Fernández: “Fictitious” wealth jeopardizing the global economic recovery

The existence of “fictitious” wealth is endangering the recovery of the global economy, now mired in a crisis that has sparked tensions in many countries and a geopolitical shakeup in various regions around the globe.

Thus argues Dr. Leonel Fernández president of Global Foundation for Democracy and Development (GFDD) and Fundación Global Democracia y Desarrollo (Funglode), in an article in Spanish daily El País based on a talk entitled
“The Global Economic Paradox.”

In his argument, the former president of the Dominican Republic affirms that the excess liquidity now floating around the global economy is used on transactions that do nothing to increase industrial, alimentary, or energy wealth – but rather on financial transactions that, instead of helping to create any sort of material satisfaction of consumer demands, creates artificial wealth based on commercial
paper.

Using figures from the latest World Bank Global Economic Prospects report, Fernández warns that since 2007 global growth projections have shrunk from 2.9% to 2.4%.

“What has caused this situation?” he asks. “How can we explain the fact that nearly nine years after the eruption of the global financial crisis of 2007, the global economy has been unable to fully recover and reactivate its growth?”

He suggests several possible reasons for this phenomenon, highlighting, first off, the lack of coordination among countries in the G20, the organization created to address the crisis by designing recovery policies.

In this respect, he notes that while the United States proceeded to apply expansionary monetary policies to stimulate growth and reduce unemployment, Europe opted for spending cuts and austerity policies that have caused stagnation in its economic
growth.

“Nonetheless,” Fernández continues, “there may be a more structural explanation having to do with the fact that, despite all measures adopted to face the crisis, a global economic model based on the preeminence of the financial sector over other productive areas still prevails.”

In the opinion of the former head of state, the predominance of the finance sector or the financialization of the global economy,
which began to gather steam more than three decades ago, has distorted the way an economic system should function and has been the root cause of both the global financial crisis and the continuing lack of economic recovery.

Fernández, who is also president of the European Union–Latin America and Caribbean (EU-LAC) Foundation, maintained that the current economic model will inevitably lead to a crisis of unpredictable proportions.

He argues that within
the framework of an economic system based on free competition, the role of the financial sector is to serve as intermediary between depositors’ savings and the credit needs of productive sectors such as, for example, agriculture and industry.

He stresses, nonetheless, that what’s happened in recent years is that the finance sector has become an end in itself, such that it accumulates revenue on the basis not of differentiation of applicable interest
rates between savings and loans, but of utilities acquired through financial innovation and derivatives that have created an interconnected global banking system at the global level.

“In reality, the lack of growth of the global economy is owed, among other things, to the fact that due to financialization a disconnect or detachment has arisen between the financial system and the productive sectors,” Fernández concludes.

Related link: http://elpais.com/opinion/1467973032_734354.html