Global Economy: Recession or Realignment
By Manuel Yepe*
A Cuban News translation
Edited by Walter Lippmann
“Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world”.
Soros predicts an economic realignment with a relative decline of the United States.
The above came from “The Worst Market Crisis in 60 Years”, an article by George Soros –the rich American financial speculator of Hungarian origin and president of Soros Management Foundation– published in the London daily Financial Times last January 22.
“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of World War II at intervals ranging from 4 to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.
It’s not the market what brings balance to these crises, but the official interventions. Until one day…
Every time the credit expansion ran into trouble the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy. That created a system of asymmetric incentives also known as moral hazard, which encouraged ever greater credit expansion. The system was so successful that people came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalized and the US started to run a current account deficit.
The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms. The authorities aided and abetted the process by intervening whenever the global financial system was at risk, but official regulations have been progressively relaxed until they have practically disappeared.
The super-boom, Soros says, got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves.
The central banks had to inject an unprecedented amount of money and new credit instruments and practices have been applied which are unsound and unsustainable. And so on and so forth in many other links of the system until the final blow came, he adds.
Used to butting in every time there’s a crisis is in the offing, the US Federal Reserve will have no choice but to announce new cuts in the interest rates to try and keep the US from going into recession, but the major market analysts take it for granted that there will be a crisis that can only be mitigated as long as China and India maintain their levels of demand to avoid an abrupt production slowdown and prevent recession from spreading.
Meanwhile, the World Economic Forum, a yearly meeting place for the world’s wealthiest and mightiest, held in Davos, Switzerland last January 21 to 26, had also pinned all its hopes on a solution to shun disaster in those two huge nations and other developing economies.
Consumed by the fear of a recession or at least a serious US economic slowdown likely to pull the world economy down with it, the Forum this year stumbled upon a paradox: where China’s and India’s huge growth rates were seen until very recently as a threat to Western economy, there’s widespread concern now about the danger that a worldwide recession puts a brake on them.
Attending the Forum was Wang Juanzhou, president of China’s mobile communication equipment manufacturing enterprise, who forecast that his country would be hit by the world recession, “but not so hard” given the expected increase in consumer spending, one of the three key elements –together with exports and capital investment– of China’s spectacular growth.
Another singular paradox generated by the winds of economic recession was manifest in the piece of advice that Dominique Strauss Kahn, the brand-new leader of the International Monetary Fund, gave the countries “with problems”: make your tax policies more flexible to overcome trouble.
After imposing for the last half century the tax surplus concept as the sine qua non, now the IMF recommends developed countries to fuel their economy by breaking their tax balance with no regard for monetary policies.
No less contradictory is to have the US’s foreign debt financed by Japan, China, Saudi Arabia and other nations not only as its great creditors but also as depositors of their huge financial reserves in Wall Street banks, thus becoming hostages to the US dollar.
In Davos, US Secretary of State Condoleezza Rice said: “The U.S. economy is resilient, its structure is sound, and its long-term economic fundamentals are healthy. The United States continues to welcome foreign investment and free trade. And the economy, our economy, will remain a leading engine of global economic growth”.
What future of the world economy do you bet on: recession, realignment or continuity of the unjust globalized disorder?
*Manuel E. Yepe Menendez is a professor at the Higher Institute Of International Relations in Havana, Cuba
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