Globalaffairs

Issue 16/August-September 2009
By Glen Ruffle

The greatest financial depression since 1929 is apparently coming to an end. There are signs of growth again, ‘green shoots’ of recovery are emerging as the economies of the world start to pick up the pieces from the past 30 years.

For it was around 30 years ago that the world took the first steps towards the process that began to end last year. With the liberalization of markets under Anglo-sphere leaders Ronald Reagan and Margaret Thatcher, the growth of money and credit globally started to really take off.

And under the steady hand of Alan Greenspan, US Federal Reserve Chairman, and his intellectual backer, Ben Bernanke, who succeeded him [1], the world basked in continual growth, with even the most educated economists seemingly oblivious to the imminently approaching demise of the system [2], believing endless, fast growth to be eternally possible.

What a difference a year makes! Following the exposure of the massive debts of Lehman brothers (the banks leverage, the money it owed, was at a rate of around 40:1 - it owed 40 dollars for every 1 it actually had [3]) and the subsequent collapse of confidence in the ability of the other banks debts to be repaid, caused a global panic and collapse that has thrown millions globally out of work.

And even now, predictions that the world is coming out of recession are usually from those with deeply entrenched vested interests. Economist Liam Halligan has argued that he’s seen “a lot of stockbrokers, estate agents, and other vested interests talking up ‘imminent recovery’ with no reference to fundamental economic realities”[4], and with unemployment still growing, and bank lending still low, proper and realistic economists must look to 2010 for any real signs of recovery [5].

As was noted here in December/January 2008-09 [6], the root problem all along has been rooted in human nature, and finally, this is being recognized at high levels, with Alan Greenspan himself commenting that humans have a “unquenchable capability…when confronted with long periods of prosperity to presume that it will continue” [7]. And attempts are being made to ensure that the institutions are in place to prevent this whole situation happening again.

So what now? What have we learned? What movements are taking place in the new economic landscape? Firstly we know that the world will adjust and life will go on. General economic opinion seems to support the stance taken by major world economies, of borrowing massive amounts of money and injecting it into the markets, of supporting and nationalising banks en masse, and of stopping many more bankruptcies.

Yet this course of action has avoided short-term pain, but passed that pain on to the future. Many states in Western Europe and North America/Anglosphere countries are now in massive amounts of debt. Years of cheap credit have come back to haunt us. And the banks are still sitting on millions (or billions) of toxic loans and liabilities that they are refusing to declare [4]. The situation is still potentially dire.

Secondly, we can note how quickly those states that had championed free markets, that had announced to the world how good it is to have open and free competition, and to let the market decide, abandoned all these principles when the market collapsed! The UK went from champion of markets to protectionist leader in a matter of weeks, much noted (with disgust) by EU Competition Commissioner Mario Monti [8]. Whatever the rich-world governments say in public, they all know that free markets are great so long as they are benefiting from them.

And thirdly, the ideology of the leading US economists, of Ben Bernanke and Alan Greenspan, is clearly flawed - the belief that the markets could regulate themselves without supervision was proven absurd [9]; and their economic system, which constantly borrowed from the future to pay for today, as Bill White, former Chief Economist for the Bank for International Settlements put it, forced interest rates ever lower in a desperate attempt to keep the game going, and the system flowing; to keep people lending and creating money through the banking system, ignoring the fact that we were now consuming way beyond our capacity and one day debts would have to be paid.

What does the future hold?

Whilst future predictions are always tricky, there is a large possibility that the value of the pound and dollar will slowly fall, as the consequences of the debt start to bite. Both the UK and US have been printing money to try and keep lending and borrowing going, so important is debt to their economies, under the name of ‘quantitative easing’. Whilst some of this money has started to circulate, it has certainly not revived their economies [10], and will probably soon feed through into higher inflation. And China has been buying up massive amounts of US debt, with over 50% of China’s financial reserves now in dollars. Paying back those who have bought into the US will take a lot of money and time, and is likely to push the dollars value down, in so doing, wiping out a huge amount of the value of China’s reserves [11]. This is likely to push China into investing in other currencies, further undermining the dollar’s place as the international reserve currency [12].

So the big losers over the long term will be those economies orientated around the market and finance, such as Britain and America. Hopefully this will restrict future governments emerging in these two countries that would foolishly pursue the ridiculous spending plans of the Bush/Blair/Brown governments. All spent well above what their countries could afford, and all faced or will face the electoral price.

The winners, though, are Asia, the European Union economies, and the Euro area. It is likely that more investors will move into buying the Euro as a stable international reserve and rival currency to the dollar, and the EU is already using the crisis as a pretext to strangle the financial power of London, and bring Britain more under its power [13].

Historians will look back at this time and note it as a major point in the period of American power, as this crisis has and will hasten the decline of Washington’s dominance. The era of unipolarity is over, and the multipolar world, where power rests in Brussels, Moscow, Beijing, New Delhi and Brasilia, has truly begun.

Glen Ruffle
First class honours degree from the University of Lincoln.

References/Sources

[1] Ambrose Evans-Pritchard (2009) The troubling side of Ben Bernanke, page B5 of The Daily Telegraph print edition, 26th August 2009.

[2] The Economist (2006) Alan Greenspan, 12th January 2006, in The Economist, at:
http://www.economist.com/displaystory.cfm?story_id=5381959

[3] BBC (2009) The Love of Money, shown on BBC 2, on 10/09/09, website available at: http://www.bbc.co.uk/programmes/b00mqmjs

[4] Liam Halligan (2009) Britain is sleepwalking towards a decade of economic misery, in The Daily Telegraph print edition, ‘comment and analysis’ section, 26th August 2009.

[5] Angela Monaghan (2009) House Price Rise is a ‘False Dawn’ Warn Economists, Daily Telegraph, 13/09/09, at: http://www.telegraph.co.uk/finance/economics/houseprices/6182764/House-price-rise-is-false-dawn-warn-economists.html

[6] Glen Ruffle (2008) The end of the world as we know it?, Global Affairs, Issue 12, December-January 2008-9, at: http://www.globalaffairs.es/en/the-end-of-the-world-as-we-know-it%e2%80%a6/

[7] BBC News (2009) Market crisis ‘Will happen again’, 08/09/09, BBC News, at: http://news.bbc.co.uk/1/hi/business/8244600.stm

[8] Ambrose Evans-Pritchard (2009) EU faces ‘existential’ danger from economic crisis, Daily Telegraph, 13/09/09, at: http://www.telegraph.co.uk/finance/economics/6183857/EU-faces-existential-danger-from-economic-crisis.html

[9] Edward Hadas (2009) Opportunity for Bernanke after first-term mistake, page B5 of The Daily Telegraph print edition, 26th August 2009.

[10] Nationwide Building Society (2009) On track for recovery? 10/08/09, at:
https://www.nationwide-members.co.uk/news/2009/8/10/on-track-for-recovery

[11] Halligan, Liam (2009) Cheap Dollars are sowing the seeds of the next world crisis, Daily Telegraph, 12/09/09, at: http://www.telegraph.co.uk/finance/comment/liamhalligan/6179482/Cheap-dollars-are-sowing-the-seeds-of-the-next-world-crisis.html

[12] Edmund Conway (2009) UN wants new global currency to replace dollar, Daily Telegraph, 07/09/09, at:
http://www.telegraph.co.uk/finance/currency/6152204/UN-wants-new-global-currency-to-replace-dollar.html

[13] Boris Johnson, on BBC News (2009) Mayor condemns hedge fund plans, 02/09/09, BBC News, at: http://news.bbc.co.uk/1/hi/business/8232723.stm

The views and opinions of contributors expressed herein do not necessarily state or reflect those of Global Affairs.

 Print Economy | Permalink | eva