Kristalina Georgieva said new IMF research, which compares the current economy to the “roaring 1920s” that culminated in the great market crash of 1929, revealed that a similar trend was already under way.
While the inequality gap between countries had closed in the last two decades, it had increased within countries, she said, singling out the UK for particular criticism.
“In the UK, for example, the top 10% now control nearly as much wealth as the bottom 50%. This situation is mirrored across much of the OECD (Organisation for Economic Co-operation and Development), where income and wealth inequality have reached, or are near, record highs.”
She added: “In some ways, this troubling trend is reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.”
She warned that fresh issues such as the climate emergency and increased trade protectionism meant the next 10 years were likely to be characterised by social unrest and financial market volatility.
What do you think will happen next?
What can be done to prevent another Great Depression?
While no one can really predict what will happen in next 10 years, it is necessary for everyone to be aware that the threat of another Great Depression exists.
To prevent another great depression, I suggest three main actions;
The head of the International Monetary Fund has warned that the global economy risks a return of the Great Depression, driven by inequality and financial sector instability. ... With disputes still raging between the US and Europe, she said “the global trading system is in need of a significant upgrade”
There are some insights,
Duarte, P., & Schnabl, G. (2019). Monetary policy, inequality and political instability. The World Economy, 42(2), 614-634.
Zhang, R., & Naceur, S. B. (2019). Financial development, inequality, and poverty: Some international evidence. International Review of Economics & Finance, 61, 1-16.
In my opinion, after every ten years (once in a decade), we face the problem of recession globally. In some decades, it is just a business cycle while in some decades it may lead to great depression. The indicators which are globally traced, are showing the concern of depression ahead and that threat can not be ignored. Further, due to integration of financial markets world over, one country can not be aloof from the global shocks. Hence, we should not ignore the threat of depression. In order to avoid it to worsen further, regulatory authorities of the countries have to tighten the norms and try to absorb the possible shocks.
Hello Professor Munck,
I think that the IMF Managing Director, Kristalina Georgieva, has legitimate concerns about the future of the global economy. Whether today’s global economy is similar to the world (US) economy during the roaring twenties that preceded the Great Depression is something that can be debated. The same argument can be made whether today’s world economy resembles the global economy prior to the US Great Recession because the world major central banks drove interest rates to zero bound and even to negative levels. Carmen Reinhart, Professor at Harvard University, was unsure of the quality of credit of many US borrowers when speaking at the Swiss Davos Forum last week. Even if many of the characteristics of the present global economy are very similar with previous pre-crisis periods, the new global crisis, if it will take place, will be different, as it will mutate just like the new viruses do.
This is the reason that countries, international organizations, and all those who truly care should become prepared and begin cooperating instead of antagonizing for their own self-interests. It does not matter whether self-interest pertains to nations, businesses, or personal interest in the case of country leaders. The IMF Managing Director, Georgieva, is correct: Income and wealth distribution is one of the underlying causes of a looming recession. Almost every new study after the Global Financial crisis reports deteriorating income inequality everywhere. The concerns by the IMF Managing Director regarding the “climate emergency” are urgent and critical regarding how the crisis can be avoided by finding a long term solution by heavily investing in the Green economy.
This topic surfaced in the Davos World Economic Forum last week as a “ clash how to achieve environmentally friendly growth” between Christine Lagarde, the new president of the European Central Bank, and the US Treasury Secretary, Steven Mnuchin. Whereas Lagarde supports policies leading to investment in green technologies that will protect the environment by reducing carbon emissions, Mnuchin supports access to cheap energy. This means more of the same i.e., discoveries of new oil and gas fields everywhere they can be found. However, fossil fuel sources of energy are mainly responsible for the deterioration of the environmental quality. Furthermore, which countries are entitled the property rights to offshore drilling recently became and still is a major reason for possible national armed conflicts involving several countries. The recent Libyan crisis and the disputes in Eastern Mediterranean attest to this claim. Investment in alternative sources of energy rather than fossil fuels and nuclear power is a solution for a healthy economy and clean environment for the present and future generations and reduction of geopolitical tensions. Greediness to have quick access to fossil cheap energy can be detrimental to the environment. Numerous examples of environmental disaster exist. The Groningen gas field in the Netherlands is an environmental disaster case that should be widely publicized to demonstrate the threats of prolonged gas drilling to the environment.
Kind regards
George K Zestos
Dear Dr. Zestos
That is very interesting indeed.
Growming income inequality, a climate crisis that really cannot be denied any longer and a financial sector that never got the regulation promised after the great financial crisis 2008-09 (see @Kedar above).
All in all the ingedients for a perfect storm. If you add to it a stormy global strategic scenario it does look grim. And yet very little that I can see being done as you suggest.
In Ireland where I live we are going into elections where the two cnetre parties are just competing on what tax cuts they might offer and no thoughts to these dangers which in our case include Brexit a real basket of unknowns.
Lagarde is an interesting figure and she was certainly right at Davos
Deart Prof. Munck!
I really think we should be worried - IMF research is reliable and the new Director of that institution is a highly experienced, top leader with professional attitude. She does not mean to cause panic but wanted to send a strong signal. There is a sound theory behind the her thoughts:
1) Christopher Quigley (2012). "Kondratieff Waves and the Greater Depression of 2013 - 2020" Copyright © 1997-2020, Financial Sense, Available at: https://www.financialsense.com/contributors/christopher-quigley/kondratieff-waves-and-the-greater-depression-of-2013-2020
2) A. Korotayev & Leonid Grinin(2012). " Kondratieff Waves in the World System Perspective" in "Kondratieff Waves: Dimensions and Prospects 2012 23–64" Available at:
Article Kondratieff Waves in the World System Perspective
As one can see the forthcoming difficulties the EU is about to face with the Brexit process and the new protectionist approach of the USA to advance its economic interest wordwide, one has to be concerned. May I argue the best way to stop this dangerous process from advancing is to persuade the UK to cancel her intention exiting the EU and bring USA into an agreement with the EU concerning the "Transatlantic Trade and Investment Partnership" . Yours sincerely, Bulcsu Szekely
Bulcsu Szekely says 'One can see the forthcoming difficulties the EU is about to face with the Brexit process and the new protectionist approach of the USA to advance its economic interest wordwide, one has to be concerned. May I argue the best way to stop this dangerous process from advancing is to persuade the UK to cancel her intention exiting the EU and bring USA into an agreement with the EU concerning the "Transatlantic Trade and Investment Partnership"
This is indeed a key point not probably recognised enough. The current UK government seems set on Brexit course even if for them it is at best a risk. It has all the ingredients of a another element in the 'perfect storm' now brewing.
A rational North Atlantic alliance also seems impossible given the current incumbent in the White House
Thanks for recent references to Kondatieff waves theorising. I was familar with it many years ago and we concluded they did not work. But I will read now with great interest.
History is repeating, concerning its Sisyphean patterns. The economic growth engine of the future, concerning a new conjuncture, is everything related to human health (e.g. eco-bio-medi-tech). However, most times the decision makers stick to old economic paradigms, opening the pathway for revolution and war. Muddling through is always better, but this requires meta-prudence and this seems to be a seldom gift in political economy, resp. decision-making. Not every greater societal conflict must end up in the same negative patterns and can find peaceful solutions, e.g. new economic bargaining models, monetary reform, alternative conjunctures. As the current exponentiality is unstable (as all exponential trans-formations in nature), it must end up in a higher social order, most possibly singularity. A win/win economy is needed to avoid violent global escalations; everybody, who understands a bit the human range of game behavior, knows that the jackpot of real life rotates via marginal stages, i.e.the first cup of water in the desert is the most precious.
Stephen I. Ternyik says
A win/win economy is needed to avoid violent global escalations
Most readers would probably agree. But how can that be achieved?
I do not think a repeat of the global Keynesianism of the post war period can be replicated today can it?
And the phase of 'easy globalisation' that began around 1995 is also over. trump is but a symptom of that.
So what are the options?
Here is one set of options
https://www.weforum.org/agenda/2019/01/what-can-we-do-to-prevent-another-global-financial-crisis/
But is this radical enough? Does it go far enough? Doe sit address climate crisis adequately? Doe sit address growing North South inequalities? Does it deal with growing social deprivation?
The incoming crises different than it's precedes because it will be multiple reasoning, oil prices, Coronavirus, and china struggling will make the effects more complex.
The Covid-19 pandemic has scarred the world. It is life now completely unrecognisable in comparison to the freedoms we had a few short months ago. Whether Covid-19 triggers an economic crisis depends on the ability of industries to adapt to the new normal.
Lockdowns have restricted travel so those industries which have successfully digitalised are thriving. Whilst those businesses that are unable to do so are in danger of collapsing and bringing a significant chunk of the economy down with them.
In this global technocracy, almost everyone has access to a personal digital device. The limiting factor to successful digitalisation is therefore the industry rather than the public. So, the industries that will survive the Covid-19 crisis are those who either do not need to digitalise or can digitalise completely. For example, even the education system has fully digitalised. From kindergartens to universities; every educational institution is holding online classes. Some are even pre-recorded. Homework is submitted at the click of a button. This new system has resulted in cost savings and one wonders why this was not more common before.
The hospitality business has suffered as it can only partially digitalise. Sit-in restaurants are empty but online take-away services are booming. The role of tele-medicine in the healthcare sector is increasing for outpatient services. Some patients even prefer to have a consultation via telephone or video calls whilst sitting in their own homes. However, many people are unwell and need to be admitted to hospital. So, this sector can’t fully digitise.
Any sector in the economy that can digitalise will thrive under these conditions of the Covid-19 pandemic. Indeed, once the lock downs end these industries may remain fully online having realised the significant benefits of digitalisation.
However, it is difficult to digitalise international travel. Furthermore, now that the world is more digitalised than ever before, we do not need to travel as much as we did before. So, it will be interesting to see what remains of the airline industry when the lock downs end…
Considering that in January 2020 there was no SARS-CoV-2 (Covid-19) coronavirus pandemic, the above-mentioned words of the head of the International Monetary Fund suggesting another great global economic crisis for 2020 turned out to be highly prophetic. The SARS-CoV-2 (Covid-19) coronavirus pandemic by the World Health Organization was announced in March 2020. Then there was a panic on capital markets, a strong sell-off, a stock market crash on the stock markets and the commodity markets. The global economic crisis began, for which the strongest recession occurred in the second quarter of 2020. Then there were opinions that the global economic crisis began, with a similar negative economic scale as the global financial crisis of 2008, and even compared to the Great Depression in the 1930s. How was this known already in January 2020? We will probably look for an answer to this question for a long time.
Regards,
Dariusz Prokopowicz