Global Crisis: Lessons Learned

We will abandon the “national Capitalism of opulence” to enter into a “more mature phase of global Capitalism”. It will be a diverse world in which there will be major unemployment and global poverty, consumption will fall and the level of economic activity will be fragile, inflationary pressures will increase, major financial interdependence and protectionism will emerge and China will be the protagonist for the global recovery. A world where consumption, opulence, excessive avarice and warlike domination, will have to open the way to a greater austerity, better regulation of the global financial system, care for the environment, poverty and human rights. More than eighteen months have come and gone since the financial crisis was made apparent, and there has been insufficient time to extract any definitive conclusions as to the consequences on the global socio-economic and political structure. , Furthermore the world still finds itself in a severe and generalized process of contraction. Nevertheless this could be a reasonable time to extract some lessons as to the nature of the crisis, its cause, development, and, fundamentally, to observe and distinguish between changes in the economy, society and geopolitics (including its international architecture). These changes appear as structurally working towards transformations that are, sustainable in the time and that are drawing the contours of a new global scene, probably very diverse to that which prevailed in 2007 and the greater part of the 2008, and in which we will live through during many years to come.

1. Increased unemployment and global poverty.

The world is currently characterized by levels of unemployment and poverty superior to those during the pre-crisis period. The American economy will reach unemployment levels near 10% before the end of 2009. Although the rate of employment has slowed, there are still about half a million people out of work per month in the United States. From its inception, the crisis has destroyed more than 6 million jobs. We must consider similar situations in the European Union and emergent economies. The World Bank estimates that on a global scale around 240 million jobs have been lost. Assuming that we have entered a period of moderate recovery, the generation of new jobs is a very long process that is not yet in reach.

Associated with this situation are two phenomena:. First of all, in the developed economies their ability to consumption has been debilitated, therefore, so will the rate of the recovery. Secondly, at a global level we will see an increase in social and political conflict and, therefore, the ability to govern on national and international scale will also be maimed. We will live for many years in a more uncertain and unstable world than the one we currently enjoy.

2. Fall of consumption and the fragility of the level of economic activity

If the American economy reverts to contraction, we will equally partake for many years lower levels of activity than those that characterized the last decade. The propensity to consumption and the confidence of the consumer will have a significant structural reduction in the USA. The levels of consumption have been exacerbated to such a degree that in 2007 the indebtedness of the North American household translated to 120% of the American GDP. The destruction of wealth and, the fear of an uncertain future and the loss of employment, have generated in American homes a profound change in the savings versus consumption relationship. I think that this change will be long lasting, equivalent to the years after the “Great Depression”, generating a type of Capitalism founded in the values of saving and austerity that characterized a whole generation. By the force of reality -–the equivalent of 3 trillon dollars worth of wealth was destroyed and 6 million jobs lost. – Americans along with the rest of the world will be part of a change in values related to avarice, abusive consumption and irresponsible indebtedness of those who took credit and those who acquired the risk when granting it. According to Hutchinson, a professor of marketing at Wharton, “in the coming years the consumer will learn to behave more frugally and he will not change this attitude in the short term although the economy stabilizes”. According to Baker, also of Wharton, “Before the economic crisis the consumer, driven by easy credit and a sensation of wealth provided by the revaluation of the stock market and real estate, had a completely impulsive and irrational behavior” and adds “the crisis has given rise to a new style of consumption that is less impulsive, where rationality will prevail over abusive expenditures and where the value of goods will become a increasingly important element”.

Although this hard blow to the “Capitalism of the abundance” it is consistent with the global preoccupations of global warming and the exhaustion of non-renewable energy resources, it presents another face that reinforces the “megatendency” of unemployment in the USA and the increase of poverty at global level. A lower tendency towards consumption in the USA creates a lower level of activity in a country in which the internal consumption translates to 70% of GDP, and this is one third of global GDP.

3. Will the ghost of inflation fly over us.

The monetary expansion created through the injection of capital to the economy on behalf of the Fed, essentially through the purchase of government debt and mortgages, lowering the interest rate to zero, creation of stimulus packages, and the capitalization of strategic companies, have all been the majors antidotes that the American authorities have utilized as anti-cyclic policies to confront the financial crisis and, the “collapse” of credit and the economic contraction. These policies, little orthodox, basically because of the volume of financial resources involved in their application, have inflated the balance sheet at the Fed to levels never before seen, as well as the fiscal deficit that has reached 9% of the GDP.

In the first place it is important to emphasize that the vigorous and simultaneous application of the above mentionedse instruments has been effective and has moved us away from the risk of a depression. Secondly, as we moved away of the precipice and approach a probable recovery, the preoccupations associated with the monetary policies that characterized the “exit strategy” of the crisis begin to surge.

In spite of the affirmations of Bernanke in relation to the breathe of instruments at his disposal to sterilize the monetary surplus once the recovery begins (increase the interest rate, pay interest to Fed deposits, sell long term titles, etc.), for many specialists and investors still face inflation risk that will be demonstrated with greater force in the second year of the recovery.

I adhere to this opinion. I consider that given the volume of money that there is to sterilize in the USA, and Europe to a lesser extent, the ghost of the inflation will fly over the North American economy for many years. It will be no simple task to reduce the fiscal deficit to 4 or 5 percent of GDP (more than a trillion dollars), especially when the budget that President Obama brought to Congress constitutes a new fiscal record. Additionally, the instruments available to respond to the monetary expansion also work against the recuperation, which will place the Fed and the Government in a dilemma “revitalisation of activity versus inflation”.

Given the nature of the dollar as a currency of reserve and reference, this dilemma will be present in the global post-crisis scene during for a long time to come. It is my understanding, resolution will be characterized by a weak recovery with an unstable fiscal framework and laboral stagnation, in which the inflationary risks of procyclical policies will be compensated for by the application of reductionist policies of the fiscal deficit and monetary sterilization.

Nouriel Roubini generates an additional alarm and writes in his Portal (23/07): “The global economy can back down towards a new recession by the end of 2010 or beginnings of 2011 due to the increase of governmental debt, high prices for petroleum and stagnation in the labor market . It is of the upmost urgency that an exit strategy from the fiscal and monetary stimulus is designed before its implementation and applied once the recovery begins”.

4. Financially interdependent world

Even though the crisis that arose in the US was brought on by the irresponsibility of the banking system in the acquisition of risk associated with subprime mortgages and their later commercialization in the capital market “camouflaged” as derivatives of derivatives, the protection of assets understood on a world-wide level to be US Treasury Bonds. This paradox, combined with the internationalization of the financial system, has created a deep interrelation between countries, far beyond the political systems that govern them.
Besides the tendencies attributable to individuals, institutions and corporations, numerous governments maintain in the reserves of their central banks significant proportions of North American treasury bonds. The most striking example would be that of China who holds almost a third of all bonds emitted by North American Treasuries (8.000.000 million dollars).

Therefore a “megadependency” exists that ties and worries many countries, creating a global network of interests that overrides political regimes and includes global vindications. In the recent meeting between President Obama and his homologous Chinese counterpart, they indicated that they will thrust a strategic and economic dialogue between Beijing and Washington. More precisely, in statement from the official press release they expressed: Both parties have agreed to work together to forge a positive relation of cooperation and mutual understanding between the United States and China in the 21st century, and to maintain and to fortify interchange in all environments. This new relation will conform to a geopolitical axis of enormous importance in the post crisis period. We are talking about the economic relationship that ties China and the US and whose material base consisted, in the pre-crisis period, of China exporting at low prices the use of cheap manpower coupled with technology from developed countries, American and European households on the other hand consumed overwhelming themselves with debt, global banks financed the over-indebtedness, China accumulated reserves buying US treasury bonds, Treasury injected resources in the American and global financial system, that continued lending to households to maintain the over-indebtedness.

5. China consolidates as the “driver” of the global recovery.

Within the framework of the logic of the pre-crisis period and the interdependence that it created, China consolidates itself as the driver of both the exit strategy of the global crisis and the support for economic activity during the first stages of the recovery. The Chinese economy grew 7.9% inter-annual in the second quarter of this year and is orienting itself towards the threshold of 8% in the third quarter, which is surprising and encouraging data for the global economy. The spokesman for the Chinese office of statistics congratulated the country for the positive results that were obtained and adjudged the success to the design and implementation of the Reactivation Plan structured by the Chinese Government. The third largest world-wide economy, highly dependent of its flourishing foreign trade, suffered because of the fall in demand from the USA and Europe for its products, which brought on a strong contraction of its exports, closing factories and destroying companies.

The Chinese Government reacted quickly with a strategic vision and financial forcefulness. The Reactivation Plan, which allocated 580,000 million dollars, was oriented to stimulate the internal market increasing the availability of credit towards consumption and investment to compensate for the fall in exports, which were reduced by 21.8% inter-annual in the first quarter. Also the governments spokesman indicated that weaknesses associated with the recovery in growth, that which had descended from 10.4% in the first quarter of 2008 to 6.1% in first quarter of 2009, indicates that the reactivation continues to be weak, its rate unstable, the model unbalanced, and as a result, there continues to be volatile factors. It should be recognized that the nature of “driver” of the exit of the crisis, and the recovery that the China economy presents/displays, is tensile to India and Brazil by the scale of its economies and the rate of recovery.

This repositioning of the emergent economies, particularly those that conform to the BRIC countries, is reflected in the new global architecture that is outlined as we move away from the precipice. The G-8, probably will have to become the G-13, adding the countries that conform to it, China, India, Russia and Brazil. Against this background the G-20 will continue as a forum to articulate decisions and measures at a global level that are adopted the G-13.

6. Greater Protectionism.

Inevitably we will enter a world where protectionistic behaviors at the global and regional level will dominate for a considerable amount of time, in spite of innumerable declarations against it. Protectionism, combined with the expulsion of undocumented workers and nationalism, will be the most relevant challenges of the increasing globalisation in financial, economic and technological matters.

These aspects, among many others that we will be experimenting with, in my opinion will characterize the world that we will face in the years to come, if the recovery slowly begins to take ground away from the contraction, as thus the numbers seem to demonstrate from the second quarter in the USA. We will be living in a very diverse world, where new values will prevail and in which possibly consumption, wealth, opulence, excessive avarice, and warlike domination will have to give way to new values of greater austerity. Globalisation will both understand and include relations and dialogue of cooperation framed in an associated agenda to deepen global preoccupations, such as care for the environment, poverty and the human rights. A world in which the new institutional architecture is fortified in its function to control and to regulate the global financial system -and that will have to be at the service of commerce, production and consumption- and not of “financial fantasies” will exist. This institutional architecture previously used the real economy to generate an industry of “papers” that was fed back into the financial system until becoming a bubble without any real content that and which later exploded into the great global crisis that we are suffering from today.

In sum, it would seem that we are leaving the era of “national Capitalism of opulence” to enter into a “more mature phase of global Capitalism”that will have to face new, but not less complex, global challenges and threats.