A recent article in the Financial Post reports that despite our best efforts to contain and prevent major financial crises, we may be in a more precarious state than ever before.
A new analysis by the markets team at Deutsche Bank finds that far from getting better at preventing and managing financial crises, we’ve actually got a great deal worse; since the breakdown of the Bretton Woods fixed exchange rate regime in 1973, these events have become a lot more frequent than they were before.
While the Deustche analysts make reference to the usual culprits, such as financial deregulation and mounting debt, the author gives numerous examples of how globalization creates the conditions that lead to large-scale economic meltdowns.
Globalization inevitably leads to the establishment of larger and more complex economic systems. As integration between the world’s nations escalates, the process of enacting laws and regulations, as well as implementing the optimal fiscal and monetary policies, becomes much more arduous. The differences between nations in terms of standard of living, social safety net expectations, unemployment, technological innovation, regulatory frameworks, cultural practices, social norms, and the like, makes the undertaking of selecting a one-size-fits-all economic policy a convoluted mess.
What we are now seeing, after many decades of globalization, is that the dismantling of borders and protectionist trade policies has brought about a system whose sole purpose is to accomplish two things:
- Cut costs
- Optimize efficiency
In order to cut costs and optimize efficiency, the proponents of globalism have dedicated themselves to creating trade policies that ensure capital and labour is as mobile as possible, allowing it to travel to where it is needed most.
Unfortunately, this has resulted in depressed wages and other deflationary effects in Western nations. Canadians now compete with the world, not just other Canadians. If you thought that Canadian jobs are for Canadians only you’re wrong – they are for everybody in the world.
As the world continues to integrate competition will necessarily increase. And as competition intensifies wages will continue to drop and profits will become razor-thin (theoretically, in a world of perfect competition and economic efficiency, profits are zero for any firm).
However, as James Kunstler would say, “Efficiency is the straightest path to hell.”
As things get more centralized the points of failure aggregate, leaving us in a vulnerable state, dependent on one gargantuan entity to keep the system alive and functioning, with no other checks and balances.
Inevitably, a black swan lurking in the background will precipitate a major crash that will morph into a contagion, taking down the whole system.
A large centralized system with no redundancies built in works miraculously well – until it doesn’t.
Once another global financial crises does occur the politicians and “economic experts” will, in a nonchalant manner, simply bail out the banks and hedge funds and introduce endless rounds of monetary and fiscal stimulus to paper over the damage. Nothing will be done to address the underlying problems – and if such short term solutions simply kick the can down the road and create the conditions for future crises (blowing economic bubbles is the way to go for our leaders), it’s not like our political leaders will still be in office at the time to take the blame, won’t they?