Economist Jeffrey Sachs on Global Crisis & Financial Risks

[00:00:01][Music] hello and welcome to the podcast pfi talks which is brought to you by prague finance institute and the leading czech economics research center sergey ei it is my pleasure to welcome world renowned economics professor jeffrey sax hello sir great to be with you so let's turn to the first block of our questions since many economists lately have been slashing their forecasts for global and regional gdp growth uh especially when they are looking forward into the next two years and all you know given the still unclear impact of covet uh policies that were implemented globally uh since uh since early 2020 and also the most recent impact on the on the global economy by the russian ukrainian conflict so if you are looking at these sort of events that have been spanning over the past two years you know what is your prediction regarding the global economic development growth and inflation for the next 24 months and what do you think policy makers should be doing about sort of navigate those rough borders that are that seem to be ahead and maybe you don't think that there are any rough waters ahead no we're definitely in rough waters uh we're in a crisis the crisis will get worse in the coming months uh and uh it could get far worse we were experiencing stagflation meaning that there are rising prices at the same time that output is falling in many parts of the world europe is already in a downturn the united states is entering a downturn china is in some kind of economic downturn so this is a global economic crisis and so i regard the overall economic situation as as bad as i've seen in decades worse than in 2008 i were likely to experience some very significant shocks in the months ahead of course the most crucial question is what happens to geopolitics does war spread does it intensify does it diminish is there a return to the negotiating table do the u.s and china come to blows which would disrupt global society do they find a way to talk with each other these are the questions that we're facing right now it's true that this is also happening on the backdrop of of immense debt leverage that the global economy what do you think is the optimal solution to the current global debt overhang and i'm by that i mean private public everything i'm just rounding up i don't even want to think about the figure because it's too many zeros so what's the solution to that so it doesn't threaten the world's uh global financial system and stability it's a great question again in the last stagflation that we had in the late 1970s what happened was that the inflation in the united states reached around 10 percent per year and the fed under a six foot seven a two meter uh chairman of the fed paul volcker uh cigar smoking tough guy uh he said we're gonna end this inflation and he put interest rates up to 20 and by the time it was over all the developing countries were bankrupt it was unbelievable well it made my career because i spent the next decade helping countries get out of debt crisis which had laid them completely flat so if we go into this just with the naive financial squeeze right now we'll end up with a lot of carnage uh meaning a lot of countries in default uh a lot of uh a a lot of very high inflation rates you look at a country like turkey now they have not managed their economy properly for years but the inflation rate is reaching a hundred percent per year right now uh argentina the inflation rate is reaching 100 there will be other countries experiencing this kind of runaway inflation maybe ukraine is going to have a hyperinflation by the end of this crisis of course we don't know but unlike 30 years ago or 40 years ago actually well almost 50 to be exact uh is the developed world are the developed economies and their financial system insulated from this impact that could be coming again from emerging markets or developing economies it's interesting you know of course in the 2010s because uh the european central bank did not do a very good job under its uh president trichet in the early years of the last decade greece nearly went bankrupt and uh it wasn't so far for ireland spain portugal and even italy and so the eurozone and slovenia the eurozone almost collapsed uh and uh it it required draghi's uh deft hand to prevent that collapse basically the european central bank had to act as a lender of last resort to prevent a disaster so central banks and their wisdom or lack of wisdom will determine a lot uh in 2008 the fed and the u.s treasury stupidly drove lehman brothers into a bankruptcy one weekend in september 2008 and it cost the whole world trillions of dollars that technical mistake that they made and so when you're in a crisis the first thing to say is these institutions are not so reliable they're not so smart they're not so fool proof that they necessarily avoid real damage what we need to come to the positive answer to your question is we need to avoid a contagion of defaults and a contagion of insolvencies and we also need to avoid simply telling dozens of countries you need to contract sharply your public investment uh and your social spending and so forth so you effectively coming full circle from what you know being the sort of from professing shock therapies you are coming full circle into actually going against these sort of uh fiscal cuts in the country no no no no no remember when i was uh advocating shock therapy i was advocating that governments not print money or or issue money in order to finance budget deficits but i was constantly recommending that the international finance help the countries to avoid defaults or crises one of the key pillars of shock therapy in bolivia and poland for example was a cancellation of the debts of those countries the foreign debts so i argued that to pay the foreign debts in bolivia would have condemned the country to a rampant hyperinflation and in the end uh bolivia's external debt to international banks was cut by about 90 at my recommendation uh similarly in poland uh in that shock therapy i recommended that poland's debt overhang should be relieved the debt that poland owed especially to its official creditors should be cut very very sharply and that indeed happened so i did not recommend simply austerity and contraction i recommended always that the international counterparts uh the creditors play a role a constructive role a positive role in preventing crisis in the better countries and in debt relief regardless the potential risk of moral hazard in well debt relief depends on the circumstances in the circumstances today i'm not recommending cancellation of the face value of debts what i am recommending is that one way or another and it depends very much on the specific circumstances that countries get the kinds of development finance that they need even on a larger scale than now and i'm talking about new debts on a long-term low interest rate basis so that these countries can continue to develop without going into default today it's a tricky proposition for countries that have borrowed on the euro bond market governments that owe money right now it may be that they have to say to the creditors well we need to extend the horizon for repayment under certain kinds of contracts where there are collective action clauses this can be done fairly smoothly and probably many countries are going to have to take that chance when it comes to official credits that a government owes to a rich country government or to the world bank or to some other international institution i'm recommending a set of measures to make sure that the uh developing countries are getting more finance in fresh form than they are repaying in on old debts there are many ways to to do that but i'm basically saying don't print money i've never believed in that because you just get high inflation but rather let's get a financial solution that doesn't condemn the country to default more to bankruptcy or to extreme austerity that's actually always been my policy recommendation since i started this approach in bolivia in 1985. and is it is it achievable under the current circumstances when the u.s fed is fighting a 40-year high inflation and has been pushing up interest rates higher to the unprecedented high for let's say several decades going back because that's actually been increasing the debt load or debt gearing of and servicing costs debt servicing costs for all the ems or developing countries it's it's going to be a close call for several reasons but let me put it this way currently the 30-year bond rate of the u.s treasury is about 3.2 still quite low the 30-year bond rate for german debt is still around 1 actually uh the 30-year bond rate for ghana or for a emerging economy if they could get a 30-year loan is 10 in other words i am advocating a significant increase of official financing at interest rates that the treasury or the german government or other uh eurozone countries pay themselves the real room for maneuver is that the interest rates paid by the high-income countries are still very low compared to what the emerging market economies face what i'm suggesting therefore is a major expansion of funds coming from the world bank the european investment bank the african development bank the asian development bank that essentially can borrow on terms very close to what the u.s government or german government or japanese government can borrow at and therefore lend at quite low and long-term interest rates to emerging markets that if they are left on their own face horrendous terms that would drive them into default and then we are back into the whole idea of like uh the currently lack of uh cooperation will on the global level we have together there you go so i'm recommending to the g20 this approach but is there a g20 even right now countries are barely talking to each other uh the us and russia literally are not talking to each other of course uh us and china barely talking to each other and cooperating on something as bold as avoiding a financial crisis somehow it's not going well and for me all through my career even when i didn't understand it properly at the time it has been determined by geopolitics will something work or won't it work because you need cooperation if the cooperative environment is there a lot can get done if there is no cooperation the chance for a contagion is very very real this i think is what we face right now i have a last question on this topic the ecb is facing a real difficult times and dilemma even i mean it's it's behind the tightening curve you know in you know launched by fat the fat earlier earlier in the season what can ecb do to actually you know put its policies back straight on the right course of like sustaining that kind of development and preventing any global financial crisis or maybe world world financial crisis number two following 2008 2009.

[00:15:09]well i think europe is in an extremely difficult situation not mainly because of the ecb but mainly because of the war in ukraine and the vulnerability on energy obviously europe's already in a downturn it could get quite severe in the coming months uh my position on this is not popular in europe uh among the politicians but as i've emphasized my position is that there is a negotiated way out of this i don't believe uh the nato line that well we're just going to fight till we defeat putin if that is the approach i don't think it's going to succeed on the battlefield and i also think that the consequences economically will become quite unmanageable uh the crisis will be very serious in my view now maybe i'm too pessimistic but uh i believe that the energy crisis and all of the uncertainties around it uh and all of the other ramifications and you compound that with the the growing break with china as well i think it will lead to a very significant crisis in europe and since we see the politics are already quite unstable in a number of countries including italy for example where the draghi government has just fallen and who knows what will happen next with elections coming up i i think that the chance of revisiting a deep eurozone crisis becomes very real so i don't see the pieces working very well right now and the ecb can only do so much in this context i think it's going to have an extremely difficult time unless we find a way to piece and to easing uh the very very high tensions right now you are viewed and correct me if i'm wrong as the co-author or co-father of the united nations development goals that are used in in the currently you know often discussed esg policies and you are the colombia's university director of the center for sustainable development and what does it mean what is your typical day like in this in this role great great great question uh typically it's zooming from uh early morning till late at night because now in our digital world we can meet and speak all over the world rather than do it sustainably and do it to sus i it depending on how exactly the electricity is provided for our zooms that remains a question but it's much more sustainable than uh getting on an airplane for every meeting that one has to have i spend a tremendous amount of my day every day working on the sustainable development goals and the paris climate agreement i believe as as i've been emphasizing that global cooperation is necessary is vital and is feasible i don't believe in a divided world i don't believe in democracies versus autocracies i don't believe in cold wars or hot wars i believe that our environmental and social crises are so severe that we need cooperation right now above all of the differences that we might suppose to divide the world and so i speak with the chinese i speak with latin america african leaders european leaders all the time and i promote solutions as we discussed uh for the financial crisis which is deepening for the climate crisis which is deepening uh and i helped to lead a network of more than 1 500 universities around the world to address through education and research and policy analysis how to promote sustainable development and war is is my enemy obviously because it's the biggest distraction uh it sucks up all the energy it destroys so much faster than we can possibly build uh it undermines every opportunity for trust and partnership uh and uh so these days i spend uh a tremendous amount of time trying to see is there some way to overcome these uh this two-front uh crisis that we face uh with russia and china against the us and its uh alliance and i always appeal for europe to be smarter in its diplomacy because europe has the values of sustainable development yet it's caught in war and i want to see europe get out of this trap of war not fall into a trap of uh a new battle with china and help lead the way to a cooperative approach to sustainable development how do you see the latest efforts by us and eu authorities in sort of codifying the uh the the esg rules um how do you see the current approach to that whether it should be sort of more better codified from the above rather than sort of driven from below by the markets it definitely we need top-down codification and top-down policies and very broadly speaking the european green deal is a valid smart i would say sophisticated approach it's got many limitations but the european green deal is a framework that the 27 have adopted it can serve as a roadmap it's not exactly a plan of course and there are a thousand details to be argued every day is natural gas really green is nuclear green and so on so these are inevitable points of debate but broadly speaking the european green deal is well done and well worth achieving and well worth promoting diplomatically to say to the latin american countries to the african union to asean and so on you need a green deal the same way we have a green deal europe could really provide a lot of leadership that way when it comes to the green deal taxonomy what's really important for the czech republic and even some other central european countries do you think that the nuclear power should be viewed as sustainable going forward and that germany should actually bring its uh you know reverse its policy of shutting down nuclear power plants i think nuclear power if this is a big if uh if it can be managed uh safely so that with the absolute state-of-the-art safety systems especially passive safety systems offers uh component of uh the zero carbon energy system i don't believe i'm not myself a purist that says absolutely no to nuclear power of course it raises many issues fissile materials nuclear safety nuclear waste and the alternatives because if you could do it without nuclear through uh efficient uh a an efficient system of wind solar hydro and so forth there's a lot of merit to that but i think within the practical context there's no doubt uh that nuclear power is gonna continue to play its role obviously in france uh obviously in central europe uh obviously in china uh in korea in ukraine countries in the world well in russia and ukraine uh i would expect so also absolutely well says jeffrey sachs uh the professor of sustainability at columbia university thank you very much for your time talking to us well it's always a pleasure thank you so much great to be with you