One of the world's leading economists, Hernando de Soto has been hailed as an innovator who could help reinvent the future of the global economy.
An author and activist from Peru, De Soto worked to raise the standard of living for his impoverished fellow countrymen by helping them attain property rights, the lack of which he sees as a source of poverty in poor countries. He has received support and recognition from many influential Western political forces, ranging from left-liberal to conservative.
RFE/RL correspondent Dragan Stavljanin spoke recently with De Soto about the world's current economic crisis and his prognosis for the future.
RFE/RL: You have stated recently that the world is on the verge of a new protracted recession. What are the indicators of this?
Hernando de Soto: The reason I say that is because I take as a definition of the recession its principle characteristic, which is the credit contraction and the way the cycle is relatively simple. When credit contracts, which is what is happening in the West today -- private credit contraction -- the result of that is, of course, less investment, less credit, which means less production, which means more unemployment, which means the fall of prices of things, which means the loss of confidence.
And then you go back to complete the vicious circle, which makes credit contract even more as a result of less there is less enterprise, less employment, etc. That's the vicious circle we are in.
RFE/RL: So what is the cause of this current credit contraction?
De Soto: In a normal recession, what you've got is basically these exploding bubbles. You've got lots of debts. You've got shaky banks. You've got falling prices. You have people losing their homes and rising unemployment. If these symptoms had been the cause of the crisis....
In any crisis we've had, or the West's had, the supply and demand would have acted and kicked in. Which is that vulture capitalists would have come in first -- read the signals, find out who is in trouble, bought it on the cheap at very low prices, and the lucrative remains of whatever there was of exploded bubbles and floundering businesses and nonperforming mortgages -- and corrected the deficiencies that led to them.
If the real problem was the contraction of credit due to lack of money, then the huge injection of legal tender via quantitative easing and bailouts, and financial rescue packages, which is, for example, what the European Union is doing now -- including the interest rate reductions -- should have spurred the economy. It's been four years since 2007 and none of the usual recession remedies have actually worked. This is because people are simply not lending. And why are they not lending? Because nobody really knows who is broke, who is a risk, and where the opportunities are.
RFE/RL: Who is responsible for the crisis in 2008? Is it a question of a technical nature? Or is it as some would say a central issue of Reaganism, of Thatcherism, the neoliberal concept of economy, of failing to apply a Tobin tax on international transactions?
De Soto: Whether you are looking at records of derivatives, whether you are looking at balance sheets, whether you are looking at any accounting that has to do with fair market prices -- in other words, reflecting what the value of your goods is according to what price they can fetch on the street instead of what you yourself may consider would be a just price -- we really are flying blind.
And that blindness is what is stopping people from believing each other because credit comes from credibility. The reason is basically an enormous collapse of confidence, which will not reappear until the [accounting] books start saying what people really have in their pockets."
Sending Good Money After Bad?
RFE/RL: What remedies, if any, do world governments have at their disposal to at least mitigate or to avoid the crisis?
De Soto: The only way you are going to avoid a crisis of a major proportion is by being able to prognosticate that is coming as much as you can. And that means having records of everything that is being done. If I have clear records of what are the balance sheets of all banks. If I have clear records of how money is moving around.
There is no such thing as a market economy without knowledge. That does not exist. I mean, the whole idea behind a market economy is that you get some kind of information that allows you to infer what opportunities and risks there are. We had it 20 years ago. Twenty years ago, you looked to the balance sheet of an American bank and that's what they had. And if they didn't have it, they would be fraudulent.
You will always have bubbles. That's unavoidable. "Bubbles" basically means that prices can go up to a certain point and, then, find their equilibrium. And sometimes that equilibrium is lower than anybody expected. That's when you get the bubble. But if you have more information as to who owns what, you are then able to make those bubbles much shorter. You can decide where somebody is accumulating so much money.
RFE/RL: Is this really a matter of knowledge? Or is it about political will?
De Soto: It is a matter of knowledge. And the question is, why isn't that knowledge given? Because it is to me part of the written contract of the rule of law in any Western country. That information has to be available. That's the reason kings were taken out of power. That's why communism fell. We don't have knowledge.
And what your question says is, why don't they change it? And the reply to that is that at this time, they are so afraid that if they do give the knowledge it will be obvious in a matter of days which banks can't pay their debts. And then, what the West is afraid of is that there will be a run on the banks. That's why, when this crisis first came on, many people said, "Well, let's find a way of telling the public that those who have savings in the bank will be protected -- through insurance or whatever it is -- so that everybody understands that they are in safe hands."
RFE/RL: Are austerity measures in the case of the European Union and particularly Greece counterproductive or effective -- and also the recent quantitative easing in the United States?
De Soto: All of those measures deal with the symptoms. They don't deal with the disease. The disease essentially has to do with the fact that nobody invests in those countries because nobody has knowledge.
So the reply is, we are still correcting the symptoms and not getting to the bottom of it. That is a characteristic that applies also to quantitative easing. Quantitative easing means putting public money where there should have been private money. They are not getting to the bottom of it yet. All of these measures are temporary.
In Fear Of The Domino Effect
RFE/RL: Why is the Greek crisis so severe and worrisome for all of Europe, and even for the world, given the fact that its economy amounts to just 2 percent of the entire eurozone economy?
De Soto: For the same reason that the subprime market in the United States nonperformance [caused the crisis]. Remember when 7 percent of the subprime market faltered in the United States in 2008? You know, 7 percent of the property of the poor in the United States is peanuts.
But what happens is that 7 percent in the United States, or that 2 percent that you are talking about in Greece, happens to be owned by a few French banks and a few Italian banks. And that those banks go under. Then what everybody fears is the domino effect -- which is: Greece goes, but then with Greece go the banks that are supporting Greece. And the banks that are supporting Greece might be supported by yet another country. And then you get a domino effect, and that's what is called a panic. That's the reason why what is apparently a small amount is really a big amount.
RFE/RL: While Western countries -- except maybe Germany -- mostly struggle to rebuild their economy, emerging economies like China are on a constant rise. Is the economic balance definitely shifting toward the east or will they face difficulties as well?
De Soto: There is no doubt that emerging markets are now more powerful than they were 20 years ago. I think there is no doubt that most emerging markets have got growth rates which the West has probably never seen. Even Peru is growing at 10 percent.
However, there is no way -- because of the way that we are integrated in the world, the way the global economy is interconnected -- that we are going to escape a recession. [That's] because, at the end, a lot of the things that the Chinese produce, that the Indians produce, that we in Latin America produce, are bought by the West.
On top of that, I think that there is an overconfidence in the powers of emerging markets. We also have problems. One of the problems that we have with China is we don't know how much of their numbers are well said or not. I think that they will take a stronger lead in the market. But I think that most of these emerging markets are not as advanced as the West thinks they are. It will take a longer time than that.
What Must Be Done?
RFE/RL: What kind of reforms are necessary to get out of this crisis and then to establish a new foundation for the global economy in order to avoid future crises?
De Soto: There is a huge divorce between the paper and the assets. In other words, money has always been pinned to something. Whether it is gold, whether it is the gold-exchange standard, whether it is the [U.S.] dollar, whether it is real assets -- money has always been pinned to a guarantee that there is something solid behind it. Whether it be a book, an intangible, or whether it be a house, a tangible.
That is what we have lost. And we have to go back to that. Whether you call it conservative or whether you call it social democratic, it has to do with a check on reality.
RFE/RL: What can we expect in the next year to five years, given the Occupy Wall Street protests and the increasing anger toward governments by people?
De Soto: We can expect political turmoil. There is no way that you can bring down the incomes and the welfare of millions of people throughout the world without you getting severe protests.
So we are obviously going to go through very big political transformations and we are going to have to make terrible adjustments until we are able to get back to reality. And always this has political consequence. And that is why it is so important that we make the corrections as soon as possible and that politicians with courage are able to tell us how we can make those corrections without blaming the neighboring countries for having done all the harm. Otherwise, like in the 1930s, we are going to open the whole situation to conflicts, social wars, and transnational wars.
I think that there is no way that you are going to avoid a collapse. The question is, are you going to be able to do it with a soft landing with governments in control, or whether it is going to be a hard landing. And the question then becomes, are you going to have somebody like a [Winston] Churchill, a Franklin Delano Roosevelt, a Charles de Gaulle? Is one of our present leaders going to be strong enough to say that these are bad moments, but we can get through them and offer a leadership program in recession? And will they have courage to do that, instead of just partial messages?
We shall see. Let's see if the leader rises. But we are going to need somebody very strong to finally tell us the truth -- which is that the West is broke and it is overleveraged and it has to have books that tell facts instead of telling lies. In terms of whether we can survive with the existing system with just a little bit of quantitative easing, with just a little bit of bailout and rescue packages -- that, I am convinced, will not work.
An author and activist from Peru, De Soto worked to raise the standard of living for his impoverished fellow countrymen by helping them attain property rights, the lack of which he sees as a source of poverty in poor countries. He has received support and recognition from many influential Western political forces, ranging from left-liberal to conservative.
RFE/RL correspondent Dragan Stavljanin spoke recently with De Soto about the world's current economic crisis and his prognosis for the future.
RFE/RL: You have stated recently that the world is on the verge of a new protracted recession. What are the indicators of this?
Hernando de Soto: The reason I say that is because I take as a definition of the recession its principle characteristic, which is the credit contraction and the way the cycle is relatively simple. When credit contracts, which is what is happening in the West today -- private credit contraction -- the result of that is, of course, less investment, less credit, which means less production, which means more unemployment, which means the fall of prices of things, which means the loss of confidence.
And then you go back to complete the vicious circle, which makes credit contract even more as a result of less there is less enterprise, less employment, etc. That's the vicious circle we are in.
RFE/RL: So what is the cause of this current credit contraction?
De Soto: In a normal recession, what you've got is basically these exploding bubbles. You've got lots of debts. You've got shaky banks. You've got falling prices. You have people losing their homes and rising unemployment. If these symptoms had been the cause of the crisis....
If the real problem was the contraction of credit due to lack of money, then the huge injection of legal tender via quantitative easing and bailouts, and financial rescue packages...should have spurred the economy.
If the real problem was the contraction of credit due to lack of money, then the huge injection of legal tender via quantitative easing and bailouts, and financial rescue packages, which is, for example, what the European Union is doing now -- including the interest rate reductions -- should have spurred the economy. It's been four years since 2007 and none of the usual recession remedies have actually worked. This is because people are simply not lending. And why are they not lending? Because nobody really knows who is broke, who is a risk, and where the opportunities are.
RFE/RL: Who is responsible for the crisis in 2008? Is it a question of a technical nature? Or is it as some would say a central issue of Reaganism, of Thatcherism, the neoliberal concept of economy, of failing to apply a Tobin tax on international transactions?
De Soto: Whether you are looking at records of derivatives, whether you are looking at balance sheets, whether you are looking at any accounting that has to do with fair market prices -- in other words, reflecting what the value of your goods is according to what price they can fetch on the street instead of what you yourself may consider would be a just price -- we really are flying blind.
And that blindness is what is stopping people from believing each other because credit comes from credibility. The reason is basically an enormous collapse of confidence, which will not reappear until the [accounting] books start saying what people really have in their pockets."
Sending Good Money After Bad?
RFE/RL: What remedies, if any, do world governments have at their disposal to at least mitigate or to avoid the crisis?
De Soto: The only way you are going to avoid a crisis of a major proportion is by being able to prognosticate that is coming as much as you can. And that means having records of everything that is being done. If I have clear records of what are the balance sheets of all banks. If I have clear records of how money is moving around.
You will always have bubbles. That's unavoidable. "Bubbles" basically means that prices can go up to a certain point and, then, find their equilibrium. And sometimes that equilibrium is lower than anybody expected. That's when you get the bubble. But if you have more information as to who owns what, you are then able to make those bubbles much shorter. You can decide where somebody is accumulating so much money.
RFE/RL: Is this really a matter of knowledge? Or is it about political will?
De Soto: It is a matter of knowledge. And the question is, why isn't that knowledge given? Because it is to me part of the written contract of the rule of law in any Western country. That information has to be available. That's the reason kings were taken out of power. That's why communism fell. We don't have knowledge.
RFE/RL: Are austerity measures in the case of the European Union and particularly Greece counterproductive or effective -- and also the recent quantitative easing in the United States?
De Soto: All of those measures deal with the symptoms. They don't deal with the disease. The disease essentially has to do with the fact that nobody invests in those countries because nobody has knowledge.
So the reply is, we are still correcting the symptoms and not getting to the bottom of it. That is a characteristic that applies also to quantitative easing. Quantitative easing means putting public money where there should have been private money. They are not getting to the bottom of it yet. All of these measures are temporary.
In Fear Of The Domino Effect
RFE/RL: Why is the Greek crisis so severe and worrisome for all of Europe, and even for the world, given the fact that its economy amounts to just 2 percent of the entire eurozone economy?
De Soto: For the same reason that the subprime market in the United States nonperformance [caused the crisis]. Remember when 7 percent of the subprime market faltered in the United States in 2008? You know, 7 percent of the property of the poor in the United States is peanuts.
But what happens is that 7 percent in the United States, or that 2 percent that you are talking about in Greece, happens to be owned by a few French banks and a few Italian banks. And that those banks go under. Then what everybody fears is the domino effect -- which is: Greece goes, but then with Greece go the banks that are supporting Greece. And the banks that are supporting Greece might be supported by yet another country. And then you get a domino effect, and that's what is called a panic. That's the reason why what is apparently a small amount is really a big amount.
RFE/RL: While Western countries -- except maybe Germany -- mostly struggle to rebuild their economy, emerging economies like China are on a constant rise. Is the economic balance definitely shifting toward the east or will they face difficulties as well?
De Soto: There is no doubt that emerging markets are now more powerful than they were 20 years ago. I think there is no doubt that most emerging markets have got growth rates which the West has probably never seen. Even Peru is growing at 10 percent.
On top of that, I think that there is an overconfidence in the powers of emerging markets. We also have problems. One of the problems that we have with China is we don't know how much of their numbers are well said or not. I think that they will take a stronger lead in the market. But I think that most of these emerging markets are not as advanced as the West thinks they are. It will take a longer time than that.
What Must Be Done?
RFE/RL: What kind of reforms are necessary to get out of this crisis and then to establish a new foundation for the global economy in order to avoid future crises?
De Soto: There is a huge divorce between the paper and the assets. In other words, money has always been pinned to something. Whether it is gold, whether it is the gold-exchange standard, whether it is the [U.S.] dollar, whether it is real assets -- money has always been pinned to a guarantee that there is something solid behind it. Whether it be a book, an intangible, or whether it be a house, a tangible.
That is what we have lost. And we have to go back to that. Whether you call it conservative or whether you call it social democratic, it has to do with a check on reality.
RFE/RL: What can we expect in the next year to five years, given the Occupy Wall Street protests and the increasing anger toward governments by people?
De Soto: We can expect political turmoil. There is no way that you can bring down the incomes and the welfare of millions of people throughout the world without you getting severe protests.
I think that there is no way that you are going to avoid a collapse. The question is, are you going to be able to do it with a soft landing with governments in control, or whether it is going to be a hard landing. And the question then becomes, are you going to have somebody like a [Winston] Churchill, a Franklin Delano Roosevelt, a Charles de Gaulle? Is one of our present leaders going to be strong enough to say that these are bad moments, but we can get through them and offer a leadership program in recession? And will they have courage to do that, instead of just partial messages?
We shall see. Let's see if the leader rises. But we are going to need somebody very strong to finally tell us the truth -- which is that the West is broke and it is overleveraged and it has to have books that tell facts instead of telling lies. In terms of whether we can survive with the existing system with just a little bit of quantitative easing, with just a little bit of bailout and rescue packages -- that, I am convinced, will not work.
