For a generation after World War II, the world financial system was, by modern standards, remarkably crisis-free — probably because most countries placed restrictions on cross-border capital flows, so that international borrowing and lending were limited. In the late 1970s, however, deregulation and rising banker aggressiveness led to a surge of funds into Latin America, followed by what’s known in the trade as a “sudden stop” in 1982 — and a crisis that led to a decade of economic stagnation. Latin America eventually returned to growth (although Mexico had a nasty relapse in 1994), but, in the 1990s, a bigger version of the same story unfolded in Asia: Huge money inflows followed by a sudden stop and economic implosion. Some of the Asian economies bounced back quickly, but investment never fully recovered, and neither did growth. Most recently, yet another version of the story has played out within Europe, with a rush of money into Greece, Spain and Portugal, followed by a sudden stop and immense economic pain. As I said, although the outline of the story remains the same, the effects keep getting worse. Real output fell 4 percent during Mexico’s crisis of 1981-83; it fell 14 percent in Indonesia from 1997 to 1998; it has fallen more than 23 percent in Greece. So is an even worse crisis brewing? The fundamentals are slightly reassuring; Turkey, in particular, has low government debt, and while businesses have borrowed a lot from abroad, the overall financial situation doesn’t look that bad. But each previous crisis defied sanguine expectations. And the same forces that sent money sloshing into Turkey also make the world economy as a whole highly vulnerable. You may or may not have heard that there’s a big debate among economists about whether we face “secular stagnation.” What’s that? Well, one way to describe it is as a situation in which the amount people want to save exceeds the volume of investments worth making. When that’s true, you have one of two outcomes. If investors are being cautious and prudent, we are collectively, in effect, trying to spend less than our income, and since my spending is your income and your spending is my income, the result is a persistent slump.
Posted on: Fri, 31 Jan 2014 12:39:56 +0000
Trending Topics
Recently Viewed Topics
© 2015