How best to summarise this long, depressing outlook on the global economy by Nouriel Roubini and Ian Bremmer? We’ll give it a shot.
First, no matter who you are, you are too optimistic:
However, as we all know from human experience, some setbacks are irreversible. We believe the recent meltdown suffered by the U.S. and its partners on the liberal side of the global economy is one of them.
Still, many policymakers and economic thinkers in the U.S., Europe and Japan remain shrouded in denial. They assume that after a period of healing, high growth will return and the rules of global capitalism will restore the preeminence of the U.S. economy and the appeal of a chastened (yet only slightly less freewheeling) laissez-faire Anglo-Saxon model.
Such thinking is either dangerously naive or the result of epistemological blindness.
Good luck with that whole G-20 thing and your dreams for a harmonious post-American world — not happening:
Conventional wisdom has it that a U.S.-dominated unipolar global system is giving way to a multipolar order, one in which various emerging powers advance competing ideas for how the world should be run and act to further their agendas. Conventional wisdom has it wrong. The financial crisis and global market meltdown have created conditions for a “nonpolar” order — one in which America’s chief competitors remain much too busy with problems at home and along their borders to bear heavy international burdens. …
In fact, the G-20 will become not so much a second Bretton Woods as a supersized U.N. Security Council: a dysfunctional institution often undermined by irreconcilable differences among veto-wielding members.
Plus, realpolitik wins and it’s every sovereign for itself:
Governments design stimulus plans to satisfy political and economic demands at home, not to revitalize the global economy. …
Efforts to move these governments toward harmonious and effective policy responses to problems that extend beyond the financial crisis — collective security, counterterrorism, climate change and global public health emergencies — will fall short.
We hope you’re ready for state capitalism, which is like industrial policy on steroids:
Another major reason that international politics won’t return to a pre–financial crisis status quo is the rise of state capitalism. A generation ago, as command economies imploded in Eastern Europe and the Soviet Union, faith that governments could mandate lasting prosperity seemed dead. Western power — fueled by private wealth, private investment and private enterprise — seemed to have established the final victory of liberal free-market economics. Over the past decade, however, public wealth, public investment and public enterprise have made a stunning comeback. An era of state-driven capitalism has dawned, one in which governments inject political calculation into the performance of markets.
And this will reverse some of the gains from globalisation, leading to problems between you-know-who:
Given the tough economic climate facing U.S., European and Japanese companies and consumers — and the unpopularity of most of their incumbent political leaders — the risk will only increase the likelihood that the developed world will meet financial protectionism with more protectionism. That risk is especially high for the U.S. and China. Friction between the world’s largest economy and its fastest-rising competitor will lower the longer-term trajectory of the global economy, creating more uncertainty in international politics.
That’s followed by worries over whose economic model (US vs China) emerging economies will emulate, more about paralysis at the G-20, and the fiscal constraints to dealing with the crisis. Our fate is in the hands of the central bankers, which brings us to the end:
The reopening of the fire hoses of credit and capital that occurred during the bubble years will happen again and intensify the boom-and-bust cycles. Driven by ever-more- desperate policymakers in the U.S., Europe and Japan, these cycles will both shorten and magnify. Political, policy and regulatory uncertainty will increase, and as a result, financial crises will become more frequent and costly, while risk aversion, volatility and uncertainty will rise. The illusions of the Great Moderation — a phrase coined by Harvard University economist James Stock to describe the two-decade period that started in the late ’80s, with its quasireligious embrace of market efficiency and infinite American power — will have created the era of the Great Financial Instability. And nothing could hasten the decline of American influence more than another self-inflicted catastrophe of global market capitalism.
Morbid stuff, but even we think this might be exaggerating just a tad.
Yes, things are obviously bad, and advanced economies could well be facing many years, perhaps even a decade, of painful deleveraging and high unemployment and slow growth.
But to say that the setback provoked by the crisis is “irreversible” for liberal economies — well, can that kind of permanence really be predicted?
And as Free Exchange notes in a smart and comprehensive analysis, the authors seem to overstate the threat from state capitalism and understate the enduring appeal of liberalism to many emerging countries where it has already worked.
But we’ll leave it there and let you make up your own minds.
By the way, we have a feeling Roubini is just getting warmed up. He is scheduled to speak at the IMF next Friday. That’s the site of his renowned speech from September 2006, when he predicted that the fallout from the housing collapse would be more severe than was widely presumed.
More on this to come.
Related links:
Paradise Lost: Why Fallen Markets Will Never Be the Same – Institutional Investor
I see a darkness – Free Exchange