Fareed Zakaria is the editor of Newsweek International, and wrote an excellent editorial for the magazine’s Davos Special Edition last month. The special edition was entitled, “Is That All?” and looked at the global recession from a number of different perspectives. Zakaria’s editorial was entitled, “The Roots of Stability”. (I can’t find the edition or his editorial online (why not, I wonder?), but to read something very similar he wrote last year, see here.)
Zakaria’s central thesis was that this recession, although it will probably be named “The Great Recession” has been shorter and less potent than was feared. The system, he asserts, is remarkably stable. He suggests that some of the reasons for this include the fact that governments learned lessons from the last Great Depression, and did not descend to self-interest, rather choosing to embark on massive state support for their economies; that extensive social safety nets exist across most of the industrialised world; that large “developing” nations, like Brazil, China, India, South Africa and others have acted prudently, keeping interest rates up and restricting credit during the bubble; and now there is a return of confidence in the average person around the world.
But the main reason Zakaria believes we have survived a truly horrific economic collapse is that the system is more stable than we think. He argues that there are three key forces for stability, each reinforcing the other and each historical in nature.
In summary, the three forces are:
- Great Power Peace – you need to go back about 400 years to find a period of such prolonged peace between the world’s great nations. Peace, like oxygen, is something we don’t think about when we have it. It is the bedrock of economic stability and trade, and, possibly for the first time in human history has created a global economic system in which everyone is invested.
- Low inflation – The foundations for this factor were laid in the 1970s and have continued in all but a few countries. This was a precondition for sustained growth and stability.
- Technological connectivity – globalisation has existed for a long time, but mainly in the form of trade (at a distance) – you made products here and sold them abroad. Today, globalisation has a fuller meaning, with multinational countries operating global supply chains, people connecting across boundaries every day and knowledge dispersed throughout the world. Information is shared, and travels quickly around the world system.
A new era has certainly dawned, and I believe it will take a lot to bring it down.
On my Facebook page, NEIL SHERIDAN (a super sharp guy working in financial services in Dubai) said:
I read somewhere that the time to get out of the markets is when someone announces a ‘new paradigm’ or the ‘end to boom and bust’ or something of the sort – can only end in tears!
Neil, I am not saying either of those things. I am just saying that I think the system is more stable than it looks. Paradoxically, that “should” protect us from big spikes on the upside as well. So, smaller booms and smaller busts in the future? But, I am definitely NOT saying that the business cycle is over 🙂
(Thanks for keeping me honest, though)