The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

World Economy at One Minute to Midnight

Over the last week, portents of doom have enveloped the Parallax Brief. Increasingly, a Great Depression of the Twenty Tens looks to be the fate of the world. Lest we forget, the economic turmoil between 1914 and 1945 led to political upheaval almost unimaginable now, and unleashed the horrors of total war on the developed world.

Why do I feel so pessimistic?

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Global System More Fragile than we Think

Much of my recent reading has been dominated by the financial crisis sweeping the world. Working in an investment bank at the moment feels rather like being a office cleaner for the Pentagon during the Cuban Missile Crisis: there is no respite from the torrent of apocalyptic news but there is little one can do to influence the situation.

However, while the effects of the current credit crisis and financial turmoil on economies, job markets, and businesses are difficult to underestimate, there is also a broader, global issue at play. Until recently, I had assumed that globalization was a new phenomenon, driven by modern developments in logistics and communication. But if you, like me, assumed this, you’d be wrong.

Paul Krugman, Nobel Laureate for Economics takes up the story:

“…our grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment.”

I first heard of this ‘first great globalization’ when watching Naill Ferguson’s excellent television series, The Ascent of Money. In it, Ferguson alluded briefly to a world which was, in relative terms, as financially interconnected as it is today.

Serendipitously, I stumbled on Krugman’s op-ed at around the same time, and what makes the first great globilization such a frightening story is the tightly corresponding similarities to the world of today: technological advances, increasing integration, and full blown globalization that fueled unparalleled economic growth.

Further, people of the time, like now, assumed that war would be so unprofitable and economically damaging that it would never happen. Of course, we now know understand the fallacy of this thinking, but the story has some sobering implications for the world of today. Krugman explains:

“But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together…

Can things fall apart again? Yes… the belief that economic rationality always prevents war is an equally great illusion. And today’s high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.”

Certainly worth a read for those interested in history, economics, and geo-politics and foreign affairs. And something else that is of interest is Ferguson’s recent review of a book covering a related subject for the Financial Times.

The point I’m trying to make is that while we live in a stable, interconnected, increasingly prosperous world, it only takes one financial or economic shock handled in the wrong way to bring nationalism back into vogue in one or two places, encourage countries to pull up the barriers, and, at the very least, lead to a domino effect that sends us drifting away from the model of increasing integration and division/specialization of labour which has made the world more prosperous than ever before. Conflict is unprofitable, but it didn’t stop us last time, and to think it will this time is folly.

I would hope we would now be more mature, but I’m not so sure. It is well known, for instance, that the Smoot-Hawley Act expedited the onset of the Great Depression, yet China and Russia have both overtly sidestepped toward a more protectionist stance of late, and dark rumblings of an Sino-American trade war can be heard just over the horizon.

You have been warned.

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