All over the world, people are really concerned about their economic situation. Their fears are made worse by the diverse prognostications of economists and politicians. Some are saying that we are heading for depression. Others are saying that the worst is over. This confusion is making people confused and fearful.
Two important influences have shaped the modern world economy;
- Globalisation
- Global Financial Crisis
The entire world is now experiencing the consequences of these two events.
Globalisation
Improved communications and transport over the last few decades have released a tremendous globalisation of the world economy. The increased division of labour has resulted in a tremendous increase in production all around the world.
Production moved to the places where it can be done most efficiently. Manufacturing moved to China, India and South East Asia where wages are lower than in the west. Highly technical tasks stayed in the developed countries.
Western producers gained an immense supply of cheap capital goods to support their activities. People in the West benefitted from an endless supply of consumer goods, which improved their standard of living.
The people of rural China found work opportunities that did not exist before their economy opened up. The only ones to suffer were the blue collar workers in the industries that have moved offshore (particularly in the US rust belt).
The world experienced a similar deepening of trade in the nineteenth century, but this was brought to an end by World War 1. In many ways, the current globalisation is a continuation of that one the was cut short by the closing of shipping lanes during two world wars and the cold war.
Since the election of Donald Trump, various political forces have begun working against globalisation. Nations are imposing tariffs and raising other barriers to trade. Some are seeking for economic self-sufficiency. The peak of globalisation may have passed.
Global Financial Crisis
During the 2000s, a tremendous expansion in credit spread all around the world. This started when the US Federal Reserve cut interest rates after the Dotcom bubble crashed in 2001 and was supported by a flood of savings from Asia. Since then a huge surplus of money has been sloshing around the world distorting markets everywhere.
The growth in the supply of money was exacerbated by a number of new banking tricks developed by banks in the United States and copied all around the world. These included securitisation of mortgages and moving debt into off-balance sheet subsidiaries. Cheap money was available to everyone everywhere, including many who could not afford to pay the money back. Leverage went deeper and wider than ever before.
The global financial crisis (GFC) brought this expansion to a sudden halt, but the credit blow out has not finished yet. Central banks kept the supply of credit flowing with low interest rates and other new tools like quantatative easing.
When housing markets collapsed in 2008, the surplus money shifted into the sharemarkets of the world. That boom is still going, but the world is probably getting closer to a season of tight money.
Fools at the Wheel
The biggest risk to the world economy is the people who pull the levers of power in the government and the financial system. They have considerable ability to get things wrong while trying to put things right. Most depressions are caused when unexpected events are exacerbated by political and financial leaders. The global financial crisis was the result of foolish responses to previous troubles. The capabilities of our political leaders have not improved with time, so they still have massive ability to stuff things up.
The Federal Reserve is still pumping credit like a thirsty man at a dry well. The Fed knows nothing else, but boosting credit is just more of the same; more of what created the GFC in the first place. Massive credit creation may limit the worst of the immediate damage, but it will spawn terrible problems for the future. Current policies will leave a lake of debt.
The Bush and Obama rescue packages restored banking confidence, but it will not resolve the underlying problems, because they rewarded bad behaviour. In a free market, the competent and wise people who prepared for hard times usually take over the assets of the reckless and incompetent. Since the GFC the reverse has happened. Governments took from the prudent people and businesses that built up wealth and gave it to the careless, foolish and bungling banks. That cannot be good for the economy.
The American financial system is seriously flawed. It will eventually collapse when God has had enough of American shenanigans, but until that happens, it will lurch from minor crisis to minor crisis and from power to more power.
Slouching to the Beast
The politicians and bankers will continue to prop up their economies, but they will also sow the seeds that sprout into the next problem. That is fine, because political powers never want correct solutions. They do not eliminate problems, because they need the next crisis to justify an expansion of power.
Mistakes by political leaders do not mean state power will diminish. State power will increase dramatically throughout the economy and society, as people demand political action to solve the problems their political leaders created. Provided their wrong solutions appear to be efficacious, people will be happy, because appearances are all that count in the political world.
The main consequence of the global financial crisis has been an enormous increase in state power throughout the world. America is slowly grouching toward being the Beast. The home of market capitalism and the bastion of independence is becoming the breeding ground for state power. Faith in the state has been growing rapidly in the United States over the last few decades. The state has now made a huge series of interventions in the economy and most Americans are cheering. People who would not accept telephone number that includes the digits 666 are glad to have the state bailing out the banks and other big businesses. They will never offer a credible resistance against the creeping power of the state again.
The global financial crisis did not destroy American power. The productive base of the United States is strong enough that after a brief hiccup its world empire has kept on expanding. The only serious consequence will be a sharp shift from freedom and independence towards state subservience and control. This radical change will happen without even a whimper of protest.
Updated 2019
