Globalization, here we come!
It is obvious that the fall-out of the U.S. financial crisis, not only in the U.S., but throughout the world will be enormous and unfathomable for months to come as the debris is sorted out.
But one effect already seems to be clear and far-reaching: the crisis and its implications for the world outside the U.S. already indicate that the pace of globalization will be given a further spurt. It will lead to a whole new plateau of intensified relationships on the economic, and therefore, the political plane among the world players.
The bonds that have been forged in the post-digital revolution which had bound the world's economy closer together in the past two decades are going to become even more extensive and tighter. That is going to be true in the so-called service industries as well as in manufacturing.
The first evidence is already in.
Take the whole issue of the financial relationship among the major trading countries and even the smaller ones. [New Zealand went into recession even before the rest of the world was aware of the crisis because of the implications of international financial flows and its own domestic economic problems which required financial policies that made it even more vulnerable.]
With almost no fanfare because of the noisy domestic debate in the U.S. over government policy, the Federal Reserve has been working more closely with the other central banks of the major trading nations in an unpublicized but spectacular way. "Swaps", that is, the central banks exchanging each other's currencies to permit each central bank to go into the market to hold up or cheapen its own currency against its partner, have taken place on a scale that is probably unprecedented.
This kind of cooperation in a crisis is not new, of course. But as Hegel said, if quantities vary enough quality changes. Out of this episode, undoubtedly, comes precedents for future action. It is, by the way, a little incongruous to hear some critics of the Bush Administration who demonized its initial proposed legislation as giving unlimited and unprecedented discretion - probably true - to Secretary of Treasury Henry Paulson while at the same time during the two weeks of crisis Chairman of the Fed Ben Bernanke, authorized by existing law, has carried on these enormous currency transactions.
As always in such upheaval, some of the contemporary mythology has already quickly gone by the boards.
In Europe, the fondest hopes of the Barons of Brussels, the supposedly all knowing EU technocrats, the Commissioners, who guide the Community from the top down, will have to abandon their long cherished beliefs that the Old Continent was cauterized against policies and events in the U.S. As this is written, we are in the midst of a European banking crisis - and the rumors are flying thick and thin that some of the supposed Rocks of Gibraltar will go into crisis if not go under. Already the governments have had to bail out a Netherlands-Belgian-French bank. The tip-off that than this was simmering below the surface was the growing strength of the dollar against the Euro despite the growing depth and indecision of the U.S. crisis.
As always happens in French crises, the ghost of Cardinal de Richelieu arose in Paris with President Nikolas Sarkozy, once thought - or hoped - to be a pragmatist on economic policy, wandered back into tirades against "the Anglo-Saxon system". He called for multibillion state bailouts for all and sundry. But on the eve of a European summit, with German Chancellor Angela Merkel already refusing Sarkozy's [now withdrawn] plea for a Europewide bailout for the crisis, it all looks like the usual pan-European confusion.
Turning to Asia, there is already a flurry of early accepted changes by which the recent orthodoxys the region and its relationship to the world were viewed.
Even before the financial crisis, it had been clear that as the U.S. headed into a business cycle downturn, if not a recession, that a slowdown in American imports would impact heavily on Asia's economies. All are geared to export-led strategies. The hefty increase in intra-Asia trade, which even the international lending agencies have crowed about, is more than anything else base on the movement of upscale components from Japan, Taiwan, and South Korea, and elsewhere, to China for assembly and export to the U.S. and the EU. Granted that there has been some creation of domestic markets,. But as now predicted dips in the gross national product grow, the culprit is obviously the decline in exports.
The constraints for creating growing Asian domestic markets [except for Gucci clothes and French cognac] are complicated and well-known. In the era we are now entering, Asia governments will either make a additional effort to overcome them - for example, China would stop draining capital from its rural areas and begin the long and difficult job of reform and growth there - or the competition for Chinese exports from other low-cost labor vendors will intensify.
As growth slows, at least for a time, the commodity prices will fall. That could help the Chinese, increasingly dependent on imported what has spiked as high cost energy and other commodities.
But the fact that the Chinese censors warned their media to play down the American financial crisis isn't a mystery. China's rickety financial system has been held up by its spectacular high household savings rate. And with the stock market in the tank for six months, China's notoriously avid savers have put their insurance against the lack of a safety net into bank savings. It wouldn't take much to start a run on Chinese banks which could be halted only by closing down the system
A downturn in commodity prices will hurt the Australians who have been living high on the hog off their increasing export markets, especially China, for higher priced commodities. It also has implications for Russia, the number two world hydrocarbons exporter but also probably the world's most inefficient oil and gas producer and transporter. Industry gossip has held for a long time that if and when oil falls below $90 a barrel, Moscow - almost totally dependent on its hydrocarbon exports for its current level of prosperity because most post-Soviet reforms have not been made - would be in trouble. Old Ras Putin's dreams of restoring the Russian empire could fade accordingly.
India's highly successful software information technology exports may be somewhat insulated from the immediate effects of the ripples out of the American crisis. True, the downturn in the U.S. economy may see fewer companies willing to lay out new capital expenditures for new software - generally believed to have been far too generous and underutilized in the past. But there would be a need for new efforts to employ the digital revolution to monitor more efficiently the new kinds of transactions which will arise from the financial restructuring - ironically, a crisis brought on in no small way by a "scientific" belief that statistical method could overcome the old need for a broader expertise and experience in vetting financial risks.
Ironically, the Japanese who collapsed into stagnation for a decade when their own Bubble Economy burst at the beginning of the 90s, although hit, too, by the decline in export prospects, are, relatively, in better shape. Their recent encounter with disaster and their rejection of the new digital accounting for their own traditional prejudices had their new megabanks eschewing most of what was conceived as those high risk but profitable subprime mortgage bargains out there.
That left their banks - and even more than insurance companies - desperately trying to figure out how to meet the most rapidly ageing process in all the world's major economies - with a $3.5 trillion kitty to go out and pick up the skeletal carcasses of Lehman Brothers and move into American equities at fire sale prices. But, as just as the first efforts of the Chinese sovereign wealth funds have turned into disaster, it means that the Japanese are increasingly stakeholders in all the ups and downs of the American and European economies, not just as pre-the Chinese growth, they were simply "transistor salesmen" as France Gen. Charles De Gaulle famously dismissed them. Of course, that won't be much help with their largest per capita - by far - internal debt of all the major industrialized nations nor with their growing reliance of exports to the problematical Chinese market. But it does seem to mean that a post-crisis Japan with all its other problems would be more integrated than ever into world supplies of raw materials - particularly energy - and more disparate and widespread markets.
In any case, price changes, if and when they come, are likely to intensify worldwide competition, growing the already existing interlocking of markets and multinational producers seeking to find a competitive edge on worldwide canvas.
Returning to our hypothesis, about the only thing that appears certain is that the ties which have brought the world closer than at any time in human history are likely to be reinforced by the effects of the crisis. And that, despite the loud crowds for protection and autarkical strictures, appears the only thing inevitable in a world very much in flux.
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