The shocks
The Western financial and economic systems that were put on government life support in October, 2008 are still on that support. There are clear indicators of this, said Wolf.
“First, nobody really believes that a major bank will be allowed to fold. Secondly, monetary policy is being run in the way we’ve simply never seen before in world history,” he said. “We are living in the world in which the highest rate of interest offered by the most prudent and cautions Western central bank is 1%; all the rest are between 0% and 1%.”
This is a gigantic fiscal event and despite the massive unprecedented interventions by Western policymakers, the recovery remains laboured and limp.
This, of course, excludes Canada which Wolf calls “a happy country.”
Aside from Canada there are only two other G-7 countries—the U.S. and Germany—whose GDP in the last quarter of 2011 was marginally above the starting point before the crisis. All the others are well below it and three of them—the U.K., Italy and Japan—are 4% to 6% below and show no signs of convergence to the starting point.
“This remains a very weird world, but the good thing about it that the governments have been able to get away with these fiscal policies,” said Wolf, who expects them to continue to do so, “for there is no way these fiscal deficits will be eliminated quickly,” unless their economies recover.
The prospect
A nation’s economy, said Wolf, can only recover if one, or all of, three things occur: a surge in net exports, a surge in consumption or a surge in private investment.
“None of these things are in the least likely [for the industrialized world],” said Wolf. “The net exports are blocked by continued lack of competitiveness and the constructional surpluses in much of the rest of the world. Consumption is blocked by the continued overhang of debt and the fact that the savings interest rates are very low.
“Investment is blocked by the fact that companies that are sitting on lots of cash see no reason why they should build huge factories in the Western world, where there is no demand and, anyway, they are not competitive.”
The financial world, he concluded, is in a big mess and the challenge of getting out is proving to be long and painfully slow.
However, the good news is that all this led emerging market governments to adopt policies that would ensure they’d never again be made vulnerable by the reckless ways of the West.
“The emerging countries truly are not in the same way at the mercy of the irresponsibilities of Western-style finance,” said Wolf. “They got through the [recent] crisis astonishingly easily; the reserves they’d accumulated proved valuable insurance and it gave them room for manoeuvre to pursue expansionary policies, dramatically so in China.”
The dynamic of the emerging world remains powerful and deeply rooted in structural transformation of these economies.
“There’s a very good chance they will continue to grow pretty quickly over the next ten years, generating significant growth in the world and [ensuring] further transformation of the relative weight of economies.”