For the first time since World War II, as a recent report
points out, the USA, Europe and Japan are all simultaneously
in economic recession.
Merrill Lynch projects that if current trends persist, the
knock-on impacts on China is likely to result in a 2009 oil
price of US$25.
Is this prediction correct? No one can answer categorically.
In fact, many a professional reputation has been lost in the
oil price projection business alone.
There is no crystal ball that will allow anyone to forecast
with any degree of certainty what will be the trajectory for
the major economies of the world over the coming few years
(the fortunes of remaining economies, such as Trinidad and
Tobago, are highly dependent on the former).
What we are, therefore, facing is a highly uncertain economic
future.
Although we cannot accurately forecast or predict outcomes,
we do need to attempt to anticipate the future, utilising
an approach termed “foresighting.”
This essentially involves sketching plausible futures and
then teasing out policy implications.
I wish to suggest, in this context, that there are three such
plausible world economic scenarios that could unfold.
Hiccup scenario
The first scenario is what I would dub the “hiccup”
scenario, in which the current financial meltdown proves to
be a very temporary, short-term hiccup—storm in a teacup,
really—which soon passes with everything back to “honky-dory’”in
a year or two.
Depression scenario
The second and extreme worst-case scenario is that the current
metropolitan recession will morph into a global depression.
Some of the “despatches” that I am picking up on
the e-mail already are speculating as to this possibility.
Volatility scenario
The third scenario is that the world economy is now on a trajectory
of significant volatility in the foreseeable future, where
stock prices and those of currencies and commodities (including
oil and natural gas) will experience short, upward spikes,
followed by longer periods of downward price oscillations.
Scenario choice?
Each scenario, to be plausible, has to be linked to interpretation
of the root causes of the current financial meltdown.
The simple—I would argue simplistic—version is that
this has been caused by the sub-prime crisis in which banks
lend mortgages to people who really could not afford them.
This is, in my view, the “Nancy story” version.
As I have argued in earlier columns, the sub-prime crisis
is simply the latest in a series of speculative bubbles that
have occurred since the turn of the 1980s.
The root cause has been the breakdown of the regulatory regimes
established after World War II at the Bretton Woods Agreement:
itself a creature and outcome of the Great Depression of the
1930s and the world war.
The election of Margaret Thatcher in the UK in 1979 and Ronald
Reagan in the USA in 1980 marked a sea-change in the dominant
economic theory and policy.
“Free markets” became the new orthodoxy and led
to the triumph of market fundamentalism and either the repeal
of regulatory laws or the downgrading of regulatory practice.
In so far as my hypothesis as to root cause is valid, the
logical derivative is that for the first “hiccup”
scenario to be realised, there would be need for an immediate,
urgent and decisive intervention to de-regulate national economies
and, as well, international economic flows given the 24/7
trading now possible on stock, currency, commodity, real estate
and financial markets.
If history is any guide, it teaches us that the last time
the leading economies were in an analogous situation it took
15 years—and the experience of an economic depression
and World War II (ie 1929-1944)—for the Bretton Woods
Agreement to be negotiated.
The more plausible scenarios, given my root cause hypothesis,
is that the “volatility” or “depression”
scenarios are more likely to prevail for a significant period
before we get a Bretton Woods 2.
I suspect that the former (volatility) is more probable, since
some of the regulatory elements of the Bretton Woods are still
in place at the national level. However, it would still be
necessary to tease out the likely implications of the depression
scenario.
The advantage of selecting these two latter scenarios as the
basis on which to plan is that if one is wrong, then there
is “fat” available for use.
If correct, however, then this “fat” will be available
to be spread thinly over the lean years.
Alternatively, if we assume the best (hiccup scenario) and
the others prevail, we are going to have to dig into the society’s
economic “bones.”
Next week, I will turn to some of the policy implications
of these scenarios for T&T.
This is a version of presentation on a panel discussion on
the Implications of the Financial Meltdown for T&T at
UWI on December 4.
