(If I touch here and there on old ground in the following it's because I'm
sending a copy of this to The Times. It's way outside their normal length
of Letter so I don't suppose it has a chance of being published. But I will
try anyway!)
It is now obvious that the government of the largest economy in the world
-- America -- is in a state of panic. The shares of Citigroup, hitherto one
of the unassailable pillars of the US financial establishment (itself
having "saved" other banks at the request of the US government), plunged
again last week and its $30 shares of a year ago are now worth $4. A past
US Financial Secretary, Robert Rubin, the present Financial Secretary,
Henry Paulson, and Obama's future Financial Secretary, Timothy Geithner,
are all working together to try and work out just what it will take to save
Citigroup in a massive third wave of loans, never mind trying to consider a
host of other banks that will also have to be saved -- or jettisoned.
I think it is very likely that stock markets of the world are now poised to
make a second plunge from this week onwards. Unlike the Great Depression
when the Wall Street Crash was followed by what seemed to be a recovery
after a few months before sinking again, I think the 40% plunge will be
followed almost immediately by another one. If it has the same relative
dimensions as the present one then this comes to 40% x 40%, or16%, or a
plunge of 56% overall between January 2008 and some date during 2009.
Intuitively, that strikes me as being about right. The financial crisis
will have played itself out -- as only one MP opined in the House of
Commons a week ago. Although bankruptcies, unemployment and social distress
will be very great in North America, Western and Central Europe, and Japan
(still sheltered and affected by America to a great extent) there will
probably be enough sound industry and commerce to hold their economies
together if revolutions don't occur in this country or that. However, we
cannot be confident about social cohesion in any of these countries. (Even
in the UK we came perilously close to revolution at the time of the General
Strike.)
But what about China? In the view of eminences grises such as Jim O'Neill,
Head of Global research at Goldman Sachs, Paul Kennedy ("The Rise and Fall
of Great Powers"), Niall Ferguson ("The Ascent of Money") and several more,
then we might be at the point of a massive shift in the global balance of
financial power. Already China could bankrupt America by selling its US
Treasury bonds. It wouldn't do that, of course, because it would have too
much to lose by way of exports to America (and possible purchase of General
Motors and/or Ford in the coming year or two) but China could certainly
come out of the present mess as the predominant global power.
But would China wield its power over the world and establish military bases
in the same way that America has done in the past 70 or 80 years (and
Britain did in the same way 70 or 80 years before that)? It's most
unlikely. This would be quite alien to the culture of China ever since
200BC when Emperor Qin Shu Huang imposed a common written language over all
the countries he'd conquered. Psychologically, the Chinese are among the
most haughty and self-contained of all peoples. The Chinese don't meddle in
the governments of other countries. When Prime Minister Wen Jiabao attended
the Top-20 Financial Conference in Washington last week he said nothing.
This extreme reserve has been so for the last 2,200 years and it's hardly
likely to change now, however serious the crisis.
China will help the West in so far as it will look after its own commercial
interests in those countries but it will get on with its own salvation
first. And this problem -- given the millions who have already been made
redundant -- is serious enough -- far more complex than any that any
individual country in the West faces.
However, there is just one way forward for both China and the West that
might emerge during 2009 and onwards. This is that the American dollar and
the Chinese renminbi will coalesce as a unified world trading currency.
Under President Obama's regime next year he will give the Chinese experts
in the State department a great deal more attention and respect than
President Bush did. Many of the largest American corporations have huge
investments in China. A dollar-renminbi currency would make a great deal of
sense.
The remit and constitution of the World Bank would have to be greatly
modified, of course, but it is interesting that its Chief Economist since
June this year is Justin Yifu Lin, one of the main architects of China's
resurgence since Deng Xiaoping set China loose in the 80s. He would be more
than capable of supervising the transition to a new currency.
We can but hope that something constructive and truly globalized will
emerge from the present disaster.
Keith
Keith Hudson, Bath, England, <www.evolutionary-economics.org>,
<<http://www.amazon.com/dp/1906557020/>http://www.amazon.com/dp/1906557020<http://www.amazon.com/dp/1906557020/>/> _______________________________________________
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