Black (insert day of week as appropriate)

What a week. It’s always dangerous to make short-term predictions but occasionally you need to stick your neck out. People are worried about their jobs. People are worried about their homes and people are worried about their savings. The toxic nature of some recent interbank lending means people are also genuinely frightened about what’s going to happen next.

To this point I offer two thoughts. First, even if the financial system does collapse it’s not the end of the world. It’s only money. On almost any other measure you can mention we are better off now than we have been for a very long time. There is no immediate threat to our physical health or our physical security*. It’s not a global flu pandemic and it’s not the start of WW3 either. Moreover, even if 2008 does turn into 1929 (it won’t) the material circumstances and prospects of most people are still vastly different.

Second, even though many parts of the world seem certain to fall into a recession there is still a lot of money around. China is awash with cash and whilst the US is certainly an important export market for China, Asia is far more important. So is internal Chinese consumption. What this means is that a US inspired financial crisis is still not necessarily a global economic one over the longer-term.

It seems to me that the most likely scenario is one where the US and Europe are de-coupled from the rest of the world economically in a manner that is analogous to Japan’s ‘lost decade’ in the 1990s. Global growth will slow down but it won’t end. Furthermore, whilst some sectors will be hit hard (financial services and retail being obvious examples) other sectors such as manufacturing or technology may still shine relatively speaking.

A final point is prices. People complain about the cost of food and petrol but what they miss is that these prices are relative. Other things, such as the cost of manufactured goods, have dropped sharply in recent years. I could be wrong about all this, of course, but I figure that if 1929 does return then we will have bigger things to worry about than my latest blog post.

* Can you imagine the consequences of another US 9/11-style attack in the middle of the current financial crisis? This is one scenario that I’d rather
not think about.

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