In retrospect, it wasn’t hard to see that the markets were becoming dangerously unstable. Germany had just adopted a new monetary system, and Europe was being flooded with cheap German money. Greece had signed up to a monetary union with Italy and France but was struggling to hold it together.Financial markets had been deregulated. New technologies were transforming production and communications, allowing money to move across borders at lightening speed.
And a massive new industrial power was flooding the world with cheap manufactured goods, blowing apart old industries.When it all fell apart in an almighty crash, it was only to be expected.
A prophesy for London, New York or Berlin in 2012? Not exactly. It is a description of Vienna in 1873. In that year, in one of the great crashes of all time, the Austrian markets triggered collapses across Europe, swiftly followed by an equally spectacular collapse in New York. It was the start of what economic historians call the Long Depression, a prolonged period of volatility, unemployment and slumps that lasted an epic 23 years, only coming to an end in 1896.Read the rest at MarketWatch
This slump won’t end until 2031
by Matthew Lynn, chief executive of Strategy Economics, a London-based consultancy. His latest book The Long Depression: The Slump of 2008-2031 is published by Endeavour Press.
Interesting historical comparison. Makes some good points.
http://www.youtube.com/watch?v=vs1DSl4WDFA
ReplyDeleteThis statement left me puzzled:
ReplyDelete"The dollar is in long-term decline as a reserve currency, and as the anchor for the global monetary system, but there is still not much sign of what will replace it."
How can dollar be declining as reserve currency if there's nothing trying to replace it? Makes no sense.
Ken, there is a lot of dissatisfaction with the USD as the global reserve currency coming from China, Russia, and other quarters, from those who think that the Fed is irresponsibly "printing" and it will lead to US inflation and dollar devaluation.
ReplyDeleteThey don't get that 1) this is not the case, and 2) that the issuer of the global reserve currency has to run deficits and accumulate debt under the current system in order to create a supply of currency and govt securities sufficient to meet global demand.
At the moment TINA to the USD. Just look at where the funds are flowing, even though US tsy yields are at historical lows and the ROW is begging the Fed for more $.
But Lynn is correct in saying that the global system needs some alternative yet to be created. The push is on for it, and with the global economy growing as it is, along with population and the proliferation of technology, the US will not longer be in the position of providing the global reserve as the world's largest economy. Something else will evolve over time, but what that may turn out to be is still quite unclear.
Understand all that .... still think the statement I quoted is illogical on the face of it.
ReplyDeleteNot sure why the world "needs" an alternative to the dollar, but if one should eventually emerge, that shouldn't be any particular problem for the U.S., right?
It would be good for the US because the issuer of the global reserve currency has to accommodate global needs in addition to running its own monetary and fiscal policy. These can at times be at odds.
ReplyDeleteThe global reserve currency is the most desirable currency in which to save, so to keep the fx rate from rising beyond what the nation desires — the point at which exports are adversely affected — there must be sufficient volume to accommodate savings desire. Right now, that's the USD.
The likely interim solution before going to a more global model is several national currencies functions as reserve currencies. That is already partially the case, but now the euro, pound sterling and yen are somewhat in disfavor because of the pressure on the EZ, UK, and Japanese economies. The US, being the world's only superpower and having the largest and most flexible economy, has the most desirable currency in which to save, and it can provide the volume desired if it chooses.
The global reserve currency is also the currency that dominates international trade. As the world develops a characteristically global economy with emerging nations developing quickly, there is a perceived need for a more global solution. What that might look like is being debated, but it isn't on the drawing boards yet.
ReplyDeleteI don't think that the global financial crisis is anywhere near being over, and I also think that part of the process of its resolution will be a reconfiguring of international institutions, making them more international rather than Western-dominated. Again, what this will look like is unclear. But there is push in that direction by the emerging economies, especially BRIC — the big ones.
Tom -
ReplyDeleteSounds like it would be quite a feat.
Not a currency that I would want to be indebted in.
Who is China to carp about printing money?