Malkiel: Systemic Risks Lurk In Developed World

May 17, 2010

Burton Malkiel can’t say enough about how ETFs are changing the investment world, but he’s troubled by all the promises developed countries have made to their citizens, but can’t possibly keep.

When Burton Malkiel, the Princeton economics professor, author of a “A Random Walk Down Wall Street” and current chief investment officer of the China-focused ETF firm AlphaShares, spoke to’s Managing Editor Olivier Ludwig recently, he extolled the virtues of ETFs, but expressed concern that unfunded governmental liabilities throughout the developed world, such as Social Security in the U.S., pose systemic risk to the global economy.


What’s your take on the economic crisis we’re living through?

We’ve gone through a major financial crisis, and it’s going to have long-lasting effects. Our economy got out of balance because our financial institutions were over-leveraged and our consumers were over-leveraged. And in some sense, the world economy was all out of whack, because we couldn’t continue to have the
be the consumer to the world and the Chinese and others being the producers. So the whole world economy got imbalanced. What we’re doing now is adjusting from that.

Our policy is we’re letting our banks earn their way out, and they do seem to be recapitalizing. While they’re recapitalizing, they’re not lending aggressively. If you’re IBM, you can get money, but if you’re a small business, you have trouble getting money. The consumer is cutting back, repairing his balance sheet; housing prices seem to have stabilized, but these adjustments are going to take some time.

One adjustment I don’t see us having the political will to do something about—and it’s a problem for the United States and for Europe and
—is that our country is over-indebted. The debt-to-GDP is getting close to 100 percent over the next year. We’ve seen what happens to a country like
. The U.S. isn’t Greece, but all of
Europe is over-indebted. That’s an adjustment that will have to take place and I don’t think we’ve even begun that process.

Petroleum went up to almost $150 a barrel in the summer of 2008. If you look at the history of oil, there’s a correlation between high oil prices and recessions. Does that worry you, looking ahead?

Well, I think that correlation has diminished somewhat, but I think the story on oil, as well as precious metals, is the enormous growth of China and the voracious appetite for oil and raw materials. My sense is that in the longer run what we’re going to see is—it’s going to be episodic and it’s not going to be smooth—but over the longer run, five or 10 years from now, oil is going to be more expensive.

I wanted to discuss
with you. Have things changed there for the better or for the worse?

Just so you know, I’m associated with a company [AlphaShares] that puts together China ETFs. There are a lot of reasons why I‘m bullish on China, but one of them is that when we talk about debt-to-GDP ratios being out of whack all over the world, one place where they’re not out of whack is China, where debt-to GDP is 16 percent. Unlike the
U.S., individuals there are big savers—they save 40 percent of their income. Our savings rate was zero; it’s slightly positive now, but what clearly has happened is that we’re starting to adjust, but Chinese consumers’ fiscal situation and consumer debt situation is much better than ours—their government-debt situation is much better than ours. That’s one of the reasons, among a variety, that I’m still very bullish on

They were the first to recover, and what
is doing now is spooking people: They’re growing not at 8 percent, but at 11 or 12 percent. And they’re tightening up because they’re growing too fast. We’re growing too slowly and we’ve got almost 10 percent unemployment. So we’re growing too slowly and they’re growing too fast. They are actually trying to restrain lending, trying to restrain the growth. It’s quite the opposite of what the problem is in Europe and the
United States



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