Jeffrey Sachs: "We're in a crisis and it will get worse in the coming months."
What this covers
We are very honored that the next guest of PFI Talks was Jeffrey Sachs, a world-renowned economist, University Professor and Director of the Center for Sustainable Development at Columbia University, where he directed the Earth Institute from 2002 until 2016. Jeffrey Sachs was twice named as Time magazine’s 100 most influential world leaders, and was ranked by The Economist among the top three most influential living economists.
Leoš Rousek, the head of corporate communications at PPF Group (https://www.ppf.eu/en) and contributor of PFI Talks, talked with professor Sachs.
You can find the video with Czech subtitles and the article on the E15 website: https://www.e15.cz/rozhovory/svetova-hospodarska-krize-je-tady-ale-bude-jeste-hur-rika-pro-e15-americky-ekonom-jeffrey-sachs-1392607
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Sachs argues the global economy faces a severe stagflationary crisis worse than 2008 requiring coordinated international cooperation on debt relief, development finance, and geopolitical de-escalation rather than conventional austerity or unilateral monetary tightening.
- Current stagflation with simultaneous rising prices and falling output across Europe, US, and China represents the worst economic situation in decades
- Unilateral interest rate increases by the Fed will drive emerging markets into default and hyperinflation, replicating the 1980s debt crisis
- Solutions require expansion of multilateral development bank lending at favorable terms and debt restructuring with collective action clauses, not fiscal austerity
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In Bolivia, Sachs recommended debt cancellation of approximately 90 percent of the country's external debt to international banks to prevent hyperinflation, which was implemented.
“i argued that to pay the foreign debts in bolivia would have condemned the country to a rampant hyperinflation and in the end uh bolivia's external debt to international banks was cut by about 90 at my recommendation”
Throughout Sachs' entire career, geopolitical factors have determined whether economic solutions work or not, because solutions require cooperation, and without cooperation the chance of financial contagion is very real.
“for me all through my career even when i didn't understand it properly at the time it has been determined by geopolitics will something work or won't it work because you need cooperation if the cooperative environment is there a lot can get done if there is no cooperation the chance for a contagion is very very real this i think is what we face right now”
The real room for maneuver in solving the debt crisis comes from the fact that interest rates paid by high-income countries are still very low compared to emerging market rates, allowing multilateral development banks to arbitrage this spread and provide concessional financing.
“the real room for maneuver is that the interest rates paid by the high-income countries are still very low compared to what the emerging market economies face”
Sachs works with Chinese, Latin American, African, and European leaders to promote solutions for the deepening financial crisis, deepening climate crisis, and leads a network of over 1,500 universities worldwide addressing sustainable development through education, research, and policy analysis.
“so i speak with the chinese i speak with latin america african leaders european leaders all the time and i promote solutions as we discussed uh for the financial crisis which is deepening for the climate crisis which is deepening uh and i helped to lead a network of more than 1 500 universities around the world to address through education and research and policy analysis how to promote sustainable development”
The global economy faces immense debt leverage that compounds the crisis situation, but the solution is not naive financial squeeze through interest rate increases but rather must involve debt relief and continued development finance.
“this is also happening on the backdrop of of immense debt leverage that the global economy... if we go into this just with the naive financial squeeze right now we'll end up with a lot of carnage uh meaning a lot of countries in default”
Sachs is advocating for a major expansion of official development financing from the World Bank, European Investment Bank, African Development Bank, and Asian Development Bank, which can borrow on terms close to developed governments and lend at low, long-term rates to emerging markets.
“i'm suggesting therefore is a major expansion of funds coming from the world bank the european investment bank the african development bank the asian development bank that essentially can borrow on terms very close to what the u.s government or german government or japanese government can borrow at and therefore lend at quite low and long-term interest rates to emerging markets”
Unlike 30-40 years ago, the key question now is whether developed economies and their financial systems are insulated from the impacts of emerging market crises, which would determine whether contagion spreads to advanced economies.
“there will be other countries experiencing this kind of runaway inflation... of course we don't know but unlike 30 years ago or 40 years ago actually well almost 50 to be exact uh is the developed world are the developed economies and their financial system insulated from this impact that could be coming again from emerging markets or developing economies”
In the late 1970s stagflation, Fed chairman Paul Volcker raised interest rates to 20 percent, which ended inflation but left all developing countries bankrupt, creating a debt crisis that required a decade of restructuring work.
“in the last stagflation that we had in the late 1970s what happened was that the inflation in the united states reached around 10 percent per year and the fed under a six foot seven a two meter uh chairman of the fed paul volcker uh cigar smoking tough guy uh he said we're gonna end this inflation and he put interest rates up to 20 and by the time it was over all the developing countries were bankrupt it was unbelievable well it made my career because i spent the next decade helping countries get out of debt crisis which had laid them completely flat”
The solution to the current global crisis requires avoiding a contagion of defaults and insolvencies, and avoiding telling dozens of countries to contract sharply in public investment and social spending, rather than pursuing austerity.
“what we need to come to the positive answer to your question is we need to avoid a contagion of defaults and a contagion of insolvencies and we also need to avoid simply telling dozens of countries you need to contract sharply your public investment uh and your social spending and so forth”
Poland's debt to official creditors was sharply cut as part of Sachs' shock therapy recommendations, serving as a precedent for contemporary debt restructuring.
“similarly in poland uh in that shock therapy i recommended that poland's debt overhang should be relieved the debt that poland owed especially to its official creditors should be cut very very sharply and that indeed happened”
Countries with euro bond market debt may need to extend the horizon for repayment under collective action clauses in contracts, and official debts may require mechanisms ensuring developing countries receive more fresh finance than they repay on old debts.
“it may be that they have to say to the creditors well we need to extend the horizon for repayment under certain kinds of contracts where there are collective action clauses this can be done fairly smoothly and probably many countries are going to have to take that chance when it comes to official credits that a government owes to a rich country government or to the world bank or to some other international institution i'm recommending a set of measures to make sure that the uh developing countries are getting more finance in fresh form than they are repaying in on old debts”
Sachs is recommending this major expansion of multilateral development bank financing to the G20, but acknowledges that without international cooperation, the chance for contagion is very real because countries are barely talking to each other.
“so i'm recommending to the g20 this approach but is there a g20 even right now countries are barely talking to each other uh the us and russia literally are not talking to each other of course uh us and china barely talking to each other and cooperating on something as bold as avoiding a financial crisis somehow it's not going well”
Sachs believes nuclear power, if managed with absolute state-of-the-art safety systems especially passive safety, could be a component of a zero-carbon energy system within the practical context, though he is not a purist against alternative approaches like wind, solar, and hydro.
“i think nuclear power if this is a big if uh if it can be managed uh safely so that with the absolute state-of-the-art safety systems especially passive safety systems offers uh component of uh the zero carbon energy system i don't believe i'm not myself a purist that says absolutely no to nuclear power of course it raises many issues fissile materials nuclear safety nuclear waste and the alternatives because if you could do it without nuclear through uh efficient uh a an efficient system of wind solar hydro and so forth there's a lot of merit to that but i think within the practical context there's no doubt uh that nuclear power is gonna continue to play its role”
The European Green Deal is a valid and sophisticated approach, well done and well worth achieving and promoting diplomatically to Latin America, Africa, and ASEAN as a global framework for green transitions.
“the european green deal is a valid smart i would say sophisticated approach it's got many limitations but the european green deal is a framework that the 27 have adopted it can serve as a roadmap it's not exactly a plan of course and there are a thousand details to be argued every day is natural gas really green is nuclear green and so on so these are inevitable points of debate but broadly speaking the european green deal is well done and well worth achieving and well worth promoting diplomatically to say to the latin american countries to the african union to asean and so on you need a green deal the same way we have a green deal europe could really provide a lot of leadership that way”
The European Central Bank under President Trichet in the early 2010s failed to act as a lender of last resort, allowing Greece to nearly go bankrupt and threatening the stability of Ireland, Spain, Portugal, Italy, and the entire eurozone, until Mario Draghi intervened.
“of course in the 2010s because uh the european central bank did not do a very good job under its uh president trichet in the early years of the last decade greece nearly went bankrupt and uh it wasn't so far for ireland spain portugal and even italy and so the eurozone and slovenia the eurozone almost collapsed uh and uh it it required draghi's uh deft hand to prevent that collapse basically the european central bank had to act as a lender of last resort to prevent a disaster”
In 2008, the Fed and U.S. Treasury made a technical mistake by driving Lehman Brothers into bankruptcy one weekend in September 2008, which cost the whole world trillions of dollars and demonstrated that central bank institutions are not reliable, smart, or foolproof.
“in 2008 the fed and the u.s treasury stupidly drove lehman brothers into a bankruptcy one weekend in september 2008 and it cost the whole world trillions of dollars that technical mistake that they made and so when you're in a crisis the first thing to say is these institutions are not so reliable they're not so smart they're not so fool proof that they necessarily avoid real damage”
The U.S. 30-year Treasury bond rate is currently around 3.2 percent, the German 30-year rate is around 1 percent, while emerging economies face 30-year loan rates around 10 percent, creating a significant interest rate gap that development banks could leverage.
“currently the 30-year bond rate of the u.s treasury is about 3.2 still quite low the 30-year bond rate for german debt is still around 1 actually uh the 30-year bond rate for ghana or for a emerging economy if they could get a 30-year loan is 10 in other words i am advocating a significant increase of official financing at interest rates that the treasury or the german government or other uh eurozone countries pay themselves”
Europe faces an extremely difficult situation not mainly because of ECB policy but mainly because of the war in Ukraine and vulnerability on energy, with risk of economic downturn severe enough that the chance of a deep eurozone crisis becomes real.
“europe is in an extremely difficult situation not mainly because of the ecb but mainly because of the war in ukraine and the vulnerability on energy obviously europe's already in a downturn it could get quite severe in the coming months... the energy crisis and all of the uncertainties around it uh and all of the other ramifications and you compound that with the the growing break with china as well i think it will lead to a very significant crisis in europe and since we see the politics are already quite unstable in a number of countries including italy for example where the draghi government has just fallen and who knows what will happen next with elections coming up i i think that the chance of revisiting a deep eurozone crisis becomes very real”
Sachs does not believe the NATO position that 'we're just going to fight till we defeat Putin' will succeed on the battlefield, and believes the economic consequences will become unmanageable with a very serious crisis.
“my position is that there is a negotiated way out of this i don't believe uh the nato line that well we're just going to fight till we defeat putin if that is the approach i don't think it's going to succeed on the battlefield and i also think that the consequences economically will become quite unmanageable uh the crisis will be very serious in my view”
Sachs believes that global cooperation is necessary, vital, and feasible, and does not believe in dividing the world into democracies versus autocracies or cold/hot wars, instead believing environmental and social crises are so severe that cooperation is needed above all differences.
“i believe as as i've been emphasizing that global cooperation is necessary is vital and is feasible i don't believe in a divided world i don't believe in democracies versus autocracies i don't believe in cold wars or hot wars i believe that our environmental and social crises are so severe that we need cooperation right now above all of the differences that we might suppose to divide the world”
Sachs does not recommend cancellation of the face value of debts in current circumstances, but rather recommends countries receive large-scale development finance on a long-term, low interest rate basis so they can continue to develop without defaulting.
“regardless the potential risk of moral hazard in well debt relief depends on the circumstances in the circumstances today i'm not recommending cancellation of the face value of debts what i am recommending is that one way or another and it depends very much on the specific circumstances that countries get the kinds of development finance that they need even on a larger scale than now and i'm talking about new debts on a long-term low interest rate basis so that these countries can continue to develop without going into default today”
Sachs' historical shock therapy recommendations in Bolivia and Poland were never about simple austerity and contraction, but always involved international creditors playing a constructive role in debt relief alongside government structural reforms.
“remember when i was uh advocating shock therapy i was advocating that governments not print money or or issue money in order to finance budget deficits but i was constantly recommending that the international finance help the countries to avoid defaults or crises one of the key pillars of shock therapy in bolivia and poland for example was a cancellation of the debts of those countries the foreign debts”
Sachs spends considerable time trying to overcome the current two-front geopolitical crisis (Russia/China against the U.S. and allies) and wants Europe to be smarter in its diplomacy to get out of the war trap and lead cooperation on sustainable development rather than fall into battle with China.
“these days i spend uh a tremendous amount of time trying to see is there some way to overcome these uh this two-front uh crisis that we face uh with russia and china against the us and its uh alliance and i always appeal for europe to be smarter in its diplomacy because europe has the values of sustainable development yet it's caught in war and i want to see europe get out of this trap of war not fall into a trap of uh a new battle with china and help lead the way to a cooperative approach to sustainable development”
Turkey currently has inflation reaching approximately 100 percent per year and Argentina has similar runaway inflation, with other countries potentially facing hyperinflation as a result of global economic mismanagement.
“you look at a country like turkey now they have not managed their economy properly for years but the inflation rate is reaching a hundred percent per year right now uh argentina the inflation rate is reaching 100 there will be other countries experiencing this kind of runaway inflation maybe ukraine is going to have a hyperinflation by the end of this crisis of course we don't know”
Sachs views war as his enemy because it is the biggest distraction, destroys faster than societies can build, undermines trust and partnership, and interferes with sustainable development efforts.
“war is is my enemy obviously because it's the biggest distraction uh it sucks up all the energy it destroys so much faster than we can possibly build uh it undermines every opportunity for trust and partnership”
Sachs has never believed in printing money for government spending because it causes high inflation, but instead advocates financial solutions that don't condemn countries to default, bankruptcy, or extreme austerity, which has been his policy recommendation since implementing shock therapy in Bolivia in 1985.
“i'm basically saying don't print money i've never believed in that because you just get high inflation but rather let's get a financial solution that doesn't condemn the country to default more to bankruptcy or to extreme austerity that's actually always been my policy recommendation since i started this approach in bolivia in 1985”
We are currently experiencing stagflation with rising prices at the same time that output is falling in many parts of the world, with Europe already in a downturn, the United States entering a downturn, and China in some kind of economic downturn, making this a global economic crisis worse than 2008.
“we're experiencing stagflation meaning that there are rising prices at the same time that output is falling in many parts of the world europe is already in a downturn the united states is entering a downturn china is in some kind of economic downturn so this is a global economic crisis and so i regard the overall economic situation as as bad as i've seen in decades worse than in 2008”
The crisis will intensify in the coming months and could become far worse, with geopolitical escalation—including potential war spread, U.S.-China conflict, or return to negotiating tables—being the crucial determining factor.
“the crisis will get worse in the coming months uh and uh it could get far worse we were experiencing stagflation... the most crucial question is what happens to geopolitics does war spread does it intensify does it diminish is there a return to the negotiating table do the u.s and china come to blows which would disrupt global society do they find a way to talk with each other these are the questions that we're facing right now”
The moderator notes that Sachs is viewed as co-author or co-father of the United Nations Sustainable Development Goals used in contemporary ESG policies and that he is Columbia University's director of the Center for Sustainable Development.
“you are viewed and correct me if i'm wrong as the co-author or co-father of the united nations development goals that are used in in the currently you know often discussed esg policies and you are the colombia's university director of the center for sustainable development”
Nuclear power is expected to continue playing a role in decarbonization globally, particularly in France, Central Europe, China, Korea, Ukraine, Russia, and other countries, despite ongoing safety and waste concerns.
“obviously in france uh obviously in central europe uh obviously in china uh in korea in ukraine countries in the world well in russia and ukraine uh i would expect so also absolutely”
In his current role, Sachs spends most of his time working via teleconference with people across the world on sustainable development goals and the Paris climate agreement, preferring this to airplane travel for sustainability reasons.
“typically it's zooming from uh early morning till late at night because now in our digital world we can meet and speak all over the world rather than do it sustainably and do it to sus i it depending on how exactly the electricity is provided for our zooms that remains a question but it's much more sustainable than uh getting on an airplane for every meeting that one has to have i spend a tremendous amount of my day every day working on the sustainable development goals and the paris climate agreement”