Financial crisis, or fundamental change?

Last week, we argued that there seems to be a convergence of evidence on a number of fronts in the existence of modern man, indicating that we are presently living through a transitional epoch from one historical era to another. This week, we look at the fact that we are now approaching the three-year mark since the global economy was hit by a financial and economic crisis that has morphed from one of private sector debt in the United States into one at sovereign level, posing the question: Are we only dealing with normal cyclical events, or is something more fundamental at a structural level taking place?

There seems to be a convergence of events in the global financial system as we got to know it, and in economics and its neat theories that governed our behaviour on this front – creating pressure and strain not only on the very systems themselves, but also in many parts of the world already threatening socio-political stability.

Few institutions have been more central to economic and financial development  in the world over the last number of centuries than banks. Banks and related financial institutions have become the very lifeblood of economic activity as we know it.

But, since late 2007, confidence in banks and their sister institutions has not only been badly shaken, but trust – which is core to the functioning of the system – has been badly violated. Banks do not even trust one another anymore and the chances of this being restored anytime soon, if ever, seem quite slim.

Mike Whitney only last week wrote about the present financial crisis in the Euro Zone: “Presently, 170 banks are having difficulty accessing the wholesale markets where they get their funding. Financial institutions are wary of lending to each other because they’re not sure who is solvent or not. It’s a question of trust.”

Illustrating not only the widespread cynicism about financial institutions, but also the extent to which the crisis may cause existing political structures to become unstuck, Whitney adds: “The ECB (European Central Bank) is not buying Greek bonds because of a ‘sovereign debt crisis’. They are buying them so the banks won’t lose money. The ‘sovereign debt crisis’ meme is all public relations hype.

"If it becomes too expensive to fund government operations, Greece can leave the EU and return to the drachma, which would give it greater flexibility to settle its debts. … This is the best solution for Greece. So, where’s the crisis?”

Another refrain that is heard more often and is becoming ever louder is “scrap the dollar as the sole reserve currency of the world”. And this is not only coming from a rising powerhouse such as China.

At the end of June, the United Nations joined this growing choir, stating in a report that it has been unable to safeguard value.

While some, such as Nobel Prize-winning economist Joseph Stiglitz, are advocating the replacement of the dollar with International Monetary Fund special drawing rights (SDRs), it would seem that certain sovereign jurisdictions are for now moving back to gold.

At the end of June, the Financial Times reported that “after two decades as net sellers of gold, foreign central banks have now become net buyers. What’s more, more than half of central bank officials surveyed by UBS didn’t think the dollar would be the world’s reserve in 2035.

"Among the predicted replacements were Asian currencies and the euro, but – by far – the favourite was gold. This is supported by… revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made similar admissions.

"There is no reason to assume these are isolated incidents, or that the covert trade of gold doesn’t continue. To the contrary, this is compelling evidence that foreign governments are outwardly supporting the status quo while quietly preparing for the dollar’s almost inevitable devaluation. What Paul Krugman believes to be a return to medieval economics may, in fact, be the wave of the future."

It is under these circumstances that certain analysts are posing the question: “Economic recession to bring down (the) American Empire?” If this is indeed what is happening, and there is no reason to doubt this, it has far-reaching implications for international relations well beyond simply the realm of the financial system and the present economic dispensation.

Adding to this, and with profound implications for the rest of the world, there is mounting evidence that the system of consumerism (particularly in the US) – the main driver of economic developments since World War 2 – is fast reaching its sell-by date.

Again, it starts in the US where The Washington Post reports that the economic shock or the financial crisis “has jolted many Americans into a new, more austere reality, which is likely to have lasting consequences for an economy fuelled mostly by consumer spending.”

Equally, capitalism as we know it – where profit for the sake of profit plays a central role – seems to be coming under increasing pressure. In many parts of the world, including in South Africa, questions are being posed if it is tenable in the longer run that growth figures for the economy are edging up while job opportunities constantly seem to be heading in the opposite direction.

The seemingly ever growing wealth gap in countries such as South Africa has many serious commentators predicting unrest over jobs, poverty, anger…

As the developed nations of Europe battle to come to grips with debt levels, citizens are finding it difficult to accept higher retirement ages and cuts in welfare spending. The result is often violent protests.

In the US, some eight million jobs have been lost in the recession – some forever – and even if the pace of job creation by a very slow recovery is doubled immediately, it is being said that it would take until 2013 to simply pull even again.

All over the world, political leaders’ positions are increasingly coming under threat. From Japan – which seems to be on the verge of replacing its fourth prime minister in three years, after Naoto Kan floated the idea of increasing the existing 5% sales tax – to Germany and the US, where Barack Obama is increasingly looking as if he is heading toward a one-term presidency.

What the world economic and financial dispensation will look like 10, 20 or 50 years down the line is impossible to predict at this point. The only thing that is sure is that it is going to be a bumpy ride getting there.

Piet Coetzer