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The following is an excerpt from a recent opinion piece of mine in the Wall Street Journal. For links to this and other writings, please feel free to visit River Twice Research.
The incoming Obama administration will face formidable challenges, but global economic collapse is no longer imminent. That may be small short-term comfort to the markets and Main Street. But having stared down the abyss, governments around the world appear determined to address root issues. The G-20 gathering of the world’s major powers in Washington on Nov. 15 was only the beginning of a long and constructive process of revising the global system.
In the new system the United States will still be the largest economy but no longer the sole determinant of global economic health. The new winners will be cash and China.Those without cash are in a precarious position. Tens of millions of homeowners and property owners in the U.S., Europe, the Gulf region and Asia have seen the value of their assets decrease sharply. They either have negative equity or insufficient income to make payments. Pension plans and 401(k) accounts have been devastated by a 50% plunge in global equities. Millions of workers have lost or are about to lose their jobs. The U.S. government balance sheet will become even more debt-laden.
But every crisis creates opportunities — or at least so goes the old Chinese saying. This time is no exception, and China will emerge victorious. As its recently announced $600 billion stimulus package makes clear, those who have cash can spend their way through this global crisis, and China has lots.
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Paulson and Bernanke have shown their willingness to throw trillions at the financial system to keep it from collapsing but it remains an unreformed house of cards. None of the fundamental problems underlying the meltdown: distressed homeowners, insolvent banks, toxic assets, credit, derivative exposure, and re-regulation have been effectively addressed. The G20 was a do-nothing photo-op. China may have the funds to invest in infrastructure but it remains an export driven economy and it is difficult to see how it won’t get burned by a global contraction.
“Global economic collapse” carries the whiff of exaggeration, extracted from the nightmares of City-types wondering how to complete the purchase of their new estate in Connecticut or the Home Counties. It’s a marketing term, used to arm-twist a willing Congress to dole out money to Wall Street, no strings, no revelations or change attached.
“Collapse”, in any case, is in the eye of the beholder. The collapse may be that of the financiers who created the unregulated chaos, from which they extracted billions, but which was inherently unsustainable, a planned bubble far more destructive than the “planned obsolescence” of Detroit’s car manufacturers. But that assumes they are reluctant bureaucrats, unable to claim unearned rewards and lay blame for debacles elsewhere, a description that would be naive, at best.
The world faced severe disruption in the functioning of credit and financial markets, caused by the belated recognition that there was no there there in the asset-less world of derivative-on-derivative-on-derivative “financing”. Rational credit markets would always return, like a lifeboat bobbing to the surface in the cold Atlantic, after its mis-engineered and mis-captained financial ship hit bottom.
The question was always cost — who would pay for the search and rescue, the recovery and repair — and whether the inevitable formal investigations would hide or reveal the identities and malfeasance of the many bad actors. Asking the question answers it.
So, too, the US has not been the “sole determinant” of global financial health for some time. Globalization of operations has gone one for more than twenty years. Outsourcing, has jogged steadily on for nearly fifteen years, and has been running flat out for nearly ten. Governments included. Nominally US actors are wearing paint and costumes from overseas, work with sets and in theaters financed offshore, and have their work advertised on the stateless internet. Only the seats remain on Broadway.
China will do well. It works to many of the tactics devised by the Japanese, but now has fewer constraints and significantly more resources than they do. For now, it owns the technology lever and the manufacturing fulcrum on which the US economy balances, though it’s still determining how aggressively to use them. It will suffer along with the US, but “news” coverage being what it is, many will never know about it, a vacuum that jargon-filled WSJ OpEd’s won’t fill.