And then all eyes turned to the real economy. Governments across the developed world have put £2 trillion on the line, and yes, the action should be enough to stop global catastrophe. And they have done well, honestly. But don’t kid yourself into believing that from now on it will be pretty painless, that following a mild slowdown, everything will be back to normal. The next few years are not going to be easy.
Yet, lurking in the background, two profound developments are at work. One of these developments could actually mean that the recovery itself may be truly impressive. The other development, well, it seems that when the tale of this saga is told with the benefit of hindsight, it will look very different. The Credit Crunch of 2008 will be seen to represent a very significant moment in the turning of the wheel of economic history.
So, what next? How long will it take for the recovery to occur? When it does occur, why will it be so dramatic? And why will history interpret the events of the last few months quite differently from the analysis we are seeing at present? Read on.
The first thing you need to bear in mind is that banking crises are always expensive. If we were to take a leaf out of Channel 4’s book, and produce our own top 50 list, but this time of banking crises, it seems everyone’s favourite would be the Swedish crisis of 1991. Over the last few weeks, Swedish politicians from that time have found themselves in demand, as the world tries to understand what they did. The plan finally hatched by Gordon Brown, and then adopted by many other governments, did in fact take a big leaf out of Sweden’s book. And yet, consider this; it has been estimated that the Swedish banking crisis took 6 per cent off the nation’s GDP. The country was immersed in recession for two years.
In 1987 it was Norway that was struck, and the cost – 8 per cent of GDP. More recently, in 1997, it was Spain which felt the horror of a full-scale banking crisis – and the cost, 16 per cent of GDP.
But there is a difference. These episodes, nasty as they were, were largely isolated affairs. Each country had the option to export its way out of crisis.
The events of the last week seem to be without precedent. Okay, you can rewind the clock back to the 1930s, or even earlier in the first decade of the last century, but, quite frankly, things were different then. The world today is not like it was, and in modern times there hasn’t been anything like it.
More to the point, if the crisis is global, it isn’t going to be so easy to export your way out of difficulty.
Then again, you probably don’t know this, but the 1930s weren’t so bad for the UK. You may recall from your history, 1926 was the year of the General Strike. The 1920s may have been a period of dizzy exuberance in the US, but in the UK depression hit early. But, following the UK’s decision to pull out of the gold standard, the pound fell rapidly, and Britain was able to export her way forward, even at a time of worldwide economic hardship.
In many ways it’s like that now. The pound has fallen massively against the euro and dollar. Since many countries, including China, more or less shadow the dollar, this means the pound has fallen sharply against currencies such as the yuan. One assumes that the yuan will appreciate soon too. That is inevitable as China emerges as a major economic super-power. So the outlook for a British export recovery looks quite good, at least in the medium term.
But the US has got to reduce imports and increase exports; the effect this will have on the global economy is unknown, but as has been stated here before, it seems naive to assume the rest of the world will be unaffected by such a major change in the circumstances of its largest customer.
Capital Economics reckons that tumbling interest rates will eventually kick-start the economy, but not for some time. “We now expect GDP to fall by a full 1 per cent in 2009 and by another 0.5 per cent in 2010,” it said yesterday.
It was argued here, a while back, that the recovery will have its roots in the falling price of oil and food. For some time we have predicted oil will be back to $70 in 2010, and food will fall in price for the same reasons. But it seems we underestimated the speed with which oil was going to fall. It will take time before cheaper oil benefits us fully. Many companies fix the price of their oil many months in advance (that’s one of the reasons we have derivatives), but it will happen. And as this happens, affordability levels will improve.
But the government’s fiscal position will take a massive hit. And when you think about it, it really is shameful that we have come out of the longest-ever run of uninterrupted economic growth with public finances so stretched. Even without the banking bail outs of the last few weeks, Capital Economics predicted government borrowing will hit £100bn, leaving Gordon’s beloved sustainable investment rule in tatters. Include the liabilities from the nationalization programme, and it seems government debt as a percentage of GDP will be at its highest level since the end of World War II.
Capital Economics reckons that the City may eventually come out of this crisis all the stronger, as it learns from the mistakes it made. But this analysis may be wrong. It is hard to believe that nationalization will benefit banks, especially if comrade Brown (see yesterday’s article) finds it irresistibly tempting to start interfering with the way government-owned banks are run.
But, in the longer term, destruction can be a good thing. The global economy grew rapidly in the post-war years to a large extent because it was starting with a relatively clean sheet, and wasn’t hindered in its recovery by legacy infrastructure. At least that was the case in Europe and Japan. In America, the 1930s depression had also created an opportunity for rebirth
But the recovery from the 1930s took an age. How long will the recovery take this time? Well, maybe a good deal quicker this time round, and the reason for that lies with technology. The Internet and mass communication have been partly blamed for the speed with which this crisis unravelled. But that criticism misses the point. The speed of the crisis was a good thing; it would have been far worse if, instead, the whole collapse had been more drawn out. Instead, we were able to get the bad news out of the way quicker, and enact a fight back that much quicker too.
The Internet, however, will also facilitate the recovery. And it may be a recovery the likes of which we have never witnessed before.
There is a concern relating to the reaction against risk. You don’t have economic growth without risk, and you certainly don’t have innovation. The public backlash we are currently seeing against risk is one of the single-biggest economic dangers we currently face.
Another risk is that the government will find itself under pressure to try and get house prices moving upwards again, perhaps through tax incentives. This would be catastrophic, and would merely create the foundation for the next crash.
When history books tell the tale of this time, however, they may see its significance in a way few have pointed out. It has been clear for some time that this century will see a dramatic change in the way the global economy is dominated. The US is set to lose its hegemony, and as this happens the fallout will be dramatic. It could certainly be dangerous, too.
The credit crunch may yet been seen as the first major event to occur as a result of this change – don’t forget the real cause of the credit crunch was the disparity between high savings in some parts of the word, and massive debts in other parts.
The global order is changing. China is emerging as a new economic super-power. The first stage in this change was reflected in the form of cheaper goods and several years of low inflation, but high growth. The credit crunch occurred, that is, really occurred, because we have just moved from stage one to stage two in the tale of this changing order.
