Beneath the Unprecedented Global Glum

Posted by on Oct 24, 2013

Beneath the Unprecedented Global Glum

The global economy finds itself, once again, on the brink of another crisis. Escalating market volatility, vacillating political leadership in OECD member countries, and the Pan-European public debt combined with the US political stalemates have contributed to the current global conditions. However, there are deep-rooted structural factors that lie beneath these apparent phenomena.

 

The most basic of the structural factors is the failure of Anglo-Saxon governance value system, both in the private and public sectors- most visibly within the financial sector. This failure has been brewing for awhile, and became manifest over the past two decades via the collapse of the US Savings & Loan crisis (1989), Enron (2001), HIH Insurance of  Australia(2001), WorldCom  (2002), Lehman Brothers(2008) Satyam (2009), and a couple of ‘reputable’ audit firms in the US. It is true that the failure of Anglo-Saxon monitoring and compliance framework was a contributing factor, but so were the US Federal Reserve’s Greenspan ideology and hence the mismanagement of the monetary policy for political ends as well as President Clinton’s desire to see American capital being dominant in the global markets.

 

The economic philosophers of the 18th and 19th century, the forefathers of modern economics, argued convincingly that the market economy could not survive without a set of underpinning moral value system. Nor could the operations of the state be able to complement the outcome of the market economy unless the state’s operational framework had a well-define social value framework based on “the public interest’. The very notion of ‘public service’ arose from the premise that the state’s value system would operationally exercise a check on the inherent and predictable excesses of the market system, would provide a set of checks and balances for the ultimate benefit of the society. This critical line was crossed on the altar of ideological warfare and the so-called ‘the imperatives of the national security’, most prominently and openly after the 9/11 in 2001. When this line is crossed, the failure of prudential and regulatory framework is simply a matter of time!

 

Another structural root cause has been and continues to be the global trade regime. Ever since the 1970s, the global system has been at the mercy of an unfair, unsustainable trade regime that caused structural imbalances from time to time. Economists have been warning on the dangers of this issue for a long while. But expressions of concern and awareness of the issues, per se, do not prevent a disaster! This has been the most spectacular failure of political leadership in OECD over the past three decades. Last year alone, OECD member countries spent in excess of US$750 billion on their misguided agriculture subsidies. From an economic point of view, this is a distortionary expenditure with negative effects on the global GDP. China’s manipulation of its currency, together with others, has been another source of structural imbalances! In effect the global economy has been subjected to a pervasive ‘trade war’ for well over three decades. Since 9/11-2001, we have had another rising structural factor contributing to the destruction of value globally, namely the three resultant wars- the ‘War on Terror’, the Iraq War and the Afghan War. These three wars augment the adverse effects of the above mentioned “trade war” on the global economy. The sum-total of these four wars adds up, in terms of my estimates to 3 to 3.8% of the global GDP! This is a colossal destruction of value, far exceeding the so-called stimuli packages offered by various OECD governments. Such value destruction did not tip the system when the global economy was riding the super- cycle of growth thanks to the positive effects of global integration (Eastern Europe,  China, India, and south east Asia) reinforced by the productivity gains from digital industry and de-nationalization of manufacturing. But as time went by the positive effects began to wear off, whilst value destruction continued, and continues even now.

 

In essence, the failure of the value system led to the simultaneous failure of “markets” and “the State”. It is this simultaneous failure that has paralyzed the policy makers! It is a new phenomenon, never confronted before. In their desperation to be seen to be doing something, and for some in their arrogance to think that they know what is facing them, they embarked upon a series of ill-conceived responses based on the assumption that the root causes were cyclical, denying the structural forces at work. The upshot was an abuse of the common cyclical policy tools, namely the monetary policy and the fiscal variables. The more they deployed the wrong tools, the less they succeeded, the more desperate they became the more they resorted to some convoluted packages destroying policy credibility in the process!