What will the global outcome of the current economic downturn be?
First we have to imagine how severe this one may be. Paul Krugman today:
How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
The blow-up of the credit bubble will severly effect financial markets. But that is certain bleed into the real economy. It is unlikely that the effects can be contained locally. The crisis will be global. The consequences in the political dimensions can be enourmous too.
The Economist muses about the political outcome in Great Britain.
As its graph shows, British GDP growth in the last ten years was solely based on the financial industry:
[T]he impact over the next year or so will be painful, not only for those who work in the City but also for the economy and the public finances. As the shockwaves ripple out from London’s financial district, they could undermine the regional foundations of Labour’s long electoral hegemony.
Labour as the ruling party not only allowed this mess to happen, but promoted it. It will certainly take a severe hit. The UK housing bubble has yet to really deflate and the Pound is likely to take a severe beating too. The political problem in Great Britain might be, that the other parties than Labour are likely even worse for its people.
Unless there is a hot war on Iran or a reheated war on Iraq, the U.S. voters mind in 2008 will be fixated on economic issues.
The Republicans have little chance to escape their responsibility for what is happening now. All their candidates but Ron Paul offer only the same neoliberal recipes that led to the desaster.
The Democratic candidates would do well to emphazise help for the lower class and solutions for the economic problems (there ain’t any easy ones, but that doesn’t matter much on the campaign trail).
Her dependency on the financial industry could cost Hillary Clinton lots of voter credit. It was also her husband that repealed the depression era Glass-Steagall Act which had separated commercial banking from investment banking. A big part of what we see now is a result of that Rubin/Clinton repeal. On economic issues, her Democratic opponents certainly have lots of ammunition against her. Will they use it?
What is not going to work in this campaign is further promotion of globalization, neo-liberal tax cuts for the rich and arguments for more deregulation. I believe the voters are too smart and too hurt to fall for more of the same. This could be the chance for an independent candidate if s/he uses some New Deal rhetorics or isolationist populism.
The Euro area will feel a lesser but still severe downturn. It may become more isolationistic and increase tariffs on Asian imports. But overall, I believe, its economy to be more stable and resiliant than the U.S. or UK ones.
Politically, bad economic times should induce a move to the left. But the pseudo left Labour and the Social Democrats in Germany are discredited after they had turned to the neo-lib right in the 1990s. This leaves room for parties on the real left. But if things get really bad, a move to some far right populism is possible too.
So far the European Central Bank has refrained from lowering interest rates. Like Wolfgang Munchau in today’s FT I’d argue that Rate cutting will not get us out of this mess:
Look at it in terms of insurance. Lower interest rates insure us against the risk of a slowdown, but we are paying a price by accepting new risks. Among the biggest are moral hazard and higher inflation in the future.
…
On balance, the benefits of a loose monetary policy are not nearly as one-sided as its advocates claim. A bias towards low interest rates got us into this mess. Low interest rates will not get us out of it. Central banks should keep their cool.
The inflation numbers are already increasing. In the U.S. the real inflation, as felt by the consumer, is some 5+%. In the Euro area it is a bit lower, thanks to a stonger currency. In China it is some 10+%. Overall it is increasing everywhere.
Central Banks should now push interest rates higher and stop the inflation trend before it gets out of control. To lower rates now will only feed another bubble, possibly in commodities, and lead to more pain and an even bigger bust later on.
China has a huge problem. Not only are stock markets there in bubble territory, but its growth is much too dependent on exports. If the U.S. and Europe push up tariff barriers, its growth will falter.
China needs to reorientate to more internal consumption. The personal saving rate there is at some insane 50%. By introducing social security systems, the need for such high savings could be deminished and consumption increased. China will also have to decouple from the U.S. Dollar. Other Asian economies will have to the same. Overall Asia has the biggest chance to decouple form the ‘western’ downturn by integrating itself.
Any economic crisis in China could either lead to severe internal turmoils, or the people could turn to leaders who argue for outside wars. (Because of its former ‘one child policy’ China has an "excess" young male population of some ten-plus millions. Historically such ‘excess’ is often ‘cut’ by war.)
The commodity based economies, Canada, Australia, oil producers, have the best chance to go through this downturn without much trouble. The ‘third world’ should follow the success story in Malawi, shun any IMF and World Bank ‘advice’ and protect themselves from outside influences.
The African countries should only allow imports, via tariffs politics, of stuff they can not produce themselves. While the big economic bullies are destracted with home grown problems, they may even have a chance to get away with it and develop themselves.
Overall we have to get back to really make real things. Real economic development and growth is impossible to achieve through selling and buying derivatives of derivatives of some paper of dubious value.
There are enough needs in this world that demand good real products. A trillion invested in development of environment neutral energy production is better for everyone on this planet than trillions of pseudo wealth pumped again and again through finance industry computers.
That is, so far, my insight on this. It certainly lacks depth and has its flaws. Please correct it and add to it in the comments.