V-curves and Taistoism | Tuomas Malinen | Negotiator 38

Summary

GNS Economics CEO Tuomas Malinen explains why the firm’s latest Q-review contained no positive scenario at all for the first time: the options are collapse, reset and great inflation. A European banking crisis has become the baseline. Malinen unpicks why record-low junk bond yields cannot coexist with record-high large corporate bankruptcies unless a central bank has broken the pricing mechanism, and why debt-financed stimulus in an over-indebted economy creates the conditions for a debt crisis. The second half covers the public clash between the Finnish government and business leaders, corporate social responsibility, and the quality of the debate over the EU recovery fund.

What is discussed

• No positive scenario. GNS Economics has always published three scenarios — most likely, bad and good. In this Q-review it could not construct a positive one. The three are collapse, reset and great inflation.
• The broken credit mechanism. US junk-rated corporate bond yields sit at record lows while large corporate bankruptcies sit at record highs. Normally the two move together; Malinen’s reading is that the Federal Reserve has broken the pricing mechanism, and that markets carried by liquidity rather than earnings is what preceded 1929.
• Banking crisis as baseline. Euro-area GDP fell 12 per cent in Q2 and 3 per cent in Q1, on top of a recession that began in late 2019. On the ECB’s own stress tests the sector cannot absorb this, which is why a banking crisis is the baseline for the first time.
• The growth question. After a decade of stimulative rates, with indebted companies and productivity flattened by zombification, Malinen asks what would actually feed organic growth — and argues that shovelling on debt in its absence creates the conditions for a debt crisis.
• The recession spiral. 26 million Americans still on unemployment benefit feeds through consumption to company results, debt service and banks, which then tighten lending and deepen the cycle.
• Prime minister versus business. Malinen calls the prime minister a Taistoist and argues it is not a prime minister’s role to comment on companies cutting production when demand collapses. He welcomes business leaders entering the debate while arguing they should not have had to.
• Corporate social responsibility, defined. A company’s duty is to remain competitive and productive so it can employ and pay wages; the engine of development is private ownership pursuing profit, as in China from 1978 onward.
• Support money and the task force. Distribution criteria were inconsistent — some recipients must repay investment funding, some applied through shell companies — and President Niinistö’s proposed economic task force of economists, officials and finance directors would, in Malinen’s view, have designed a better mechanism.
• Finnish banks versus the continent. Deposits near a hundred billion make the domestic sector look solid, but on integrated markets a shock spreads, and banks that expanded their loan books most aggressively are the usual casualties.
• The recovery fund debate. Continuity is built into the mechanism; the claim that a citizens’-initiative vote equals a vote on EU membership is called absurd; finance minister Matti Vanhanen said he had never considered EU debt; and Finland receives three billion against a contribution above six, eight with interest.

Watch

The recording lives on the Neuvottelija channel: V-käyriä ja taistolaisuutta | Tuomas Malinen | Neuvottelija 38. A Finnish edition of this episode is published at www.neuvottelija.fi.