"A pebble in a churning sea." That is how the New York Times describes the
$700 billion bail-out prescribed by the US Fed. As for the EU, it has not
even been able to produce a pebble so far -- nor, in my view, is it ever
likely to. (In Western Europe it's now every country for itself and this
will probably mean the effective end of the EU as a meaningful body both
during the present maelstrom and after it.)
It very much looks as though stock markets around the world will continue
to panic and that, in due course, the still-absurd share prices will settle
down to sensible levels -- say, at something like a price-earnings ratio of
10:1 or 15:1 -- with only the viable businesses and banks surviving.
Meanwhile, because Western banks are doubtful about the assets of other
banks (probably because their own assets are dubious) they are decreasingly
helping one another out by means of inter-bank loans. More to the point,
they are now calling in the loans they have made to many of their business
customers, no matter how much pain or distress they might cause to
employees. Thus the financial world is now driving wedges of all sizes into
the real economy, which in turn produce other spirals of bankruptcies and
unemployment and only a proportion of businesses (and banks) will survive.
And who can say what this proportion might be? 95%?, 75%?, 50%? 25%? The
agricultural-industrial-services structure of the modern economy is now so
different from that of the 1920s and previous times when economic
depressions occurred that we can have no idea of how the new depression
will settle out in terms of numbers of people in employment and spending power.
My own view is that the chief cause of the trouble is that, a century ago,
government after government started disassociating their currencies from
any underlying value -- gold usually. The value of individual national
currencies then became dependent on two variables: (a) the profligacy of
individual governments -- that is, how much money they borrowed and then
had to print; (b) the inventive nature of individual populations -- that
is, how many brand new goods (or services) were able to be produced,
attractive enough to be bought both by its own population and those of
customers in other countries.
The idea of bringing back gold-backed currencies is now so politically
out-of-date that it is exceedingly unlikely that this could ever be
seriously considered again (though sensible people who can afford it are
now making sure that they possess gold during the period of this current
depression). The only other alternative is that a world currency could be
adopted. This would stop currency speculation for one thing, prevent
differential national inflations for another, and ensure that interest
rates in this or that region were truly appropriate to the local
circumstances and not guess-fixed by central banks for political reasons.
And here we have two pointers which could make this politically feasible.
Firstly, we have a World Bank already. Secondly, the idea of a
transnational electronically-based currency is also firmly on the agenda.
We already have PayPal and several other systems which aspire to do this.
But a new idea can only come from the mind of one person who is able to
make it crisp and communicable. And I have a curious intuition who this
person might be. If Deng Xiaoping was the person who was able to unleash
private initiative in China in the 1980s, then Justin Yifu Lin was China's
economic architect, making sure that the country's resurgence was an
orderly process. And he's recently been appointed Chief Economist at the
World Bank. If indeed a world currency is the only long-term solution for a
smoothly-functioning globalized economy then he is one of the very few
people in the world who has the right sort of track record and credibility
to bring it about.
Will my intuition will be correct? It's doubtful I suppose, but the next
few days, weeks and months will be fascinating to observe.
Keith Hudson,
6 Upper Camden Place, Bath BA1 5HX
(044 1225 311636 or 312622)
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