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Economic Shift to the East

December 15, 2010

As the recovery – or lack thereof – continues, it is becoming more clear that there is an important shift in economic power away from Europe and America and toward the emerging Asian economies.  There has always been concern that the Chinese sleeping giant would awake and overtake us, but I doubt that anyone anticipated the entire western world would roll over and play dead. Interestingly, it is our “free market” ideology, once touted for toppling the totalitarian Soviet system, that is now paralyzing the West’s recovery from crisis.

The large and mature Western economies were much harder hit in the Great Recession than was Asia. The housing bubble may have started in America, but the damage quickly spread to Europe where the correction is even slower coming.  The wave of credit destruction in the wake of the housing bubble is also not restricted to the United States.   house-prices

Banking institutions in Germany and the UK were on the forefront of financial innovation, just like Wall Street.  The new methods of spreading of risk guaranteed that no one was sheltered from the collapsing housing and credit bubbles.

Despite years of continued high growth levels, China and other Asian economies have only suffered mildly by comparison to us in the West.  These export-driven countries did suffer some damage as consumers pulled in their horns to begin the process of rebuilding their personal finances.  But the developing countries still have enormous domestic markets of their own, so they have the potential to make up for lost exports.

At present, the West is refusing to adopt policies that can pull us up collectively by our bootstraps and get us moving again.  Instead, the austerity being promulgated on both sides of the Atlantic is likely to depress growth for at least another three to five years.  Deflationary pressure will keep unemployment at record levels, reducing consumer demand, keeping housing prices low, and generally depressing growth further.  The true insolvency problems of some of the weaker European countries threatens to build into another crisis, just as failing state budgets in the United States threaten to create their own fiscal problems.  Belt-tightening merely exacerbates these problems – creating further unemployment and even lower levels of monetary circulation.

Prolonged low growth in the West, along with simultaneous rapid expansion in Asia, foretells a major economic shift to the East.  Before the Great Recession, it was argued that the European Union would rise in importance as America shrank against Chinese manufacturing dominance.  That doesn’t appear to be the case anymore.

In a real free international market, well-off countries’ currency would appreciate while those in trouble would become worth less.  This process would tend to help poorer economies increase their exports while making the goods in rich countries more expensive for others.  This natural balancing mechanism currently has some problems.  China has been holding its currency at an unnaturally low value in an effort to keep their exports flowing briskly.  This process has left China holding large quantities of US treasury bills, as China essentially funds the debt needed to buy their goods.  Meanwhile in Europe, Greece and Ireland might like to devalue their currency so that they could repay their debts more easily, but they can’t, since they don’t have a currency anymore.   These impediments to natural shifts in currency value promise to further destabilize world politics.  Tensions mount when the Greeks and the Irish are working 10 hour days to pay German bankers for loans gone bad.  A flood of cheap Chinese exports keeps American workers unemployed while at the same time needing to service debt held by the Chinese.   Yet, if China allows the Yuan to float, then the value of their US debt holdings will undoubtedly fall, and they will be unhappy.

In the post-Reagan world, the free market has meant the pursuit of profit without conscience or consequence.  Globalization has turned the whole world into the capitalist’s “commons,” while the politics of power has given the elites the legitimacy of governments.  We are now witness to a tragedy of the commons on a global scale as each corporation, bank, country, state, and billionaire stakes out their claim to their fraction of the commons while simultaneously despoiling the lot.

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