown and his legendary five, impossible-to-meet tests that restrained the gung-ho Blair and ensured Britain stayed out of the single currency. Absurdly, Osborne has tried to give the credit for that to William Hague and his save the pound campaign, which rather forgets that both Hague and his campaign were crushed in 2001. If Eurosceptics want to have a hero whose picture they can put on the wall alongside the sainted Margaret, I'm afraid that it's got to be Gordon. That they can't is testament to a visceral hatred not only of Brown but of his chief lieutenant at the time, whose opposition to the euro was total and decisive: Ed Balls.

Least fashionable of all is the case that Brown was right on the deficit. The coalition's entire programme is predicated on the notion that Brown was incontinent with the nation's money, running up colossal debts. But the rise in borrowing from some £40bn to £170bn was not the result of a crazed spending spree. It was the consequence of the crash of 2008 and the subsequent collapse in economic activity, consisting mostly of increased welfare payments – including the dole for those thrown out of work – and declining tax revenues caused by fewer people earning wages. This was a deficit created by crisis, not by profligacy.

If Brown was not the source of the disease, what about his remedy? His preferred approach – over which he fought with, and lost to, Darling among others – was to secure the recovery first, get the economy ticking over nicely, and only then start attacking the deficit. If the economy were growing, shrinking the deficit would be less painful; tackling it too early risked sucking out demand, choking off the recovery and so, paradoxically, increasing the deficit.

Well, guess who called it right. The last quarter with Brown in charge saw growth of just over 1.1%, surpassing all expectations, with unemployment coming down. The economy appeared to be getting back on its feet. But then the deficit fetishists of the coalition took over and the economy stalled, with more growth in that last Brown quarter than in the next four Cameron quarters combined. Suddenly Brown's insistence that growth had to come first looks prescient and wise.

Indeed, there are judgments big and small for which Brown was mocked at the time but which look rather different now. As PM, he overruled Darling, preferring to increase national insurance rather than VAT. Now, thanks to Osborne, we've seen the calamitous impact of a VAT rise on both inflation and demand. More crucially, Brown realised at the start that the economy had to be central, refusing to be diverted to other projects, however worthy, including promised constitutional reform. Barack Obama may well wish he had made the same call, putting healthcare to one side and focusing exclusively on jobs.

Of course, there was much that Brown got badly wrong. Hailing the end of boom and bust was absurd; relying on City and house price bubbles to raise cash was fatal; failing to run a surplus during the good times foolhardy.

But what's intriguing is that these were mistakes made as chancellor, on which Brown's standing remains high. Perhaps a revision is in order, downgrading his record in No 11 but upgrading his performance in No 10. The Conservatives won't ever undertake such an act of revision, the historians might not do it for decades to come. But Labour, whose future prospects partly depend on knowing what to say about its recent past, should do it much sooner.