Leading United States economist Laurence Kotlikoff is optimistic about solving the big structural problems plaguing global finance, but has a grim prognosis for the US if it doesn't change fiscal and monetary policies.

"We're heading the way the British Empire went, it's inevitable" he says. "The [US] dollar is going to give way to the Yuan as the global currency at some point, it's just a matter of time."

Kotlikoff is a professor of economics at Boston University and will be in New Zealand next week as the Sir Douglas Myers Visiting Professor to Auckland University.

He was named by The Economist as one of the world's 25 most influential economists and in 2016 he ran for the US Presidency as a write-in candidate.

Advertisement

He's also a New York Times best-selling author.

While he has a strong reputation, his ideas sit outside the mainstream political views in the US.

"The global population is absolutely exploding. We're adding a China in the next 20 years and then until the end of the century we're adding three Chinas in terms of population," he says. "And most of that population is going to be concentrated in sub-Saharan Africa and the Middle East."

Kotlikoff argues if we see productivity move up towards US levels in these regions – as we have seen in China in the past few decades – then we will see them dwarf the US economy by the end of the century.

"The biggest economies by the end of the century would be sub-Saharan Africa, followed by the India, followed by the Middle East, followed by China," he says. "The US would go from about 15 per cent of GDP down to about five per cent."

Exacerbating US woes is the fact the country is effectively broke and is pushing the day of reckoning on to future generations by running enormous fiscal deficits, Kotlikoff argues.

He is no fan of President Donald Trump's new tax reforms, but in the broader context of America's multi-trillion dollar deficits he does not think they will make much difference.

"Each president is kicking the ball here and nobody is facing the reality of what's coming. It's going to end very badly for older people and younger people."

It will become increasing difficult for the US to maintain its dominant global position and be "the policeman of the world'', he says.

"I think the US is going to be forced to take a back seat. And we may not take that very well."

Professor Laurence Kotlikoff is the Sir Douglas Myers Visiting Professor to the University of Auckland Business School. Photo / Supplied
Professor Laurence Kotlikoff is the Sir Douglas Myers Visiting Professor to the University of Auckland Business School. Photo / Supplied

Kotlikoff says the only way to address the deficits will be to raise real revenue – which will mean astronomical tax rates if the US stays on its current path.

"It's another way of saying that the country is broke."

Kotlikoff suggests "the power of economics to solve future problems" as a headline for this article.

It's a line that hints at an underlying sense of hope that more serious financial and economic reforms will be embraced eventually.

Since the global financial crisis he has been a strong advocate for more radical reform of the global financial system and wants to see it move away from highly leveraged lending which he sees perpetuating a cycle of boom and busts.

"We have to move away from this highly leveraged banking system, which is also highly opaque, to something which has no leverage."

We were seeing central banks repeat low interest rate policies as they did prior to 2007, pushing up house prices and creating potential for a big crash.

"We can see some of the elements," he said.

Kotlikoff advocates mutual fund banking, or what he calls "limited purpose banking".

"It's 100 per cent equity, mutual fund financed banking. So the entire finance system would just run through mutual funds."

Most Americans are already doing most of their banking with mutual funds, through their retirement accounts, he says.

While he accepts the big banks wouldn't like it, he argues that with the right regulation it would remove risk from the system and ensure financial institutions couldn't fail.

In the current system the global economy is constantly swinging "from irrational exuberance to irrational pessimism," he says.

"It's kind of like a bi-polar person There's no inherent reason for an economy to have anything but steady growth. Technology is getting better all the time and we have more people in the world. Inherently the world economy should grow. And it should grow smoothly."

Professor Kotlikoff will present a seminar "Our Global Economic Future and How to Fix It" at Auckland University Business School next Tuesday at 2pm. For more information, contact Professor Robert MacCulloch r.macculloch@auckland.ac.nz.