Triple Shock to the Global Economy

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By Eric Le Boucher

You've entered the kingdom of uncertainties. Oil? How high will it go? The dollar? How far will it drop? The financial crisis? When will it end? Recession? In the United States? In France? From week to week, the prognosis for each of these questions eludes us. A dark crisis mechanism is at work that seems impossible to arrest.

We're suffering the blows of a great triple shock, the scope and the consequences of which are still difficult to measure, but which we know will profoundly refashion the global system.

The first shock is the world's shift from the West to the East. The unique American engine is exhausted, China, Asia are taking over. The second shock is a consequence of the first: Chinese thirst for raw materials has caused prices to explode and provoked a return of inflation - dead for 30 years - to the forefront of concern. The third shock is the financial crisis which persists, expands and leads to the end of (too-) easy credit.

There is no equivalent for the first shock unless it be the passage of supremacy from Europe to America during the First World War. The second is like the so-called "oil" shock of the 1970s. For the final shock, comparison oscillates among the Great Depression of the 1930s and the more limited crises of the 19th century and those more recent crises of the 1980s. The three shocks together have, in any case, an unprecedented scope: boom, boom, boom, they come at once and act in concert.

The Federal Reserve is blamed for having been the source of the evils of easy money. The "wizard" Alan Greenspan, adulated only yesterday, decided on interest rates too low to encourage growth, but that inflated asset bubbles instead. American households were able to go into debt cheaply and consume more and more. Imports grew in a straight line; the trade deficit deepened; the dollar began to weaken.

The United States has other, enviable, "fundamentals:" productivity gains, a high-tech sector, immigration ... but its debt-fueled growth model spiraled out of control with respect to real estate. The house was barely purchased before it gained in value, which allowed it to be refinanced and borrowing to be increased. Lending organizations invented subprimes to convince households without the means that they, too, could become property-owners under this system. Up until the day when, after an increase of 80% between 2000 and 2006, prices stagnated, forcing those households into bankruptcy.

The subprime crisis is one of excessive indebtedness. The American growth model will have to change: the return to savings will atrophy consumption; the dollar's fall could allow exports to take up a part of the slack. How? To what extent? It's too early to know.

In any case, the American deficit has its complement: the Asian surplus. China became the United States's workshop, then, as it accumulated monetary reserves, its creditor. The size of developing economies has grown vertiginously: they account for 50% of global GNP (in purchasing power parity). The "dragon" swallows half of global pork production, ditto for cement, a third of steel production. Its oil consumption will triple between now and 2030. Hence the surge in energy, metal and food prices.

From now on, food and energy will be more expensive. We are experiencing the end of a 30-year downward trend in commodity prices. Does that mean the resurgence of the specter of inflation? Probably not, even if it is too soon to be entirely reassured. In the immediate future, these elevated prices are going to corrode purchasing power, slowing both consumption and growth.

To what extent are developing countries autonomous enough to resist the fall of the American economy, now poised on the verge of recession? This East versus West "uncoupling" is one major uncertainty.

Then, there's the financial crisis. The collapse of an investment fund in the American giant Carlyle Group, this week, has come to show that that crisis is far from being contained. What's new about this crisis is that it does not center on one country or one bank, but concerns the sui generis construction of the financial world. Did the Fed's too-low interest rates or the excessive ingenuity of the math geniuses bring it about? In any case, the banks, and especially other financial organizations have sold and resold fragile stacks of "products," in ignorance of their risks. The regulations that forced these products off-balance sheet were an incentive to crime, while the obligation to mark to market daily has precipitated losses. In short, the hyper-finance world offers a great many subjects for revision, and, in the meantime, fear of new losses, failures and credit rationing after years of excess is strong.

The three shocks create uncertainty in the short term. Over the longer term, they will prove not to have been solely negative, and should give birth to a new economy with multi-polar growth, strong research and development in energy and agriculture, wiser finance. But the process of giving birth is always agonizing.