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Ignoring the Storm

The most recent G7 finance ministers’ meeting in October was an utter failure. The only thing that they agreed on was to admonish China to revalue its currency. The yuan’s value, while important, is not the central question facing the world economy today. The real immediate problem concerns what is happening and what will happen to the dollar. But the real issue for prosperity concerns the foundations of the global financial system.

How low will the dollar go? How can we undo the imbalances of economies – China, followed far behind by Europe – exporting massively to the United States or to the dollar zone? Will the US mortgage market, which is expected to become even more difficult in 2008, subside into calm afterwards, or will it contaminate the whole international financial system? Is there a risk that rising oil prices – already reaching all-time highs – will cause further debt defaults worldwide? The spate of earning reports from America’s biggest banks suggests that there are real worries here.

The condition of the world economy nowadays is very strange. There are no great shocks but various declines and crises. Central bankers try to soothe and reassure, but they are not very convincing. Governments are silent, acting more or less as if nothing important is happening. And, according to many economists, commentators, and journalists, today’s worries are temporary, solvable difficulties. There is no general crisis on the horizon.

I disagree. I believe that we have entered a period of weakening across the different parts of the global economic system, and that this may lead to a global recession. This weakening calls for a strong international public response, including tighter regulation, if we are to avoid such a crisis.