One year ago, the world seemed as if it might be coming apart. The global financial system, which had fueled a great expansion of capitalism and trade across the world, was crumbling. All the certainties of the age of globalization"”about the virtues of free markets, trade, and technology"”were being called into question. Faith in the American model had collapsed. The financial industry had crumbled. Once-roaring emerging markets like China, India, and Brazil were sinking. Worldwide trade was shrinking to a degree not seen since the 1930s.
Pundits whose bearishness had been vindicated predicted we were doomed to a long, painful bust, with cascading failures in sector after sector, country after country. In a widely cited essay that appeared in The Atlantic this May, Simon Johnson, former chief economist of the International Monetary Fund, wrote: "The conventional wisdom among the elite is still that the current slump 'cannot be as bad as the Great Depression.' This view is wrong. What we face now could, in fact, be worse than the Great Depression."
Others predicted that these economic shocks would lead to political instability and violence in the worst-hit countries. At his confirmation hearing in February, the new U.S. director of national intelligence, Adm. Dennis Blair, cautioned the Senate that "the financial crisis and global recession are likely to produce a wave of economic crises in emerging-market nations over the next year." Hillary Clinton endorsed this grim view. And she was hardly alone. Foreign Policy ran a cover story predicting serious unrest in several emerging markets.
Of one thing everyone was sure: nothing would ever be the same again. Not the financial industry, not capitalism, not globalization.
One year later, how much has the world really changed? Well, Wall Street is home to two fewer investment banks (three, if you count Merrill Lynch). Some regional banks have gone bust. There was some turmoil in Moldova and (entirely unrelated to the financial crisis) in Iran. Severe problems remain, like high unemployment in the West, and we face new problems caused by responses to the crisis"”soaring debt and fears of inflation. But overall, things look nothing like they did in the 1930s. The predictions of economic and political collapse have not materialized at all.
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A key measure of fear and fragility is the ability of poor and unstable countries to borrow money on the debt markets. So consider this: the sovereign bonds of tottering Pakistan have returned 168 percent so far this year. All this doesn't add up to a recovery yet, but it does reflect a return to some level of normalcy. And that rebound has been so rapid that even the shrewdest observers remain puzzled. "The question I have at the back of my head is 'Is that it?' " says Charles Kaye, the co-head of Warburg Pincus. "We had this huge crisis, and now we're back to business as usual?"
This revival did not happen because markets managed to stabilize themselves on their own. Rather, governments, having learned the lessons of the Great Depression, were determined not to repeat the same mistakes once this crisis hit. By massively expanding state support for the economy"”through central banks and national treasuries"”they buffered the worst of the damage. (Whether they made new mistakes in the process remains to be seen.) The extensive social safety nets that have been established across the industrialized world also cushioned the pain felt by many. Times are still tough, but things are nowhere near as bad as in the 1930s, when governments played a tiny role in national economies.
It's true that the massive state interventions of the past year may be fueling some new bubbles: the cheap cash and government guarantees provided to banks, companies, and consumers have fueled some irrational exuberance in stock and bond markets. Yet these rallies also demonstrate the return of confidence, and confidence is a very powerful economic force. When John Maynard Keynes described his own prescriptions for economic growth, he believed government action could provide only a temporary fix until the real motor of the economy started cranking again"”the animal spirits of investors, consumers, and companies seeking risk and profit.
Beyond all this, though, I believe there's a fundamental reason why we have not faced global collapse in the last year. It is the same reason that we weathered the stock-market crash of 1987, the recession of 1992, the Asian crisis of 1997, the Russian default of 1998, and the tech-bubble collapse of 2000. The current global economic system is inherently more resilient than we think. The world today is characterized by three major forces for stability, each reinforcing the other and each historical in nature.
The first is the spread of great-power peace. Since the end of the Cold War, the world's major powers have not competed with each other in geomilitary terms. There have been some political tensions, but measured by historical standards the globe today is stunningly free of friction between the mightiest nations. This lack of conflict is extremely rare in history. You would have to go back at least 175 years, if not 400, to find any prolonged period like the one we are living in. The number of people who have died as a result of wars, civil conflicts, and terrorism over the last 30 years has declined sharply (despite what you might think on the basis of overhyped fears about terrorism). And no wonder"”three decades ago, the Soviet Union was still funding militias, governments, and guerrillas in dozens of countries around the world. And the United States was backing the other side in every one of those places. That clash of superpower proxies caused enormous bloodshed and instability: recall that 3 million people died in Indochina alone during the 1970s. Nothing like that is happening today.
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var url = 'http://content.pulse360.com/ECC45BD6-867E-11DE-8C30-D41FEDADD848'; url += '?CommercialNode=' + commercialNode; // NOTE :: The "scr" + "ipt" break is essential, presumably to bypass loose // js/DOM safeguards against doing what we want to do here. document.write('"); var isAuthenticated = false; Discuss Enter Your Comment NWK.widget.CommentsSubmit.form = $('#comment-form'); NWK.widget.CommentsSubmit.init(); placeAd2('comments/'+commercialNode,'88x31|2',false,''); Sponsored by Member Comments Reply Report Abuse Posted By: Tom Sawyer @ 12/13/2009 1:53:43 PM
Great article, thank you Mr. Zakaria. It is simply amazing how different the world financial situation appears today, compared to what was being forecast a year ago.
Reply Report Abuse Posted By: edkollin @ 12/13/2009 1:28:44 PM
I am even more pessimistic then one year ago. At that time I figured we would have a real bad depression but not as bad as the one in the 1930's. Now I feel we will have a depression as bad or worse then the 1930's. How can I say this you say. Have you had your head in the sand?. Don't you read Newsweek? The recovery is going full stream ahead, consumers spending and inventories up, unemployment is down, the naysayers were proven dead wrong the bailout worked. I say this because as noted in the article said nobody has learned anything. We have gone back to just the way we were before. We are spending what we don't have. Consumers are spending because they have lost their discipline not because they have enough money to do so. One can be petrified for only so long, as a defense mechanism for mental survival a sense of normalcy returns. It happened after 9/11 and now again. The problem is the basic flaws in the system and our spend spend spend mentality remain. Something will have to give. We may very well have a recovery that brings us back to 2006 but it will even out. Waiting so long made is what made the recession we are recovering so bad. So by not fixing the basic flaws and putting a band aid (albeit a good one) on it we are postponing the day of reckoning and making sure it will be worse when it does come..I don't know how our expert writer could be talking about peace when it seems an Israeli/Iran war is imminent. (Which may mean the day of reckoning may be next month)
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Others predicted that these economic shocks would lead to political instability and violence in the worst-hit countries. At his confirmation hearing in February, the new U.S. director of national intelligence, Adm. Dennis Blair, cautioned the Senate that "the financial crisis and global recession are likely to produce a wave of economic crises in emerging-market nations over the next year." Hillary Clinton endorsed this grim view. And she was hardly alone. Foreign Policy ran a cover story predicting serious unrest in several emerging markets.
Of one thing everyone was sure: nothing would ever be the same again. Not the financial industry, not capitalism, not globalization.
One year later, how much has the world really changed? Well, Wall Street is home to two fewer investment banks (three, if you count Merrill Lynch). Some regional banks have gone bust. There was some turmoil in Moldova and (entirely unrelated to the financial crisis) in Iran. Severe problems remain, like high unemployment in the West, and we face new problems caused by responses to the crisis"”soaring debt and fears of inflation. But overall, things look nothing like they did in the 1930s. The predictions of economic and political collapse have not materialized at all.
A key measure of fear and fragility is the ability of poor and unstable countries to borrow money on the debt markets. So consider this: the sovereign bonds of tottering Pakistan have returned 168 percent so far this year. All this doesn't add up to a recovery yet, but it does reflect a return to some level of normalcy. And that rebound has been so rapid that even the shrewdest observers remain puzzled. "The question I have at the back of my head is 'Is that it?' " says Charles Kaye, the co-head of Warburg Pincus. "We had this huge crisis, and now we're back to business as usual?"
This revival did not happen because markets managed to stabilize themselves on their own. Rather, governments, having learned the lessons of the Great Depression, were determined not to repeat the same mistakes once this crisis hit. By massively expanding state support for the economy"”through central banks and national treasuries"”they buffered the worst of the damage. (Whether they made new mistakes in the process remains to be seen.) The extensive social safety nets that have been established across the industrialized world also cushioned the pain felt by many. Times are still tough, but things are nowhere near as bad as in the 1930s, when governments played a tiny role in national economies.
It's true that the massive state interventions of the past year may be fueling some new bubbles: the cheap cash and government guarantees provided to banks, companies, and consumers have fueled some irrational exuberance in stock and bond markets. Yet these rallies also demonstrate the return of confidence, and confidence is a very powerful economic force. When John Maynard Keynes described his own prescriptions for economic growth, he believed government action could provide only a temporary fix until the real motor of the economy started cranking again"”the animal spirits of investors, consumers, and companies seeking risk and profit.
Beyond all this, though, I believe there's a fundamental reason why we have not faced global collapse in the last year. It is the same reason that we weathered the stock-market crash of 1987, the recession of 1992, the Asian crisis of 1997, the Russian default of 1998, and the tech-bubble collapse of 2000. The current global economic system is inherently more resilient than we think. The world today is characterized by three major forces for stability, each reinforcing the other and each historical in nature.
The first is the spread of great-power peace. Since the end of the Cold War, the world's major powers have not competed with each other in geomilitary terms. There have been some political tensions, but measured by historical standards the globe today is stunningly free of friction between the mightiest nations. This lack of conflict is extremely rare in history. You would have to go back at least 175 years, if not 400, to find any prolonged period like the one we are living in. The number of people who have died as a result of wars, civil conflicts, and terrorism over the last 30 years has declined sharply (despite what you might think on the basis of overhyped fears about terrorism). And no wonder"”three decades ago, the Soviet Union was still funding militias, governments, and guerrillas in dozens of countries around the world. And the United States was backing the other side in every one of those places. That clash of superpower proxies caused enormous bloodshed and instability: recall that 3 million people died in Indochina alone during the 1970s. Nothing like that is happening today.
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Great article, thank you Mr. Zakaria. It is simply amazing how different the world financial situation appears today, compared to what was being forecast a year ago.
I am even more pessimistic then one year ago. At that time I figured we would have a real bad depression but not as bad as the one in the 1930's. Now I feel we will have a depression as bad or worse then the 1930's. How can I say this you say. Have you had your head in the sand?. Don't you read Newsweek? The recovery is going full stream ahead, consumers spending and inventories up, unemployment is down, the naysayers were proven dead wrong the bailout worked. I say this because as noted in the article said nobody has learned anything. We have gone back to just the way we were before. We are spending what we don't have. Consumers are spending because they have lost their discipline not because they have enough money to do so. One can be petrified for only so long, as a defense mechanism for mental survival a sense of normalcy returns. It happened after 9/11 and now again. The problem is the basic flaws in the system and our spend spend spend mentality remain. Something will have to give. We may very well have a recovery that brings us back to 2006 but it will even out. Waiting so long made is what made the recession we are recovering so bad. So by not fixing the basic flaws and putting a band aid (albeit a good one) on it we are postponing the day of reckoning and making sure it will be worse when it does come..I don't know how our expert writer could be talking about peace when it seems an Israeli/Iran war is imminent. (Which may mean the day of reckoning may be next month)
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