The world economic situation

Ten years have passed since the crisis of 2008, often remembered as the one caused by the bankruptcy of the bank Lehman Brothers, which was certainly a consequence, but whose roots must be sought, among others, in the American policy of building social consensus, through the creation of economic wealth using the lever of monetary expansion. The technological revolution led by Silicon Valley companies has produced enormous economic growth that has not resulted in a rise in wages as in previous industrial revolutions, when, under the pressure of the demand for labor, the wages grew in proportion to the increase in productivity, induced by new inventions and new processes applied to production.
The age of the internet and the web has generated enormous wealth that has not been redistributed in the form of increased incomes, and has also contributed to the obsolescence of some industrial sectors resulting in layoffs of low and medium skills workers.
The Clinton administration, in order to seek a social consensus, favoured an expansionist monetary policy which, on the one hand, allowed the increase of the stock market values, in order to increase the value of the pension funds and, on the other hand, thanks to the great availability of liquidity, also of the real estate assets. The banks, which could count on the very low interest rates at which the FED financed them, seized the possibility, well seen by the Washington administration, of allowing everyone to access the mortgage for the home, even in the face of mortgage guarantees on goods of poor quality and uncertain sources of reimbursement (sub – prime). These conditions prompted American families to get into debt in order to increase their spending capacity, thus deluding themselves of increasing their well-being by being able to consume more. As long as it lasted, everyone was earning from this mechanism: builders, real estate agents, banks and manufacturers of building materials, then in 2006, about a year after the first increase in rates by the FED, the market cooled and debtors began to be insolvent.
The great mass of debts that had been “packaged” by the banks granting them, through securitization operations, and ended up constituting the so-called “structured products”, in reality bonds with underlying baskets of assets that were not too liquid and could not be analyzed, which became “toxic” within a few quarters, infecting the balance sheets of all financial institutions, banks, insurance companies, pension funds, involved in the whirlwind of wealth creation through the exchange of paper, or rather bits.
As in the past has happened many times, the bubble burst and, instead of hitting the Company of the South Seas, as in England at the beginning of 1700, overwhelmed the investment bank Lehman Brothers, which was judged “too big to save”. In reality, the bank’s main problem was not knowing exactly what was the total amount of open derivative transactions and therefore its top management was not able to answer the question of the U.S. Treasury Minister and his staff on what was the amount needed to save the institution. The panic that broke out on the markets on September 15, 2008, following the news of the default of a large and ancient financial institution, which also had a rating of AAA, froze all interbank lending activities and forced central banks to become “lenders of last resort” to avoid a recession reminiscent that of 1930s. In the meantime, new rules have been introduced around the world to keep commercial banks separate from investment banks, capital and risk control requirements for all financial operators have been raised and stringent rules to protect savings have been introduced in many countries. However, as briefly mentioned, the 2008 crisis was not caused by Richard Fuld’s mistakes, but was ruined by the political decisions of previous years.
In these ten years, between 2008 and 2018, America enjoyed the second longest period of economic expansion, along with other nations such as Australia, Canada and the Netherlands (all three, belonging to so-called developed countries – have archived more than 20 years of uninterrupted growth), along with the Asian giants (China, India, Singapore, Taiwan, South Korea, Philippines, Vietnam and others), some African countries (with economies mainly linked to raw materials, such as Nigeria, Angola, Mozambique, South Africa) and others in the Middle East (the Emirates with their policies of economic diversification with respect to the exploitation of energy sources).
However, the economic situation in the third quarter of 2018 presents some worrying critical elements, partly deriving from the excess of liquidity with which the previous crisis was treated and, on the other hand, deriving from political uncertainties and geo-economic imbalances.
The first risk factor is the duty war between the United States and China. In the face of imbalances in the trade balances of the two countries, the Trump administration has decided to apply import duties to the United States of many Chinese products. In response, the Beijing government also applied trade fines to American products, severely restricting trade between the two economies.
This war, for the time being just commercial, hides a much more intense competition on the technological dominance, in which the United States, world leader since the 40s of the last century, sees its leadership eroded by China, which has invested heavily in new digital inventions (including artificial intelligence and analysis of big data) and now has some world leaders that compete in their own right with their American counterparts.
There is also geo-political competition with China, which is claiming its role as a major world economy and, in the face of a lack of willingness on the part of international institutions to admit it to the club of leading powers (Word Bank and IMF, first and foremost), an alternative order has begun to be built with the Asian Investment Bank for Infrastructure (AIIB), founded in Beijing in October 2014, and launching the One Road One Belt project, or “Via della Seta”, which constitutes an infrastructure network for land and sea connections between Asia, some Pacific Ocean countries, Europe and Africa, with substantial investment projects and financial support for the countries concerned. Both initiatives underline the Chinese Government’s willingness to integrate and collaborate economically with a multitude of partners, promoting international trade and the exchange of goods and bringing the era of a convertibility of the yuan closer, given that with some countries this is the currency with which economic exchanges take place.
A second risk factor is the tension between the United States and Russia, both on the use of technology to influence elections in some countries (primarily in the USA itself, but also in Europe, according to the accusations) and on the possible Russian violation of the INF treaty, on intermediate-range missiles.
Since the annexation of Crimea by Russia, relations between Moscow and Europe and the United States have been increasingly tense, turning the clock back to the Cold War, with economic sanctions applied by the United States and Europe against Moscow that have pushed the Kremlin government increasingly towards Asia and especially towards China, a hungry buyer of energy resources, trade partner and economic development. The Russian Far East, very sparsely populated, is increasingly Chineseized, with populous China towns across the border and with the Trans-Siberian used as a line of transport of goods and people in the heart of Asia to the gates of Europe
Russia is also an important and successful player in the war in Syria, where it has kept Bashar Assad as President of the country, fighting and defeating the claims of ISIS to create the Caliphate. It has also exercised considerable interference in Iraq and Lebanon, and has been able to maintain excellent relations with Shiite Iran without affecting the historic alliance with Israel, and, even with some incidents, has a constant collaboration with Turkey (NATO country), cemented by the willingness to not allow the birth of an independent Kurdistan. Most importantly, Russia has its own ships in the Mediterranean, using the Tartus naval base.
Russia is also very active in the Balkans, also to counter the ambitions of the Americans who had used the recognition of Kosovo’s independence to have greater influence in the area. Putin, however, also because of the solid links with the Orthodox Church of Moscow, has reported the Russian presence in the Slavic lands, on the other side of the Adriatic.
Third risk factor is Europe, where the sovereigns and populists’ wind on the continent and the British vote in favor of Brexit have weakened a common policy of the European Union both in economic terms and as a world-class player. The common currency, the first step in a broader political integration and all other money-related instruments, has not yet completed its course and the scepticism that exists today between the various European partners, exacerbated by economic imbalances and different policies budget, does not provide for any short steps ahead.
The fourth risk factor is the instability of some countries, from an economic point of view, but politically strategic, such as Turkey, Argentina, Brazil, Saudi Arabia.
Turkey has embarked on an Islamist drift, with the electoral success of the AKP, which also worries about the country’s membership in NATO, its involvement in the Syrian war with ambiguous and not always clear alliances, its agreements with Europe to contain the migratory flows, which make Erdogan a “despotic sultan” with whom to confront, trying not to collide.
Argentina, after the elections to the Presidency of the Liberal Mauricio Macrì, it was hoped to start a recovery and a market opening, after the years of predatory economy of the Kirchner, is instead had to resort to the IMF’s care, as well as Brazil that has just elected a President, Bolsonaro, which presents many unknowns, especially on a possible anti-democratic veer of the populous South American state.
Saudi Arabia, which seemed to have started with the young heir to the throne a series of reforms in terms of modernization and greater openness of the country not only as a major exporter of crude oil (and Opec’s pillar), has blocked the listing of Saudi Aramco (circumstance that would have brought transparency on the management of the main owner of world oil reserves) and has disconcerted all the historical allies, above all the United States, for the brutal murder of the journalist Khashoggi by a Saudi command, directly connected to men very close to Prince Mohamend Bin Sultan, in the Saudi consulate in Istanbul, with serious embarrassment also of Erdogan, who also committed some brutality.
The crisis in Europe, both social and economic – at least for the states of the southern shore – is exacerbated, both in numbers and in perception – by migratory waves coming from countries battered by the wars of the Middle East and Central Asia (Syria, Yemen, Iraq, Afghanistan), from the failed states of Africa (Libya and Somalia), but also from the simple aspiration of many migrants to seek better economic and personal conditions of life. These flows of people, which no restrictive wall or policy can ever stop, as history teaches, can be a great resource if managed in a cost-effective way, which consists in implementing all integration policies that start from education and from the regulation of flows, based on the absorption capacity of the economies with which they are to be integrated. Immigration is often seen as an invasion and, as such, triggers mechanisms of defense and rejection. In reality, Europe is a continent whose population is aging and will increasingly need young people, trained, to be integrated into its productive mechanisms.
These four main factors of political uncertainty immediately translated into a cooling down of China’s economic growth (forecasts for 2018 are 6.5%, worse since 2009), of many of the developing countries (which are also burdened by a high level of indebtedness due to the abundance of liquidity over the last ten years and very low interest rates that have led investors to look for returns even in less robust economies), of some European economies, including Italy, but also England and France itself.
In addition, the economies of the advanced countries have reached a public debt average of 100% of GDP, with a 30% increase compared to the 2007 data. Debt in emerging countries rose from an average of 35% to 50%, same period.
These data make new fiscal stimulus difficult as a policy to combat the crisis.
Moreover, compared to ten years ago, when the economies of the G20 countries coordinated to prevent further disasters, there is much less trust and ability to collaborate with governments, aggravated by the presidency of Trump who has repeatedly declared and acted out of multilateral contexts. There is evidence, among many, the failure to sign the Paris climate agreement and the non-use of the WTO for trade disputes with China.
An important point to understand how to deal with the crisis that could come is to be clear that while the first was born from an excess of liquidity (with which the finance of the West was flooded) to which the G20 countries responded compactly in the continue on the road to globalization, the crisis that could emerge today is due to the inability of the ruling elites to give a global response to the concerns, social and economic, local.
Faced with the impoverishment of the middle classes of the United States and Europe, politics has embarked on processes of de-globalization, closing markets and borders in an attempt to protect the “local” in spite of the “global”. Hence the slogans “America first”, “Brexit”, “No Europe”, “Reshore the production”. And since these promises, with which the representatives of populist parties have been elected, can not be maintained because the budgets of the already heavily indebted states do not allow other unproductive expenses and, moreover, can not be closed in their territory in an era in which digital technologies have effectively erased borders, the real crisis will be in democratic representation, with the risk of exchanging elections for the purpose and not the means by which to govern.
Nationalisms and strong men in power or on the rise, make monetary, fiscal and diplomatic instruments popped up, but the world continues to be so interconnected that a beat of butterfly wings in California can provoke an earthquake in Japan, so international forums, both economic and political remain the best arenas in which to tackle economic, political and social problems and try to solve them. The chaos, understood above all as an inability to navigate in stormy seas, does not show the shoals and the rocks, making shipwrecks and their crews shipwrecked.
Returning to international cooperation is the basis for countering the next crisis. This will have to take place in the appropriate venues and with the greatest possible participation of all players in the search for the lowest common denominator to reach an agreement that allows the increase of trade, currency and people, climate agreements, nuclear weapons and contrast of fundamentalist terrorism.