Is the world facing fundamental changes?

 
Trader works on the floor of the New York Stock Exchange, August 10, 2011 There have been weeks of extreme volatility on the markets not seen since the global financial crisis three years ago

Recent events, including stock market falls, the escalating sovereign debt crises, US credit rating downgrade and a near-stalling of growth in the developed world are leading increasing numbers of experts to wonder if the world is facing some fundamental changes.

In reality, many of the ideas reflect trends that have been under way for many years, but the crisis had accelerated the process of change.

Four years after the financial crisis began and the world has certainly not returned to normal.

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Wile E Coyote

The euro's performance has reminded us of the point where Wile E Coyote runs off the edge of the cliff and fails to fall simply because it does not occur to him to look down”

End Quote Simon Derrick Bank of New York Mellon

No major developed economy has yet fully regained the output lost during the recession and global share prices remain almost a third lower than their peak prior to the crisis.

Financial stocks have lost two-thirds of their value. Government debt has spiralled due to the bank bailouts, although it has become apparent that not all governments can finance this debt.

If stage one of the crisis involved the transfer of liabilities from the financial sector to governments via bank bailouts, stage two is witnessing transfers from weaker governments to stronger governments, as the latter seek to prevent the former from defaulting and causing more financial turmoil.

Soul-searching

Government indebtedness has led to a sea-change in attitude towards risk.

Developed world government bonds are no longer the risk-free investment they once were. In fact, credit markets show that government debt is now perceived to be riskier than corporate debt in western Europe.

The downgrade of US debt from triple-A to AA+ by S&P also sparked a bout of soul-searching among sovereigns that remain triple-A rated by all credit rating agencies. Attention was focused on France last week.

A grim reaper figure holds a globe pierced by the scythe of capitalism in front of the Bank of England during a protest on 13 October, 2008 As banks around the world came close to collapse in 2008, some predicted huge changes

The crisis has consequently taken on an increasingly political focus in recent months.

Political leaders are struggling to manage a situation where austerity measures designed to reduce deficits and retain credit worthiness have coincided with a near-stalling of developed world recoveries.

Economic growth slowed to 0.3% in the US and 0.2% in the UK. Germany - the eurozone's hitherto star performer - expanded just 0.1% and France stagnated.

Sticking together

Increasing numbers of analysts are questioning the survival of the euro due to the political tensions.

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The big changes that are being mooted in terms of the world as we know it are in fact largely trends that were already in place”

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Many see the euro - in its current guise at least - to be sustainable only if the euro countries are prepared to issue common eurobonds.

Such an "all for one, one for all" debt issuance is seen only as a last resort by Merkel and Sarkozy, and would require great change in terms of control over national economic policy and fiscal budgets among euro member states.

However, many analysts consider eurozone leaders to already be in the eleventh hour.

Currencies weaken

It's not only the euro which faces problems.

The Chinese authorities are now calling for a new world reserve currency to replace the US dollar following S&P's downgrade.

The greenback and the euro may never again be the strong currencies they were before the crisis struck (assuming the euro survives).

Likewise for sterling, where an inability of the Bank of England to meet its inflation targeting remit is testing its credibility and further encouraging investors to move out of currencies which are losing their value through inflation into safer havens - notably gold.

Power shift
Traders on the New York Stock Exchange (11 August) Investors fear policymakers don't have the right tools to help the economy

China, of course, has the opposite problems to the West in many respects. It is accused of having an undervalued currency and continues to battle to cool near double-digit growth.

This means that, not only does China have a hold over the West due to its vast holdings of US debt, but ongoing recoveries in the West are also very dependent on whether the Chinese authorities can manage to engineer a soft-landing.

The financial crisis has therefore resulted in an acceleration in the existing trend of economic power and influence moving from West to East.

Trends exposed

So the big changes that are being mooted in terms of the world as we know it are in fact largely trends that were already in place - the shifting of power to the East, the accompanying perceived decline in the status of developed world currencies and government debt, and the need to reduce the developed world's unsustainable dependency on debt and credit.

Even the viability of the euro has always been in question, with its creation having been seen by many to have been driven by political rather than economic reasoning.

The crisis has just brought all of these issues firmly into focus, but quite what will happen in the long run is of course speculation.

Low rates

The one change that seems quite certain, however, and that will directly affect most of us in the developed world in some way or another, is that interest rates look set to stay extremely low for the foreseeable future.

The US Federal Reserve has pledged to keep interest rates at close to zero for the next two years, and the Bank of England is also not expected to hike rates until 2013.

There again, perhaps even this is not guaranteed because we may yet see a fundamental change in economic policymaking.

Many see the current emphasis on inflation targeting to have failed, not least because central banks have a remit to control something which is effectively out of their control, as inflation is these days dominated by global factors. Nothing is for certain.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement.

 

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  • rate this
    +18

    Comment number 67.

    govt debt is a result of tax payers bailing out the private sector.Why was this seen as a good idea?would it have not been better to guarantee our savings and open up a nationalised bank and have just let the whole corrupt,greedy banking system collapse?In a world run for the people this is what would have happened.you gotta love the vested interest,the one thats not yours but loves your money

  • rate this
    +1

    Comment number 63.

    The current hysteria is shocking until you realise there were newspaper and magazine articles in the mid-1890's recesssion, the 1930's depression and the mid-1970's slump all predicting the end of capitalism. It was rubbish then and it's rubbish now...

  • rate this
    +4

    Comment number 61.

    I think there are two kinds of change. One is fundamental, the world is underresourced and overpeopled. The other is geographical and class-related. Venice lost it, Spain lost it, Europe lost it. Now the western world as a whole is losing it - economic advantage and dominance. No doubt, some of the rich will stay rich. But slowly they'll be reduced to pretensions, like Venetian princes in H James.

 
 

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