tygerland.net

There is strong undercurrent of mainstream anti-globalisation appearing in the comment pages of the major newspapers recently. Not so long ago it was pretty much a given that this economic juggernaut was unstoppable. Critics lambasted countries such as France for closing the curtains and hiding behind the sofa, hoping beyond all hope, that globalisation would just go away. “You can’t ignore it,” they said, “you can’t pretend the new reality doesn’t exit.” When the French dismissed the EU constitution as Economic-Anglicisation by the back door, we scoffed, “look at those silly frogs and their hulking welfare state!” But should we have been so confident?

We had got cocky of course. The world has been going through a long period of economic growth, fuelled by the emerging Asian economies; chief among these was China, that enormous manufacturing powerhouse. These emerging Tigers didn’t have a sophisticated banking system, so huge amounts of capital was used to buy US treasury bonds and pumped into Western Anglo-Saxon economies. This massive capital flow ensured low-interest rates in the US and UK, allowing low-cost lending, which fuelled an insatiable demand for shiny new products, most of which were made in China. Circle closed, economic growth guaranteed. Hmmm.

Last year UK consumer lending (inc. secured lending) smashed through the one trillion pound mark, within 6-months it had risen another 10%. People began to question the enormous levels of consumer debt. In the US too, the balance sheet of household assets and debts became neutral at 0%. Alarm bells began to ring. In both countries the ongoing house price boom has begun to cool, and homes, many of which are underwriting huge loans, suddenly don’t look so secure.

It’s not just a problem on the demand side either. On the supply side of this capital merry-go-round, namely China, things don’t quite appear so rosy, as reports suggest billions are being wasted on silly investments. Massive over-capacity is leaving China exposed as the global economy cools. Rising commodity costs, and shrinking supply (mainly energy), is leading to a reduction in demand. The dollar, the worlds default currency, in which China has invested billions, has rarely looked so insecure.

The communist bigwigs in Beijing are panicking. Local government officials are being jailed for their poor investments. The Chinese economy needs to be cooled effectively, or it threatens to overheat. Would a recession in China lead to a global recession? And would this expose millions in the West, who have borrowed so much at those low, now unsustainable, interest rates? Probably.

Those French and Germans, who didn’t borrow half as much, look pretty comfortable behind that sofa.