The World Economy

[Azarkon]

The future most definitely does not belong to China, or India, or America, or anybody alone. In my view, regional economic blocs are likely to arise, based on the principle that trading between countries near one another is easier and more profitable (less transport fees, etc.) In my view, there are four geographical blocs that can rival one another in the near term:

 

Europe, with the EU at the center

East Asia, with China at the center

North America, with the US at the center

South Asia, with India at the center

 

Of these, the top three are already very powerful. If you combine the GDP PPP of China, Japan, Korea, and Taiwan you'll get a number that's comparable to that of the EU's and the US's. China (and North Korea if it ever reforms), of course, still has a lot of potential for growth, so this bloc will likely become more powerful barring major political and/or environmental disasters. South Asia is not yet there, but they have good demographic profiles and recent growths. South America is another potential bloc, but its ascension seems even further in the distance.

 

And then you have the swing states - places like Russia, Turkey, Australia, even Vietnam. They don't quite belong to any one bloc, geographically, but are not strong enough to be blocs in and of themselves. These states will likely continue to "swing" from side to side, depending on their own interests and situations.

 

What's interesting, however, is that these blocs do not necessarily correspond to political blocs. China, Japan, and Korea do not get along with one another. Neither does Britain and the EU (though the conflict there is more tame). The US may very well court India as a counterweight to China and Pakistan. Meanwhile, tensions within the EU prevent the formation of a common foreign policy.

 

So, what does all this mean? To me, it means that you can't judge the politics of the future based on the economic powerhouses of today. Geographically, it is likely that the aforementioned blocs will be the centers of economic power; politically, however, the situation is much more complicated. Militarily - well, let's not even go there.

 

Still, the lesson to take away from all this is that things change, and yet, paradoxically, things also stay the same: http://en.wikipedia.org/wiki/List_of_regio..._past_GDP_(PPP). Regions like China and India have long been powerhouses - for thousands of years, they comprised a huge percentage of the world's economy. Yet, within a few centuries, the rise of the West eclipsed them all. But this spurt, though it was world-changing, was also transient - it was only a matter of time before other centers adopted the lessons of the West and embarked upon their own modernizations. And so, we're moving back towards the old paradigm of Europe, East Asia, and South Asia being major centers. But as if to insist that change is possible, the colonization of the Americas resulted in the emergence of another mega-bloc, and the decline of the Middle-East resulted in the loss of a mega-bloc. The future is not certain, but it is also not arbitrary.

Edited January 27, 2009 by Azarkon

[Humodour]

The future most definitely does not belong to China, or India, or America, or anybody alone.

 

I agree wholeheartedly.

 

In my view, regional economic blocs are likely to arise, based on the principle that trading between countries near one another is easier and more profitable (less transport fees, etc.)

 

I disagree for a simple reason: it won't happen. Regional trade actually isn't easier or more profitable. It certainly hasn't been the significant force shaping economies in the past. Globalisation only hinders it further. This disagreement obviously frames the rest of this post.

 

In my view, there are four geographical blocs that can rival one another in the near term:

 

Europe, with the EU at the center

East Asia, with China at the center

North America, with the US at the center

South Asia, with India at the center

 

Far too simplistic for the reasons above. I believe each of those countries will have their power spread through the entire world, which is pretty much already the case. Australia relies on China, America, AND Japan for trade (among many other smaller partners). Which is why we typically don't suffer from recessions in any one country, only global ones (like when the USSR collapsed). Because China is in (or near) a recession now (by economist standards, not newspaper ones - 6% drop in GDP growth is enormous), Australia will enter one, too.

 

And then you have the swing states - places like Russia, Turkey, Australia, even Vietnam. They don't quite belong to any one bloc, geographically, but are not strong enough to be blocs in and of themselves. These states will likely continue to "swing" from side to side, depending on their own interests and situations.

 

Yep. Australia's even gearing up for war because our leaders expect a resource race (which I don't think will happen). It doesn't pay to be an unguarded diamond in a den of thieves.

 

What's interesting, however, is that these blocs do not necessarily correspond to political blocs. China, Japan, and Korea do not get along with one another. Neither does Britain and the EU (though the conflict there is more tame). The US may very well court India as a counterweight to China and Pakistan.

 

Then they're not exactly blocs, are they?

 

Meanwhile, tensions within the EU prevent the formation of a common foreign policy.

 

Sort of. I mean they argue endlessly over the details but you can't deny they've concrete overarching ideology with the will and means to back it up (NATO). Expect hell if any country tries to go to war again.

 

So, what does all this mean? To me, it means that you can't judge the politics of the future based on the economic powerhouses of today. Geographically, it is likely that the aforementioned blocs will be the centers of economic power; politically, however, the situation is much more complicated. Militarily - well, let's not even go there.

 

This makes a lot of sense. However I disagree with your use of the term 'bloc' because it has distinctly militaristic/political connotations.

 

Still, the lesson to take away from all this is that things change, and yet, paradoxically, things also stay the same: http://en.wikipedia.org/wiki/List_of_regio..._past_GDP_(PPP). Regions like China and India have long been powerhouses - for thousands of years, they comprised a huge percentage of the world's economy. Yet, within a few centuries, the rise of the West eclipsed them all. But this spurt, though it was world-changing, was also transient - it was only a matter of time before other centers adopted the lessons of the West and embarked upon their own modernizations. And so, we're moving back towards the old paradigm of Europe, East Asia, and South Asia being major centers. But as if to insist that change is possible, the colonization of the Americas resulted in the emergence of another mega-bloc, and the decline of the Middle-East resulted in the loss of a mega-bloc. The future is not certain, but it is also not arbitrary.

 

I think one thing it's safe to predict is that Africa will take China and India's place as an economic powerhouse in the next 50 years, though, because economic growth is logistic, and once China and India develop sufficiently, the capitalists will realise it's cheaper to offshore to Africa. It'll be weird to hear Indians complaining about their job being outsourced to Africa.

[Humodour]

Because they want to? I don't know, why don't you ask their members of parliament? Turkey has been dabbling with membership to the EU and it's predecessors since 1949. Even the current Islamist party in power is pressing to join the EU.

 

A lot of countries in the EU are also quite capable of going their own way. Aaaaand?

 

1949? There was no EU back then, let alone a Coal-steel union that was formed in 1953.

 

http://en.wikipedia.org/wiki/Council_of_Europe

 

So what currency should I trade my soon to be worthless US dollars for?

 

Nothing. Most projections show the US dollar won't collapse, and those that do show other countries' currencies collapsing more, meaning the USD is still the dominant currency.

 

The Euro isn't a bad one, though. It's like 20% of world reserves (the USD is like 70%).

 

Um, anyone else notice that Iceland's government just collapsed? Wow.

 

Not really, they are just calling early elections. This might sound odd to Americans, but it happens in other countries when there's things like a loss of confidence, or supply (budget) is blocked, or the executive (President, Prime Minister, etc) calls for it.

 

I found the total collapse of Iceland's economy to be far more interesting - due to their small size, most of their investment is foreign, which obviously killed them when America and Britain caught a severe case of the economic 'flu.

 

Through it all they're still probably one of the richest countries in the world per capita, with one of the highest standards of life.

 

i don't know if it is available, but the PPP (purchasing power parity) is a better GDP indicator than the nominal, which is what these values are. china ranks differently, in particular (they're the biggest difference of the top economies).

 

taks

 

The thing about PPP is it's for internal comparison. It says little to nothing about international strength or competitiveness. Of course, GDP growth is calculated based on internal growth for obvious reasons (i.e. to eliminate fluctuations based on currency shift).

 

But yes, China's doubles with PPP to about $8 trillion.

 

It'd be intresting to see what teh difference is in access to services. Not just HDI, but things like doctors roads, electricity, etc.

 

Britain should always be Eurosceptical. Our independence has always relied on no one power gaining total ascendancy on the continent. I'm a fan of the EU when it stops us fighting one another. But I'm against it in many many smaller ways. The lack of demcratic accountability is one.

 

When I first learnt about the EU I was puzzled as to why Britain was a member "They're about as European as your average Australian!".

 

As far as an economic community goes, I still think that the Commonwealth made far more sense. Given that we each had things we actuallly wanted to trade, as opposed to the EU where we all make the same things.

 

It pissed Australians and New Zealanders off a lot when you guys entered the EU. So we set up a bunch of FTAs with eachother and South-East Asia instead. In hindsight, our economy got stronger because of it, so thanks. :D

[Wrath of Dagon]

So what currency should I trade my soon to be worthless US dollars for?

 

Nothing. Most projections show the US dollar won't collapse, and those that do show other countries' currencies collapsing more, meaning the USD is still the dominant currency.

 

The Euro isn't a bad one, though. It's like 20% of world reserves (the USD is like 70%).

 

But is anyone else running as huge a debt as we are?

[Enoch]

Az is also forgetting the global trading bloc called the WTO. There are only a dozen or so non-member states left, and the cost of any country or group of countries withdrawing from the pact would be quite steep. The WTO agreement contains provisions allowing for regional sub-agreements, but these sub-agreements cannot alter the basic WTO agreements with respect to trading partners outside the sub-agreement.

 

Anyhow, here's the essential reading on how the global financial system got where it is: All four parts of the Washington Post's "What Went Wrong" series, and Michael Lewis' account in Portfolio (contains profanity). These articles are U.S.-centered, but most of the things that can be said about the financial industry in New York were also true of the financial industry in London, Frankfurt, Hong Kong, etc.

 

Actually, while I'm thinking about it, a side note on China: I don't get the optimism I'm seeing in some circles. Their banks are almost certainly in worse shape than western banks (due to lending decisions made based on political exigencies and the need to maintain full employment instead of simple return-on-investment), although you'd never know it from what reaches the press. There's a lot of fear in the U.S. about the amount of U.S. debt that is currently in Chinese hands. These people are forgetting a core truth of lender-borrower relations: lend me a little money, and you own me; lend me a sh!tload of money, and I own you. These Chinese debtholders are terrified of the U.S. monetizing its debt (i.e., triggering high inflation to reduce dramatically the value of what it owes), and they'll do whatever they can to prevent this, including continuing to buy more U.S. debt to stave off this inflation. On top of that, poor economic times tend to trigger social instability, particularly against already-repressive regimes. I think you'll see more than one famine-related riot in the coming years, potentially in China and in some of the petro-economies.

[Enoch]

So what currency should I trade my soon to be worthless US dollars for?

 

Nothing. Most projections show the US dollar won't collapse, and those that do show other countries' currencies collapsing more, meaning the USD is still the dominant currency.

 

The Euro isn't a bad one, though. It's like 20% of world reserves (the USD is like 70%).

 

But is anyone else running as huge a debt as we are?

http://en.wikipedia.org/wiki/List_of_count..._by_public_debt

 

The absolute value of U.S. debt is high, but when viewed relative to the size of its economy, it's reasonable by international standards.

[Wrath of Dagon]

Hmm, interesting, Japan is near the top, just the opposite of what I'd expect. Of course our debt has been going up dramatically last year and will almost certainly get much worse in the future.

[Gorgon]

Japan is undergoing a serious recession as well, its banks particularly have been hit hard by the credit crisis, and because the banking sector is so huge they have felt it before most countries.

 

Interesting to see we aren't on the list at all, were in the black. (Denmark that is)

Edited January 27, 2009 by Gorgon

[Azarkon]

Az is also forgetting the global trading bloc called the WTO. There are only a dozen or so non-member states left, and the cost of any country or group of countries withdrawing from the pact would be quite steep. The WTO agreement contains provisions allowing for regional sub-agreements, but these sub-agreements cannot alter the basic WTO agreements with respect to trading partners outside the sub-agreement.

 

Anyhow, here's the essential reading on how the global financial system got where it is: All four parts of the Washington Post's "What Went Wrong" series, and Michael Lewis' account in Portfolio (contains profanity). These articles are U.S.-centered, but most of the things that can be said about the financial industry in New York were also true of the financial industry in London, Frankfurt, Hong Kong, etc.

 

Actually, while I'm thinking about it, a side note on China: I don't get the optimism I'm seeing in some circles. Their banks are almost certainly in worse shape than western banks (due to lending decisions made based on political exigencies and the need to maintain full employment instead of simple return-on-investment), although you'd never know it from what reaches the press. There's a lot of fear in the U.S. about the amount of U.S. debt that is currently in Chinese hands. These people are forgetting a core truth of lender-borrower relations: lend me a little money, and you own me; lend me a sh!tload of money, and I own you. These Chinese debtholders are terrified of the U.S. monetizing its debt (i.e., triggering high inflation to reduce dramatically the value of what it owes), and they'll do whatever they can to prevent this, including continuing to buy more U.S. debt to stave off this inflation. On top of that, poor economic times tend to trigger social instability, particularly against already-repressive regimes. I think you'll see more than one famine-related riot in the coming years, potentially in China and in some of the petro-economies.

 

Famine-related riots are unlikely to occur in China these days because of two things: 1) China is self-sufficient with regards to food and 2) it's got a lot of treasury reserves to buy food with in case harvest fails due to natural disasters. The greatest risk for food problems are actually places that are isolated from the world, like North Korea. The threat of the financial crisis comes in two forms: 1) less food aid from developed countries as they cut back and 2) protectionism, which has serious consequences for world trade & therefore food security.

[Azarkon]

I disagree for a simple reason: it won't happen. Regional trade actually isn't easier or more profitable. It certainly hasn't been the significant force shaping economies in the past. Globalisation only hinders it further. This disagreement obviously frames the rest of this post.

 

I don't think regional trade will replace global trade. Regional trade is the elephant in the room, so to speak - people don't talk about it but it looms at large. Look at the US's trade with Canada & Mexico, for example: http://www.census.gov/foreign-trade/top/ds...11/balance.html. For all the attention the media pays to China, it's with the countries closest to us that we trade the most. China has a similar pattern (Japan, South Korea, Taiwan, and HK are major trading partners) but because those countries do not have the capability to absorb its export-based economy, it turns to the US. In the future, as China's economy modernizes, it will probably not depend on exports as much; consequently, as its development level reaches that of the US's, there will probably be less trade between the two countries, as China turns to more convenient partners close by. The thing to understand is, transport fees do matter, especially in a world where everyone is competing for limited energy resources.

 

As far as the use of the term "bloc" goes I was more referring to, I suppose, the "hubs" of economic power in the foreseeable future. I do not see Africa as a short-term hub because it has systematic political and infrastructural problems. It's like North Korea vs. China - sure, the former has even cheaper labor and is strategically positioned to take advantage of the East Asian trading game, but it's got a regime that is, for the lack of better words, anti-business. By contrast, even though China has a repressive regime, it is very business-friendly. Politics, social organization, and even culture do matter - it's not simply a dogmatic process by which the whole world invariably rises, one after another, like some tuned clockwork, and that's part of what I was trying to say through "it's not certain, but it's not arbitrary, either."

 

Consider this: from the Wikipedia page I linked, India, China, and Europe comprised some 70-80% of world GDP for the last two thousand years. By contrast, Africa, despite its vast continental area and role as the cradle of humanity, comprised around 10% on average or less. Why is this, and how can it be fixed? Those are the questions African leaders must answer if they are to become a major economic hub in the coming years. It's certainly possible for Africa to rise and take India and China's place as economic powerhouse, but in the short-term (ie next fifty years), I doubt it's guaranteed. (At the same time, however, I don't expect India & China to depend on cheap, export-driven labor forever; both of them are developing technology-based economies, and will eventually be competing with the US & Europe, not Africa.)

Edited January 27, 2009 by Azarkon

[Monte Carlo]

Consider this: from the Wikipedia page I linked, India, China, and Europe comprised some 70-80% of world GDP for the last two thousand years. By contrast, Africa, despite its vast continental area and role as the cradle of humanity, comprised around 10% on average or less. Why is this, and how can it be fixed? Those are the questions African leaders must answer if they are to become a major economic hub in the coming years. It's certainly possible for Africa to rise and take India and China's place as manufacturing powerhouse, but in the short-term (ie next fifty years), I doubt it's guaranteed.

 

1. Free Trade. Real free trade. I suspect the new US President, a machine Democrat, won't be very keen on that. The EU definitely won't be (q.v. the aforementioned CAP), the preferred vehicle being aid packages (spent largely on gold-plated limos and helicopter gunships for the generals).

 

2. The mis-directed US Neo-Con zeal directed at Iraq would have been better focussed on Africa. South Africa would need to be won around, sure, but stabilizing East Africa from Zimbabwe to Somalia would have had as much, if not more, of an emmolient effect on global instability and the "War on the Abstract Pronoun." I imagine many Zimbabweans would have been throwing flowers in front of the US armoured columns, as opposed to bombs.

 

I hope to see Africa on it's feet in my lifetime, with decent, functioning democracies, tangible health outcomes for it's people (and the defeat of HIV) and growing economies of the type the continent could easily develop (and deserves). Unfortunately, trading blocs and patronising cant from Western politicians continues to frustrate that laudable objective.

 

Cheers

MC

[Enoch]

Famine-related riots are unlikely to occur in China these days because of two things: 1) China is self-sufficient with regards to food and 2) it's got a lot of treasury reserves to buy food with in case harvest fails due to natural disasters. The greatest risk for food problems are actually places that are isolated from the world, like North Korea. The threat of the financial crisis comes in two forms: 1) less food aid from developed countries as they cut back and 2) protectionism, which has serious consequences for world trade & therefore food security.

Fair point. Widespread famine probably isn't all that likely with regard to China. (Although having sufficient food inside such a large country isn't necessarily the same as having it in the hands of people who need it. Outside the big coastal cities, China's internal infrastructure is not a strongpoint, particularly after last year's earthquake and the resulting floods.) But if they falter in maintaining employment levels because of declining demand for their exports, joblessness/poverty works just as well as a cause for internal strife.

[Meshugger]

Because they want to? I don't know, why don't you ask their members of parliament? Turkey has been dabbling with membership to the EU and it's predecessors since 1949. Even the current Islamist party in power is pressing to join the EU.

 

A lot of countries in the EU are also quite capable of going their own way. Aaaaand?

 

1949? There was no EU back then, let alone a Coal-steel union that was formed in 1953.

 

http://en.wikipedia.org/wiki/Council_of_Europe

 

That is a seperate entity from the EU, but i am not suprised that you brought that one up, i have been mixing those up from time to time.

[Gorgon]

My god, does that still exist. What exactly do they do, manage the European song contest..

[Walsingham]

Corruption will do for Africa long after trade relaxes, Monte. Never mind the HIV holocaust in waiting.

[Meshugger]

The Kreml advices for less state intervention in the US economy

 

I repeat: Putin (=Kreml) wishes for less state intervention in the US economy.

 

Who ever would've though that happening?

[Walsingham]

The Kreml advices for less state intervention in the US economy

 

I repeat: Putin (=Kreml) wishes for less state intervention in the US economy.

 

Who ever would've though that happening?

 

Well, as the Pope of state meddling in finance maybe he's qualified to render commentary?

[Meshugger]

Speaking of executive bonuses, i stumpled upon this link.

 

It reminds me of what my professor in finance once said long before the crisis started, something in the vein of: "The very reason on why executives are payed these ridicolous amounts of bonuses, are to ensure that they don't quit and start to speculate on the company's stock themselves. In this case, bonuses are given in order keep up with the gap that a private investor would potentially earn. The instruments on how to measure these 'gaps' may vary, but the board usually take the safe route and pay more, and in some cases, a lot more than what could be earned at the stockmarket."

 

Moral of the story? The system is built upon awarding the bad guys at the expense of the good guys.

[Walsingham]

I still don't understand what is actually wrong with a good old fashioned peasant lynch mob. I'm being serious.

[Aristes]

A lynch mob may, perhaps, serve justice, but a mob is never just. The very heart of a mob is caprice, and justice is never random.

 

/fortune cookie

[Meshugger]

I still don't understand what is actually wrong with a good old fashioned peasant lynch mob. I'm being serious.

 

A symbolic 'tar and feather' would be nice. Think of the headlines that would make. Even if you would go to jail, it would almost be worth it.

[Enoch]

A lynch mob may, perhaps, serve justice, but a mob is never just. The very heart of a mob is caprice, and justice is never random.

 

/fortune cookie

Fair point, especially when one considers that the core problems were being handled by only a small percentage of these firms' employees. Take AIG, for example-- their core insurance business (i.e., the vast majority of their employees) has been consistently profitable throughout this, but the management of their "Financial Products" subsidiary, which was trading in Credit Default Swaps, managed to take on enough bad risk (trusting computer modeling that never considered the possibility of lots of firms/investments/loans going bad all at once) to swamp the rest of the company and force the Fed to buy up 80% of it.

 

As to Mesh's point, I'd mark the key point as Salomon Brothers going public in 1986, which set off a chain reaction of all the other big financial firms having their own IPOs so that they could keep up. Prior to that point, all the Wall Street firms were partnerships, mostly doing fee-based work for clients, but also doing some trading using the firm's own resources (i.e., the partners' money). When you switch from trading your bosses' money to trading with the money of thousands of anonymous shareholders, your tolerance for risk increases dramatically (especially when that risk is comfortably off in the future, well after you'll have cashed your annual bonus check). Plus, the premium you have to pay traders to keep them honest now extends upward to all your executives and the even the Board of Directors.

[Walsingham]

If that's true about AIG tehn I'd point out how common it is. Far far FAR too many people take their computer models as gospel, without questioning the assumptions. The insurance losses on Katrina were similar. Everyone was modelling the probability of single system failures, not multiple system failures. It's part of the problem you get when you have very clever mathematicians making models administered by bored pen pushers.

[Enoch]

If that's true about AIG tehn I'd point out how common it is. Far far FAR too many people take their computer models as gospel, without questioning the assumptions. The insurance losses on Katrina were similar. Everyone was modelling the probability of single system failures, not multiple system failures. It's part of the problem you get when you have very clever mathematicians making models administered by bored pen pushers.

It was a big part of it. If you've got an hour or so to burn, here's the first part of the WaPo's 3-part series on the events leading up to AIG's collapse:

 

The Beautiful Machine