Wednesday, 12 August 2015

Interesting times for the world. Or a Chinese curse at least

What we tend to forget about economics, is that it takes a long time for changes to work their way through. A long time, that is, relative to political careers.

Ronald Reagan, enthusiastically supported and followed by Maggie Thatcher, began to dismantle economic regulation in the 1980s. The process culminated in the repeal of the US regulations (the Glass-Steagall Act) that prevented any individual bank providing both retail functions, such as current accounts or personal loans, as well as much riskier investment services, in 1999. The repeal was initiated by Republicans, but backed by President Clinton, so no party is blameless in this sorry episode.

That means that over nearly twenty years, the structure of regulation that had been set up in the wake of the great crash of 1929, and which had prevented any bank failures in the States for half a century, was deliberately dismantled. Because the process took so long, a lot of people could claim credit for the prosperity apparently generated as a result: Reagan, Bush, Clinton and little Bush in the US, Thatcher, Major and Blair in the UK.

These leaders seemed sound managers of their own nations’ and the world’s economy. But that’s because the eventual consequences of the deregulation were only incubating below the surface. Apparent success was being furthered by a wild drive for increasingly risky financial gambling, building up a mountain of unreal value which had, eventually, to collapse.

In 2008 it did. As a result, in Britain blame for the failure tends to be assigned to Gordon Brown, Prime Minister at the time; in the US, although the crisis began to break at the tail end of the Dubya Bush presidency, Obama was in office as it spiralled out of control, and he had to take the steps needed to restore stability. For which he can then be blamed or praised, depending on taste.

It feels to me as though we’re about to see a similar phenomenon. For over twenty years now, the West has been watching the Chinese economic miracle with amazement. At times when our economies have struggled to grow by 2 or 3%, China has seen growth of nearer 10%, year after year after year. Some economists warned that the rate was too high, and could not be sustained in the long run. Indeed, a time of reckoning would come, when this house of cards too would fall.

If you keep saying that for several years, and the growth just keeps happening, eventually you sound like the boy who cried wolf. A belief becomes established that the good times will continue indefinitely, and that those claiming otherwise are merely doom sayers.

Sadly, the reality is simply that it just takes economic phenomena that long to become manifest. In recent times, we’ve seen increasing signs of weakness in the Chinese economy. There has been a steady decline in growth so that, though still high by Western standards, it has now fallen to around the 7% level (though some suspect that the true figure is lower: facts arent always easy to come by in China). The trend is firmly downwards.

Economic Growth in China: the International Monetary Fund view
In the last few months, there have been interest rate adjustments, share suspensions and now, for two days in succession, devaluations of the currency (the first of them trumpeted as a “one-off” measure).

It’s beginning to feel as though the wheels may be coming off the bus, as some economists were warning years ago. Once again, we have been lulled into false security by the fact that such processes take so long. Once they start to unravel, they can slide fast and be acutely painful for a long time – look at Greece.

The comparison with Greece is an interesting one. Because the Greek economy is a sideshow, in the global scale of things. China, on the other hand, is the world’s second economy. If it gets into trouble, Greece is going to look like a gentle dip in the smooth running of the international financial system. It’s encouraging that voices are already being raised in the US to protect its economy against the possible effects of a Chinese downturn. They need to be heeded.

As far as I can tell, it’s an urban myth that “may you live in interesting times” is a Chinese curse. It does, however, look as though we may be about to enter some interesting times. And the cause may well be a curse from China.

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