In all these countries, the trouble started in the financial sector. The question is, how did it move from the financial sector to the real economy, to economic growth, to real GDP?
Well there are several channels. Number one is what we call in economics a 'negative wealth effect'. If the stockmarket declines by 40%, then people feel less wealthy; if they feel less wealthy they buy less; if they buy less, less is produced and fewer people are employed. So that's one channel.
But there were other channels through investments where the credit system was flawed; even sound companies couldn't get credit with which to produce, with which to buy material, with which to buy capital, with which to invest and to produce. So the credit system problem …… that lubricant of the economy was non-existent. So those are only some of the channels through which it moved from the financial sector to the real economy.
1 GDP （Gross Domestic Product 的缩写）国内生产总值2 Negative wealth effect 财富递减效应3 lubricant of the economy 经济的润滑剂
There is a meltdown in Russia and in Venezuela - in one day. Now what do Russia and Venezuela have in common? Nothing except that they are both big oil exporters, and since those five countries had that economic meltdown - moving into a depression in Indonesia with 20% decline in GDP to a deep recession everywhere else, 5% decline in GDP - they need less oil and they need less raw materials. So all countries that export oil and that export raw materials are going to suffer.
This is how the system spread. It spreads even through the trade channel, or through the financial channel from one country to the other - and when there is loss of confidence the spread is rather rapid.
1 meltdown 熔化，溶解，这里指经济萎缩2 depression 萧条3 recession 衰退4 raw materials 生产原料5 spread 传播，蔓延
There's an intrinsic flaw in the system. There's no constraint at all on short-term lending, international lending, but there's no international lender of the last resort facility which can assure this debt can be redeemed.
Of course it's being spent on projects which have a life longer than the term of the debt. I mean, that's a rather complicated way of saying that there's a mismatch between the term of the lending and the investment period for which it's being used, as there is in the case of domestic banks - if you have a cheque account at a bank, the bank is in fact using that to lend money on projects which might have a life of two or three, or longer years, but you can withdraw the money tomorrow. And the way in which this is reconciled for a bank is ultimately, say the Reserve Bank of Australia can provide liquidity, has a lender of the last resort role.
But there's no such role internationally, and that means that lenders have an incentive to stampede, to have a run on a country. And at the moment we don't have a way of dealing with that.