When major economic changes occur, their effects tend to take years to manifest and spiral in unpredictable directions.
Who would have thought that a crisis that started with mortgage defaults in suburban America in 2007 would lead to Greece's financial crisis in 2010? Or did the New York stock market crash of 1929 contribute to the rise of fascists in Europe in the 1930s?
The world economy is an infinitely complex web of interconnections. Each of us has a visible set of direct economic relationships, such as the stores we shop at, the employers who pay us, and the banks that give us mortgages. But once you create two or three levels, it's really impossible to know with confidence how their connections will work.
And that, in turn, illustrates what is so disturbing about the economic disaster that has accompanied the spread of the coronavirus.
In the coming years, we will see what happens when that web is torn apart and millions of links are destroyed at once. And it opens up the possibility of a world economy quite different from the one that has prevailed in recent decades.
“I hope we can get back to normal economic activity, but that's not the problem. It's just the beginning.” About the 2008 financial crisis. “These are times of fundamental uncertainty, orders of magnitude greater than what we are accustomed to.”
Amid such uncertainty, it would be foolish to make overconfident predictions about what the global economic order will look like in five years, or even five months.
But one lesson from these episodes of economic disruption is that these surprising ramifications tend to emerge from vulnerabilities that have gone unaddressed for years. Crises highlight issues that are often ignored during good times.
One obvious candidate is globalization. Globalization allows companies to move production to where it is most efficient, people can hop on a plane and go almost anywhere, and money can flow where it is best used. The idea of a global economy centered on the United States was already disintegrating between the rise of China and America's own shift toward nationalism.
There are signs that the COVID-19 crisis may be exaggerating and further solidifying these changes.
“It's going to make every country rethink how dependent they want to be on other countries,” said Elizabeth Economy, a senior fellow at the Council on Foreign Relations. “I don't fundamentally think this is the end of globalization. But it does reflect a growing sense within the Trump administration that in times of crisis, the United States needs critical technology, critical resources, and spare manufacturing capacity.” It’s accelerating the thinking that’s happening.”
Consider some evidence that the foundations of globalization are weakening.
France's finance minister has told French companies to reevaluate their supply chains to reduce their dependence on China and other Asian countries. U.S. Customs and Border Protection has announced that it will seize exports of certain medical supplies. And on Friday, Sen. Lindsey Graham suggested that the U.S. should punish China for its failure to contain the virus by canceling debt held by the Chinese government, a move that would undermine U.S. debt as the foundation of the global financial system. This is a measure that will jeopardize the role of the government.
Even before the coronavirus outbreak, the limits of globalization were becoming clear.
Trade as a share of global GDP peaked in 2008 and has been in decline ever since. With the election of President Trump and the outbreak of the trade war with China, multinational companies were already beginning to rethink their operations.
“I think companies are actively talking about resilience,” says Susan Lund, a partner at McKinsey & Co. who studies global interconnectivity. “To what extent are companies willing to sacrifice quarterly efficiency for long-term resilience, such as natural disasters, the climate crisis, pandemics, or other shocks?”
Rather than a full-fledged withdrawal from global trade, she envisions a shift to regional trading blocs and a focus on companies building redundancy in their supply networks. Given the current global scramble for goods, governments will likely insist on relying more on domestic production for certain items, such as medicines and medical devices.
China is reorienting its economic strategy, aiming to become a maker of technologically advanced products such as aircraft and communications equipment, rather than the world's low-cost manufacturing hub. Because of this, Americans, Europeans, and Japanese are increasingly reluctant to do large-scale operations in China for fear of intellectual property theft.
Under the Trump administration, the United States is experiencing tensions even with its traditional allies in Western Europe. Putting all this together, it appears that a more all-for-every-country mindset was already ingrained before COVID-19, and has been reinforced by the pandemic.
“What often happens after a crisis like this is people talk about a new era and how the world will be different post-pandemic,” said Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management. ” he says. “I think this time we will accelerate trends that were already starting before this pandemic.”
Past episodes of deglobalization, such as the unwinding of global commerce that occurred during World War I and the 1918 influenza pandemic, have seen global There was also a restructuring of the financial system.
It's entirely possible that something like that will happen again this time, but initial signs point in a different direction, with the dollar becoming more entrenched at the center of the global financial system.
The U.S. Federal Reserve has opened swap lines with 14 foreign central banks, allowing them to inject dollars into the domestic banking system and a novel program that allows other countries to obtain dollars using their government bonds as collateral. started. These moves are helping to prevent a global dollar shortage from paralyzing the global economy.
European officials are reluctant to take steps that would make the euro the center of the global monetary system, such as issuing bonds jointly guaranteed by eurozone countries. And China is rather reluctant to reshape its financial system in ways that could make the yuan more important to global commerce, such as allowing free capital inflows and outflows.
Former Bank of England Governor Mark Carney gave an influential speech to central bankers in August last year, calling the current global monetary and financial system highly dependent on the dollar unsustainable. insisted. But the pandemic may be entrenching that flawed system.
“The dollar system is inherently unstable, but so are bicycles,” said Toews, the historian. “They are unstable, but with a skilled rider they can be great. And the Feds have proven they are expertly riding the bike of dollar hegemony.”
Over the past 12 years, it has sometimes felt as if the world was reliving the period from 1918 to 1939, as if narrated by a forgetful student who didn't understand the sequence of events. It was done. This era also saw a global financial collapse. The rise of authoritarian governments. The emergence of a new economic power (then the United States, now China). And a pandemic, but not in that order.
We may not know exactly where this crisis is going, whether it's the global economy or whatever. But one thing is clear. That said, when you don't know how history will end, it can certainly be scary.
