Storm, The by Cable Vincent

Author:Cable, Vincent [CABLE, VINCE]
Language: eng
Format: epub
Tags: Finance
ISBN: 9781848870581
Publisher: Atlantic Books
Published: 2010-01-02T05:00:00+00:00

5

The Awkward Newcomers

The storm has blown up at the point at which economic boom turned to bust: boom witnessed in the surge in oil, food and other commodity prices; and bust in the credit crunch, the consequence of a collapse in financial markets and the global banking crisis, linked in turn to a bursting bubble in major residential property markets. I have emphasized that these changes reflect longstanding cyclical fluctuations which have now come together in a spectacularly powerful and damaging way. But cycles alone do not explain what has occurred without reference to major structural change in the world economy, and in particular the growth of China and other major emerging economies.

To simplify greatly a complex argument with many nuances, the rapid growth of these emerging economies, especially China, has been generating demand for raw materials and food – growing more rapidly than supply and pushing up prices. The dependence of these countries on export-led growth also supplied the world with cheap manufactures, creating a non-inflationary environment which made it possible for the USA, the UK and other Western countries to grow so rapidly, without triggering overt inflation, over the last decade. But it also led to a large accumulation of current account surpluses, and these translated into large foreign exchange reserves which, combined with the surpluses and reserves of the raw material exporters, created a vast pool of liquidity which has flowed back into Western economies. While cheap manufactures created the conditions for low inflation and low short-term interest rates, the vast accumulation of – mainly – Chinese foreign exchange earnings manifested itself in the purchase of US government bonds, keeping down long-term interest rates. This liquidity and cheap capital provided the fuel for a credit boom and the massive expansion of financial markets, and drove up asset prices, especially in housing, to unsustainable levels: hence, in due course, the crash, and the storm. It is not too far-fetched to say that the ‘nice’ era of non-inflationary growth in Western economies has been built, mainly, on Chinese labour, and that the sophisticated structures of modern financial capitalism have depended on the continued cooperation and stability provided by the Chinese Communist Party.

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