As a youngster I remember being told that if everybody in China jumped simultaneously, the weight of the volume of people would cause an enormous tidal wave to engulf the western world. Goodness knows whether it’s true. It does illustrate a particular and important point though, which is if people do things simultaneously, there can be very adverse effects, and there are very adverse effects in the world economy if everybody does things all at the same time. If everybody saves simultaneously, we tend to get a recession and unemployment, and there’s no income for anybody and there’s very little saving. If everybody spends simultaneously, well the economy overheats and you get inflation. What you want in an economy is a little bit of overheating and a little bit of underheating all at the same time so there’s not an aggregate one or the other.
Now, here’s a question I’ve been dwelling on in recent weeks. As the world economy evolves and changes particularly with the growth of other regions of China, India, the BRICs, Brazil, Russia as well, are we becoming a world economy where things happen more simultaneously or where things happen less simultaneously? Well here’s the theory. In theory, of course, the world economy gets more legs to stand on. It used to be we just had the United States and Europe really. They dominated everything, and they tended to perhaps move together, so if one failed, everything failed. In theory, we have more legs. We’ve got China, we’ve got India, we’ve got Latin America, we’ve go the resource-rich countries of the Middle East and Australia – that gives a world economy lots of legs. If one fails, surely some of the others are going to remain upright.
So, in theory, the world economy should remain much more secure than it used to be. My feeling though is it’s not going to quite work out that way. As the world economy becomes more integrated, whatever happens in one place is more than likely to ripple through and affect things in other places and in particular mood swings. If there’s a bubble and then a bust in one place, it’s more likely to ripple through and affect sentiment in other countries and make the bubble and the bust occur there too. And I think that’s the evidence of somewhat of what we saw in the financial crisis around subprime debt in the United States and in the banking system thereafter.
So in theory you’d think the world is entering a new era with many legs, lots of security and not everybody jumping at once. In practice, I really have my doubts about how that new era is going to play out.
That’s my view. You can join the debate with The Open University.