Era of confidence ends in trepidation
| mists consoled themselves that it was better to have unbalanced growth than none at all. A savage clampdown on the US consumer might have thrown the world into recession. As Michael Saunders, economist at Citibank, says of a similar situation in the UK: “They had no option but to create this imbalance. Would they really prefer to make a desolation and call it stability?”
Many were the investors and analysts focused on the US's current account deficit, and the threat to the dollar, as the greatest risk. And the market prices that garnered much of the world's attention during 2007 and 2008 were of commodities, which lurched upwards. The sudden price boom provoked a worldwide food crisis that had governments scrambling to secure supplies – often through a “starve-thy-neighbour” policy of encouraging imports to feed their restive populations while blocking their own farmers from selling abroad. But when the crash came, it was not the currency markets that triggered it. Instead, it was the way the housing bubble was financed that triggered a dislocation, starting with a credit crunch in 2007 and accelerating through a full-blown financial crisis in 2008. Suddenly the academic debates about what to do with monetary and fiscal policy in a 1930s situation became all too relevant. The Federal Reserve and its counterparts around the world pulled out weapon after rarely used weapon from their arsenals, ending up with the howitzer of quantitative easing, or the electronic equivalent of printing money. Disaster, at least on the Great Depression scale, has been averted. The big economies have mostly pulled out of recession and are on the mend. But just last month markets were stunned when Dubai World said it wanted to postpone debt payments, and it is too soon to feel relief, let alone optimism. A decade that began with confidence is ending in trepidation, particularly for the world's burdened taxpayers. The century limps into its teens looking ahead to yawning government deficits and global imbalances that are still not resolved. In the nearer future is the difficult question for central banks of how to exit from their strategy of pumping money into the economy. Most of all, we are entering the new decade with a loss of confidence among the world's governments, regulators and central banks about how they should be running the global economy. The post-cold war triumph of finance capitalism has been shattered, but no one quite knows what will follow it. |
Era of confidence ends in trepidation