The world is not going to end. It is worth stating that in the light of the hysteria and ill-informed speculation being generated around the financial and energy crises that are impacting upon the global economy.
Commentators have a penchant for judging contemporary situations in the light of past disasters. Hence the current crisis becomes the worst possible combination of 1930s depression and 1970s stagflation. It makes for good headlines but very poor economic history. The 1930s depression was precipitated by monetary orthodoxy and trade protectionism; stagflation by commodity price hikes that were met with monetary laxity. It was also a time of wage hikes in traditional industries that were already in decline in Western countries.
Different conditions
Current conditions are challenging but totally different. Central banks have learned something in the past 80 years, they are not scared to ease to accommodate downturns and, unlike 1930s policymakers in the US, are not hindered in their efforts by the gold standard.
1970s-type commodity price hikes are a feature of the present malaise but Western economies have the advantage of greater energy efficiency, and global industry has already been restructured with the traditional smoke stack activities now located in China.
Definitely, a painful adjustment period is in progress. But looking beyond daily stock market gyrations, the following are reasons for optimism: the impetus that will be delivered to developing more energy-saving and alternative technologies; the fast speed at which economies under the influence of good policy now recover from downturns (months and years rather than decades); the advent of a new middle class in the emerging markets that is a powerful source of demand; the related growth of exports from Western economies even during the crisis; the capital flows coming from emerging markets to developed countries; and a widening impetus to tackle climate change issues – witness the transformation in the US approach with China likely to follow as its consuming middle class complain about the quality of their air.
There are as many reasons to be optimistic as pessimistic in this environment but sentiment – like the markets themselves – tends to overshoot in both directions.
