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(10 september 2011) THE CRACKS OF LONDON TO WIDEN

Economic growth is a hard thing to come by these days.   Politicians are first on the line to know about that.  Not because growth is today damned elusive in the West, but because politicians have generally taken the easy option to manage their economy for more than 20 years. 

First, extensive financial deregulation let the tiger loose.   Financial markets are now so big that they think they can call most of the shots.  Putting this tiger back into a cage will take a feat.  One financial bubble may be an accident in the course of history, but two massive bubbles in the span of a decade speaks about the damage this tiger has created.  Something is deeply wrong.

Second, easy credit and domestic consumption have created an illusion of easy economic growth, well entertained by politicians.  The resulting housing bubble and the financial crisis of 2008 may not have reached the scale of the Japanese crisis of 1990, but it is deep enough to lead the USA into the same rut.  In the space of 15 years, a nation goes from large surpluses to a big hole, from plenty of room to manoeuvre, to a point where a question mark is put on the US dollar.   Quite suddenly it looks a bit more dramatic.

The government, for the better or worse, is doing its bits to revive the economy:  After QE I and QE II, a more modest QE III is on the planning board.  But deleveraging will eventually come roosting to Washington.  At the other end, the consumer is still licking its wounds, paying back debt, and hoping the roof of his house will not fall through.

We are all finding out that real economic growth is built upon the sweat of productivity, innovation, and export markets.  Hard stuff to manage in normal circumstances, but decidedly more difficult when you are facing a massive cost challenge from Asia.   We are discovering as well that off shoring manufacturing to China had an insidious trade off:   Yes a better life for the consumer at Wal-Mart, but a great deal of growth options were signed off as well to emerging nations.  Growing through exports is just becoming a tougher game for all, not least because technology is spreading far off shores. Here the weak US dollar is playing a useful prop for the time being.

No wonder middle class in America is nervous.   Health and education costs have behaved as if completely excluded from the consumer inflation index.  Full time jobs are hard to find and pay rises stay sub inflation. Business prospects look challenging.  The emerging champions from Asia are now big enough to prowl in other emerging markets.  Within a decade, and sooner than later, they might feel ready to give it a try in Europe and America.  Soon corporate middle management, the backbone of middle class, will have a renewed fight in its hands from this competitive challenge.  If blue collars were swept away by technology, software and off shoring, then white shirts will discover that foreign engineers and managers are equally hungry and smart.

Now, how will western politicians behave with this cauldron of angry middle class, elusive growth, a stubborn China, and a debt burden that keeps growing?  We might soon find out.  Elections are forthcoming in France, Germany, USA and a change of brass in China is scheduled next year. 

Will the cracks of the London riots widen and reach the lines of despairs in Athens?   Will politicians be tempted to take from one pocket of the consumer and ask him to spend from the other one?  Will they find the words to tackle the difficult reforms lying ahead?  Or will politicians think it easier to change the rules of globalisation and pull back a little for a breathing space?   Amidst tension and worries, the search for the right compromises will loom large.

Or might the cracks of London just lead to breaking the crystal? 

André Du Sault

Posted in CFO & treasury, World economy.

Tagged with , , , , , .

5 Responses

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  1. Gérard Samet says

    La solution proviendra, comme toujours en cas de crise, de leaders, ayant une vision et acceptant de donner des règles coordonnées à la mondialisation. Le G20 est le cénacle parfait pour cela, à condition d’y trouver une coalition de politiciens déterminés que l’on a souvent appelé, même pour les femmes, des hommes d’État. Seul ce type de collectif en imposera au système financier. Mais encore faut-il le vouloir: la politique ne doit pas se faire à la corbeille.

    • Vania says

      Thought it wo’lundt to give it a shot. I was right.

  2. Lenna says

    Dag nbabit good stuff you whippersnappers!

    • Kier says

      Since the jobs bill is supposed to be for new jobs why is Biden treiathneng existing ones will be cut? Is this another state bailout that is not for creating new jobs based on Biden’s own statements? to maintain current jobs is not stimulus. s for new jobs.

  3. Jonathan Treacher says

    Excellent piece and absolutely on point. Would have been great if some solutions were posited – but then again, if they were, the author might have a glittering political career ahead of him!

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