Deregulated financial markets now dominate the world economy and the scale of international financial movements is now massively greater than the financial impact of manufacturing, farming or consumer behaviour. All that footloose money moving freely within seconds across an utterly unmanaged market produces extreme upswings and even more extreme crashes.
The booms seem to be getting stronger and so do the busts. The 1989 Savings and Loans crisis was the worst since the 1929 and cost in the region of $160billion. In 1997 there was a massive financial crisis that swept through South East Asia. It wiped billions off the value of economies in places like Thailand and cost millions of people their jobs. Next we got a dot com bubble. Followed by a dot com crash. Then in 2007-8 we got the big one and a worldwide financial crash occurred that has produced misery for millions of people who had nothing to do with creating it.
It is possible that there are some wild optimists out there who think that 2008 brought an end to all that and that there will be no more financial crashes. Most sensible economists expect another crash sometime. They disagree on the timing, the scale, the causes and the possibility of any cure but there is an astonishing degree of unanimity on the expectation that some kind of financial crisis will happen again.
So it is worth asking the question: “How well equipped are our governments, our businesses, our banks and our citizens to cope with another crash?” I think the answer to that is pretty frightening. The world is highly likely to encounter another financial crisis but it is in a really bad shape to cope with it.
On the day of his election Donald Trump inherited an economy that was growing strongly on the basis of 8 years of low interest rates and of government spending exceeding government revenues. His first action of significance was to cut taxes without funding that tax cut. That has a huge expansionary impact. Then he increased government expenditure on areas such as the military. That strengthened the upswing and the government deficit. At the same time interest rates were at historical lows and borrowing money was incredibly easy. So consumer debt and business debt began to increase out of control at the same time as government debt was mounting. Not surprisingly this generated historically high levels of economic growth in the US. Strongly driven by consumer expenditure much of which went on foreign imports. The US is now spending £446 billion a year more abroad than it earns and it is over 20 years since it last had a tiny surplus.
High levels of debt and unfunded consumer and business expenditure are two of the most classic symbols of a developing financial crash. Anyone who tells you that they know for certain when and where one will happen is a liar or a charlatan. Yet the entire US stock market has recently given itself over to quite a significant panic that this is exactly what is likely to happen before the end of 2020.
If it does then governments, businesses and individuals are in a much worse state to cope with it than they were in 2007-8. Central banks like to ease an economic crash by slashing interest rates. That is hard to do when they are still at record lows in an attempt to cure the damage of the last crash. National governments also often try to reduce the pain by spending more than they get in with the aim of boosting their economy temporarily. Countries like the UK and the US are going to find that very difficult when they still haven’t once got income above expenditure ten years after the 2008 crash and they are now carrying nearly double the level of debt per person that they were worrying about ten years ago.
Much of the reason that the world economy survived by the skin of its teeth in 2008 was that several countries worked really skilfully together to get out of the problem. That level of international economic collaboration no longer exists. The US is in a trade war with China and with the EU. The UK is in the middle of a Brexit crisis and is paralysed as an effective world economic leader. There simply isn’t any country with the moral authority or the political clout to bring economic planners from across the globe together in order to cope with the next crisis. It is therefore likely to be a much deeper, much more threatening and much less manageable economic crisis than what happened in 2008.
In a logical world countries would have taken warning from the last crash and would have spent the years following it making sure their economies were built on stronger and more sustainable foundations. We’d have built energy security. We’d have strengthened local supply networks. We’d have made sure countries could produce much more of the food that they eat. We’d have increased investment in modern manufacturing and service industries and brought financial services under much stronger government regulation. We would also have rebalanced national economies away from depending one big capital city and ensured that economic success was spread around the country and made more stable.
Instead in the UK we printed over £400 billion of free money and pumped it into the banking system and then let it go straight back to inventing clever and complicated financial instruments that made high temporary profits out of insecure leveraged lending. In the US they printed over $3,000 billion and did much the same. The EU took a lot longer but eventually got round to also boosting the economy for financiers whilst denying entire countries like Greece any of the same economic largesse.
Imagine what could have been done by using those sums of money to re-engineer the world economy away from a dependency on fossil fuels? Imagine how much more secure our society would be if it had gone on long term investment in reduction of energy use or developing circular production techniques that removed plastic waste.
Any truly responsible government would have spent the last ten years trying to make sure we were better prepared to cope with the next crash than we were when the last one came. That would require significant improvements in international planning and co-ordination so that we were ready with the world economic management tools we need to manage a world economy.
What we have seen instead has been a desperately dangerous growth in national rivalry, an increase in economic competition between countries, a decrease in trust and a return to seriously out of control financial bubbles. Blind hope that there will not be another crisis has replaced serious action to prevent one. What could possibly go wrong?