The World Service invited myself and Jim O’Neill, chief economist at Goldman Sachs on to the Business Daily programme today for what they hoped would be an intellectual punch-up. They were not disappointed. Prof. Jagdish Bhagwati had also been invited, but sadly was stuck in a traffic jam so unable to join us in the discussion, and instead was recorded separately…
O’Neill started by positively mocking the ‘peak oil thesis’. Ho, Ho, Ho… never heard anything so crazy he said… He had just read a book by a Californian – with no geological or economic background – calling for transition economies, and had never read such rubbish! “Don’t tell me you believe that peak oil nonsense!” I explained that I had grown up in a gold mining town, whose inhabitants and owners believed that gold would pay their wages and dividends for ever… Not so, mining there dried up in the mid 1990s and iIt turned out that reserves of gold, like oil, are finite. Today, my home town, Welkom in the Orange Free State, is a ghost town. When I asked him why Saudi oil production numbers seemed stuck, and would not budge even under intense pressure from the US, he looked incredulous.
We then moved on to the Credit Crunch – ‘just another periodic crisis’ O’Neill said. He had already lived through five – no big deal, finance sector irrelevant, oil price the real problem, trade powering ahead, global economic growth of 4% forecast for next year…all is sunny and bright in a world in which Chinese and Indian consumers are gearing up to rescue the global economy. The US which has not even entered recession, they will regrettably, but inevitably in his view, shift to the margins of the global economy.
If things are not so bad in the US, I asked, why has unemployment risen every month for the last seven months? And, given a low savings rate, will unemployment not accelerate the build up of debts, arrears and defaults – and trigger another downward spiral of housing market prices? And would not such defaults wreak even greater havoc on the globally integrated financial system?… Naw, he said, you exaggerate… and then rattled off data for retail sales in China these last three months. I challenged these and suggested that Chinese consumption was only 3% of Global GDP and therefore unlikely to substitute for falls in US consumption… “More like 7%” he estimates.
We were asked to look ahead. He regards the current upheavals as a storm that will soon pass. He said it was ridiculous to suggest that this crisis implied sustained economic failure. I said that I was extremely gloomy; that it would take ten years at least to recover from this financial meltdown, that the finance sector had done more to harm the prospects for globalisation than any anti-globalisation protester.
As we prepared to leave the studio, he hurled an insult. Why, if I cared for the poor, did I not study the data? The interview had ended, so I blew my top and accused him of arrogant, patronising conduct. At which point BBC staff ducked for cover under desks…
O’Neill, in my humble opinion, and no opinion could be more humble, is a classic example of an orthodox economist that regards finance as marginal to the economy, who focuses instead on trade and the supply and demand for goods and services – and whose narrow analysis blinkers him to the possibility of prolonged economic failure caused by financial meltdown.
Alternatively he is the pragmatist, focussed on the real world economy, and I am utterly deluded. But in my defence I have this to say: he and most orthodox economists were totally unprepared for ‘debtonation day’ – August 9th, 2007….Unlike yours truly, they failed utterly to predict it, they downplayed it (‘its only the sub-prime sector, won’t spread to other sectors’), they failed to correctly analyse its causes, and many still do not grasp its implications.
Scary… but it was a great dust-up all the same.
Listen to Business Daily on the BBC World Service for the full interview, live on Friday 8th August, 2008, 11.40am GMT, and via their website thereafter.