Five fantasies about the global economic system
It’s worth noting an article that the Guardian’s economics editor Larry Elliott filed earlier this week from Davos. Although he acknowledges that it is possible to construct an argument which is sanguine about the current prospects for the world economy, it is not the most likely outcome. One of the reasons, he suggests, is that the movers and shakers are still living in a “dream world” propped up by “at least five big fantasies” about the global economic system.
In summary then (since the whole article is well worth reading):
- “The first is that policymakers are in control, when all the evidence of the past decade is that they have allowed the global imbalances to develop unchecked, turned a blind eye to the excesses in asset markets and blown up a series of bubbles.”
- “The second is that the global economy has decoupled so that problems in the US will not affect the rest of the world. This, of course, is precisely the opposite of the message of recent years, when the argument has been that globalisation has increased the linkages between national economies…”
- “The third fantasy is to believe that the financial system is basically sound. There is still a tendency to believe that the scandal that cost Société Générale €4.9bn (£3.6bn) was the result of the activities of a rogue trader rather than simply the most egregious example of a form of the wild gambling that has been going on unchecked….”
- “The fourth fantasy is the assumption that the problems of the past six months are a crisis of liquidity, when they are in reality a crisis of solvency. Provision of cheap money … is not nearly so effective if businesses and consumers are unable to pay off their debts.”
- “Finally, there is the fantasy that not much has to change. Today’s problems are the culmination of a 20-year process that has seen curbs lifted on banks and investment houses, finance become a bigger and bigger part of developed economies, and a distribution of rewards in favour of those allegedly in charge of the runaway train.”
From a futures perspective, the way Elliott has framed the argument reminds me of Pierre Wack and the ‘three miracles’ story from the first set of Shell oil scenarios. As recalled in The Age of Heretics by Art Kleiner, “On the chart it was labeled “High Supply” (B3): it said that through the heroic efforts of the oil companies , the West would develop enough new oil to keep on top the world’s demand. …. “But let us see”, Wack said drily, “what would have to come to pass”. This future would require not just one, but three simultaneous miraculous events to come to pass”.
Or as Elliott notes in his article:
A long-term solution requires recognition that the crisis of the past six months is not the equivalent of a fit athlete suffering a muscle strain that will wear off given a bit of time and some intensive physiotherapy but rather the not quite fatal heart attack for the 60-a-day smoker. Briefly cutting down to 50 a day is not the panacea.
But given the response at Davos to those who suggested that the financial system might need to be re-regulated, such a recognition is a blind spot right now.