We can all be forgiven for being bewildered by the implications of the turmoil in the global financial markets. Over the past seven months most of the UK’s biggest mortgage lenders – and all of the US investment banks – have ceased to exist as independent entities. We are witnessing the first signs of a seismic shift of power from the United States/Europe to China, Russia and the Gulf States.
I believe that the near collapse of the global banking industry will serve to accelerate trends which are already in play. Indeed the US economy may never recover its dominant position in global markets. With hindsight the current financial crisis may be as crucial to the undermining of US economic dominance as the outbreak of the First World War was to Britain’s.
The erstwhile expectation that by the middle of this century China and India will have attained the standard of living and international power on a par with the US now needs revising. We may be there considerably sooner.
I write these words at a time when US and European governments are desperately trying to underpin the global banking system. Amidst a doubling of US national debt as a percentage of GDP there has been a massive destruction of shareholder value. The much vaunted US $800 billion bailout is not only unaffordable but may fail to restore confidence to the financial sector let alone corporate Main Street America. For our part, government borrowing will spiral well beyond the predicted £43 billion this year and £38 billion next. The suggestion that next year’s out-turn will see a public sector over-run of £90 billion plus no longer seems so fanciful.
In the midst of all the damage and destruction to the value of the West’s financial resources, we also face a major loss of economic power and international prestige. The seriousness of the current situation is only just beginning to dawn on the public at large. In the year since queues snaked outside branches of Northern Rock, there has been a strange calm as if the travails of the financial services sector might somehow be ring-fenced from the ‘real’ economy. Everyone – whether they yet see it or not – is going to be affected by the seizing up of inter-bank lending. Most worrying is the possibility that the recapitalisation of the UK banking sector may not lead to a restoration of normal credit flows. This is already having a serious impact on future domestic economic growth and is unlikely to be ameliorated even by an aggressive strategy of interest rate cuts.
Whilst European governments try desperately to fix the system, there is a real danger that their co-ordinated long-term commitment of taxpayers’ funds will be regarded as unfair both by domestic electorates and by key policymakers in trading partners outside the West. Unfortunately economic theory and public sentiment may pull in opposite directions – to be seen to reward greed and incompetence in the banking sector could prove fatal to any rescue programme.
To put it simply, money is power. Financial power and global political leadership go hand in hand. The bailout of US and European banks will essentially be underwritten by the flooding in the global capital markets of US and European government bonds which will be mopped up by cash-rich sovereign wealth funds in China, the Gulf and Russia. Their money will buy them power. This power will be used to exert more influence – in the case of China and Russia, backed by military force around its borders. Our entire model of democracy and free markets will be put to the test.
As we have seen in recent months, one of the few impediments to Russia exercising military power around its borders is the influence of an educated, wealthy and fast-growing domestic middle class. To date India and China (beyond Kashmir and Burma/Tibet) have shown relatively little interest in exercising their military muscle. As their global financial clout becomes more apparent, so too will their appetite for interference in world affairs.
The Islamic world will also see the West’s ongoing economic crisis as an opportunity to exacerbate conflicts in its region. One has to ask who in the West will have the financial clout – or political will –to spend on policing any new flashpoints?
Having visited China three times over the past five years, I have seen with my own eyes the rapid pace of development there. If the US and Europe lose moral leadership in the management of global financial markets then there is little doubt that within a decade the West will be forced to accept China as an equal.
I have spoken several times over recent years in parliament about the impact of debt and have written on my own website about the current crisis. We have been living well beyond our means as individuals and collectively. The use by this government of PFI to fund capital projects is little more than a pyramid sales scam against future generations of taxpayers. The reckoning is upon us.
In short we have been mortgaging our future, expecting subsequent working generations to foot the bill for the cost of today’s health care, education and pensions. Back in February 2007 I warned, ‘As some of our brightest investment banking brains create ever more complex financial instruments, the line between substance and form becomes ever more blurred…This country’s economic fundamentals do not look so smart going forward, and we are simply kidding ourselves about the true costs of accounting in the future’. Today’s much vaunted recapitalisation of the banking sector is in essence more of the same – a further debt for future generations to repay.
For some years it has been clear to me that any incoming Conservative government’s room for economic manoeuvre would be desperately limited. Now, on top of already historically high levels of government debt and off-balance sheet financing, we face having to grapple with the costs of sorting out the turbulence in the financial industry.
There will be no winners – at least on these shores. These momentous few weeks underpin an accelerated shift of global power eastward.