Recidivism of the World Economy

The world economy is bleeding and nobody seems to have a clue as to how to stop it before life is snuck out of it. Nearly every country you turn to seems to have a major economy crisis facing it to say the least. Volatility has returned in a full swing to every financial market around the globe, no thanks to the major stock market crash of the year that occurred in August, giving rise to increased opaqueness and uncertainty about the future of investing.

Investors are more risk averse now than ever before and they keep asking for more risk premiums in proportion to their risk-taking propensities, which no market seems to be taken seriously given the low interest regimes around the world’s major economies. Further, the world’s two biggest economies are holding other world economies for ransom, with their future successes hanging on what decisions come out of those two major economies. With the news coming out of the U.S. and China economies being disappointing and discouraging, the odds are that those other periphery economies could wait longer than necessary. In this article, I will be throwing more light on how bad or good the world economy has fared recently by explaining the actions and inactions of the world’s biggest economies and supranational organizations.

 China is over-ambitious

Contrary to what many may believe, China is a capitalist nation. China runs a specialized form of capitalism: managed capitalism. Managed capitalism is a form of capitalism where property rights are preserved in a way to favor the national government agenda. In this type of capitalism, allocation of resources are handled by technocrats and not government by itself in order to fulfil the goals of the national government. The good thing about this type of capitalism is the speed of execution of strategic goals due to the control of the so-called technocrats by the government. However, if the political climate in such economy is repressive in nature, its productivity will suffer eventually whenever a global challenge hits. China has a political structure that does not have safety net programs for its citizens, and this is the bane of the Chinese economy. The highhandedness of China’s ruling class in being deviant to major global resolutions China is party to has prevented its citizens from being innovative, which in turn is affecting the country’s productivity. That explains why Chinese stock market is the most hit when volatility enters the world stock markets. In fact, China is officially a bearish market for investors given a major crash of over 40% from its June peak.

Further, the major economic growth experienced by China at the beginning of the new millennium (year 2000) was fueled by the globalization of production by major world’s multinational corporations caused by lower costs. This window of opportunities created by this major global phenomenon caused China to pursue managed capitalism in order to pursue its own national ambition of world dominance. As a result, China spread itself so thin by pursuing too many goals at the same time: mercantilist international business strategy; push for its currency to be among world’s major currencies; and dominance of the world global decision-making. Though many would argue that China is really dominating the global scene of business, however, available data are proving otherwise.

Having a stockpile of foreign reserves does not correlate with dominating the world economic stage. If the world economy continues to be gloomy, China may see itself spending its reserves on stimulating its economy more than producing, with the attendant effect of further contraction in its economy.

IMF Inadequacies

 With the way the international monetary system is set up, the IMF plays an important role in determining the dynamics of the world economic pattern. The IMF is a specialized agency of the United Nations but has its own chatter, governing structure, and finances. Its members are represented through a quota system broadly based on their relative size in the global economy. All the powers of the IMF are vested in the Board of Governors, which consists of one governor and one alternative governor for each member country. The IMF is one of the resolutions of the Bretton Woods agreement that took place at the end of the World War II in 1944 when representatives from 44 nations met to deliberate on ending the gold standard of international monetary system in order to curb inflations that was rife around the globe then. This led to the establishment of the fixed exchange rate regime.

 By design, the IMF roles are to ensure orderliness in the international monetary system and to check the use of devaluation as a weapon of competitive trade policy. This was expected to introduce some level of discipline and flexibility to the ways member nations conduct their monetary and economic policies. By default, the IMF should stand ready to lend foreign currencies to members to tide them over during short periods of balance-of-payments deficits, when an aggressive tightening of monetary or fiscal policy would hurt domestic employment. However, antecedents of the IMF have proven otherwise; many countries that have borrowed from the IMF have been hit with stringent macroeconomic policies, which has escalated unemployment in those nations. Consequently, many people around the world, including myself, strongly believe that the IMF is a stooge of the western nations, many of which have controlling stakes in the IMF fund. Further, I advise that many developing nations should look elsewhere for loans during periods of economic downturns in order not to subjugate their futures. I also believe that whenever the IMF comes out with their forecasts, developing nations should flip the coin and pursue strategies that are meant for developed nations to be economically free.

 The United States is Self-serving

 To be fair, the United States is doing well at the moment overall. With the recent data of 3.9% GDP growth and 5.1% unemployment rate, things seem to be looking up. However, the recent abysmal performances of its major stock indexes is proving otherwise.

The same financialization strategy (dollarization) that was used by the U.S. to control the affairs of the global economy is now its undoing. The rise of the U.S. started during the World War I of 1914-1918, when in deviance to the gold standard monetary system that was in place then, the U.S. decided to devalue its currency in order to sell more of its products abroad, a move that started its dominance of the global economy. This strategy continued until it led to the Great Depression of 1939-1943. The Great depression came to being because of the excessive demand for U.S. products (which was created by devaluation in the first place) by other nations feeling the heat of the ongoing World War II, leading to high inflation at home. The Bretton Woods agreements of 1944, which led to the creation of the IMF and the World Bank, helped to bring sanity to the mess created by the U.S. in the first place. Again, the United States scored big and dollar becomes the central currency of the fixed exchange international monetary system. In its usual manner, when the fixed exchange system became unsustainable for the U.S., it backed out of the agreements, and helped to create a manage-float system. By this time, the U.S. has enjoyed a tremendous inflow of capital from different economies of the world, a move that has made the dollar the main currency of global economic transactions. Consequently, the U.S. has become a golden egg of sort which must be treated with utmost care; any downturns to the U.S. economy will have a resonating effect to the global economy. The U.S. recognizes this fact and it continues to deploy it to its advantage.

 Fast forward to the present day, the inadequacy in the deployment of the forward guidance strategy by the Fed is costing the global economy. Investors around the globe had waited this long for the Fed to raise the interest rates but to no avail. Many are now projecting December as the likely month for the interest rates hike because the Fed didn’t come through with its rates hike for September as earlier signaled. I guess one reason to this act of the Fed is the fact that the U.S. inflation rate is still far from the targeted 2%; premature raise of interest rates could trigger a deflationary move in the economy, which would adversely affect the nation’s employment rate.

However, I think the primary reason for this reluctant act is that the U.S. is wary of how China could react to the interest rates hike. Unfavorable reactions by the China could cost the United States a lot of pain and could make it lose its competitiveness again to China. In my opinion, I think the U.S. government is waiting for wages to grow across the country before it could raise the interest rates. Doing so will help stimulate consumer spending during rates hike periods. The question now is: for how long will the world wait just because the U.S. is advancing its own cause?

 Conclusion

 First, bipolarization of the world economy by the U.S. and China is costing the world a great deal. The U.S. and China are fighting the cold war of competitiveness and the world is bleeding for it. As long as each of the nations keep deploying their predative economic policies in order to outsmart the other, other periphery economies that depend on them will suffer a great deal. The best way out is for the two economies to cooperatively work-out their differences and collectively pursue economic strategies that are in the best interest of the global economy; the world cannot stand another economic depression at this moment. Second, the growing concerns about China’s slowing economy will adversely affect the dynamics of the world economy. As long as investors believe that China’s economy slowing is faster than analysts had anticipated, volatility will continue to rule the affairs of the world economy. Third, the effect of exceedingly cheap oil on exporting countries will continue to depress their foreign reserves, which could lead to fundamental disequilibrium in their economies. The long-term effect of this phenomenon on developed economies too cannot be overemphasized. Fourth, uncertainty over the likelihood of the timing of interest rates hike by the United States Fed will further depress the world economy.

 As the world economy recidivates, individual economy should begin to look inward on how best to manage their resources efficiently. For emerging markets and developing economies, relying on the U.S. and China for their next move will wreak havoc on their economies. Also, reducing their exposures to loans from supranational organizations like the IMF will help them to be self-reliant. Emerging markets remain the future of the world, and getting everything right politically, economically, and structurally will go a long way to help the world recovers and prospers.