The 2008 financial crisis began in the 1990s with the rise of derivatives. Derivatives were defined as sophisticated financial instruments which allowed traders and more mature investors to hedge risks.
The rise of derivatives marked the beginning of the use of high-speed data-processing and eventually, high-speed trading in order to take advantage of arbitrage; trading opportunities in different markets of different commodities and financial instruments. The new financial model was labeled quantitative finance.
If you watched The Big Short which was the story of how the 2008 financial crisis began, you would eventually ask the question what happened? What happened basically was a pile of bets secured, supposedly, by other bets or hedged, which resulted in the very difficult process of finding out who really held the original hedge. The simpler explanation is it was a pyramid of derivatives so complicated that when the pyramid fell, it was difficult to find out who owed who what and it was triggered by credit default swaps on high-risk mortgages which fueled the housing boom in the US.
As is the case with any “financial crisis,” Wall Street gets away with it. Those who spotted the opportunity for the short, get to walk away with a huge pile of money. The others are left holding the bag. One hundred percent of the time Joe the Plumber gets the bill for the high-stakes games that these financiers play.
Quanitative easing became the operative phrase. Interest rates were so low that it became cheap and easy to borrow money. This fueled the global economy. Wall Street eventually made a comeback. The US piled on with its deficits, which it could afford, because the dollar is fiat currency.
In the interim, you had small flare-ups like the Greek financial crisis. But this was isolated to Europe because of the complications of having a union of nations with a mix of fiscally sound and unsound economies. Germany was the strongest economy and held the European Union together. Imagine how through each world war, Germany’s economy alway managed to make a comeback as an export manufacturing powerhouse. This is all about the German’s excellent research and development and manufacturing prowess.
The economic mess we find ourselves in now is different from 2008 but all of this began in the 1990s. This was the time the US began its recovery from the stagflation of the 70s through the 80s. It was the dotcom boom which fueled that recovery.
Geopolitics eventually rears its head in the global economy. The socio-political environment is a factor in the economic environment. The playbook is basically the same. The rise of the US as an economic power was fueled by European migration. Cheap migrant labor built the US into what it is now and it’s rise before in the 18th century when revolutions brought monarchies down in Europe.
Jeffrey Sachs puts depicts the present situation very succintly.
THE WORLD IS ON THE EDGE OF NUCLEAR CATASTROPHE in no small part because of the failure of Western political leaders to be forthright about the causes of the escalating global conflicts.
The relentless Western narrative that the West is noble while Russia and China are evil is simple-minded and extraordinarily dangerous.
It is an attempt to manipulate public opinion, not to deal with very real and pressing diplomacy. The essential narrative of the West is built into US national security strategy. The core US idea is that China and Russia are implacable foes that are “attempting to erode American security and prosperity.”
These countries are, according to the US, “determined to make economies less free and less fair, to grow their militaries, and to control information and data to repress their societies and expand their influence.
The irony is that since 1980 the US has been in at least 15 overseas wars of choice (Afghanistan, Iraq, Libya, Panama, Serbia, Syria, and Yemen just to name a few), while China has been in none, and Russia only in one (Syria) beyond the former Soviet Union. The US has military bases in 85 countries, China in 3, and Russia in 1 (Syria) beyond the former Soviet Union.
President Joe Biden has promoted this narrative, declaring that the greatest challenge of our time is the competition with the autocracies, which “seek to advance their own power, export and expand their influence around the world, and justify their repressive policies and practices as a more efficient way to address today’s challenges.
US security strategy is not the work of any single US president but of the US security establishment, which is largely autonomous, and operates behind a wall of secrecy.
The overwrought fear of China and Russia is sold to a Western public through manipulation of the facts. A generation earlier George W. Bush, Jr. sold the public on the idea that America’s greatest threat was Islamic fundamentalism, without mentioning that it was the CIA, with Saudi Arabia and other countries, that had created, funded, and deployed the jihadists in Afghanistan, Syria, and elsewhere to fight America’s wars.
Or consider the Soviet Union’s invasion of Afghanistan in 1980, which was painted in the Western media as an act of unprovoked perfidy. Years later, we learned that the Soviet invasion was actually preceded by a CIA operation designed to provoke the Soviet invasion!
The same misinformation occurred vis-à-vis Syria. The Western press is filled with recriminations against Putin’s military assistance to Syria’s Bashar al-Assad beginning in 2015, without mentioning that the US supported the overthrow of al-Assad beginning in 2011, with the CIA funding a major operation (Timber Sycamore) to overthrow Assad years before Russia arrived.
Or more recently, when US House Speaker Nancy Pelosi recklessly flew to Taiwan despite China’s warnings, no G7 foreign minister criticized Pelosi’s provocation, yet the G7 ministers together harshly criticized China’s “overreaction” to Pelosi’s trip.
At the core of all of this is the US attempt to remain the world’s hegemonic power, by augmenting military alliances around the world to contain or defeat China and Russia. It’s a dangerous, delusional, and outmoded idea.
The US has a mere 4.2% of the world population, and now a mere 16% of world GDP (measured at international prices). In fact, the combined GDP of the G7 is now less than that of the BRICS (Brazil, Russia, India, China, and South Africa), while the G7 population is just 6 percent of the world compared with 41 percent in the BRICS.
There is only one country whose self-declared fantasy is to be the world’s dominant power: the US. It’s past time that the US recognized the true sources of security: internal social cohesion and responsible cooperation with the rest of the world, rather than the illusion of hegemony. With such a revised foreign policy, the US and its allies would avoid war with China and Russia, and enable the world to face its myriad environment, energy, food and social crises.
Above all, at this time of extreme danger, European leaders should pursue the true source of European security; not US hegemony, but European security arrangements that respect the legitimate security interests of all European nations, certainly including Ukraine, but also including Russia, which continues to resist NATO expasion into the Black Sea.
Europe should reflect on the fact that the non-enlargement of NATO and the implementation of the Minsk II agreements would have averted this awful war in Ukraine. At this stage, it is diplomacy, not military escalation, is the true path to European and global security.
There is no country in the world that is a match to the US’ financial hegemony for the simple reason that there is no other fiat currency. Just look at how other currencies depreciate against the dollar with each Fed rate hike.
Japan and China hold most of the US debt because of the deficits the US runs against them but to sell the US Treasury’s would also result in their own economic downfall. It is for this reason also that the emerging alliance between Russia and China and India and South Africa, can’t just walk away from the international financial system which is controlled by the US and its major European allies.
The global economic situation wouldn’t be as bad if only the US didn’t target Russia and exhausted diplomacy to avert a war with Ukraine. But as it appears now, both the US and Russia miscalculated. Russia thought a blitzkrieg could overwhelm Ukraine while the US was under the impression that economic sanctions would end with Putin’s ouster. The result is both are now stuck in a quagmire.
The US and its European allies are now caught in the vicious cycle of having to raise interest rates to curb inflation while continuing to print money in order to subsidize their respective populations from the economic effects of the protracted war which has great impact on energy and commodities prices.
Dan Steinbock writes in the Manila Times.
As in the 1980s, this rampage could cause lost years, even lost decades in the Global South. The difference is that, unlike four decades ago, today’s international environment is far more dire.
As fiscal and monetary policies are being exhausted in the West, new rounds of debt-taking will intensify. That will further amplify inflation, destabilizing exchange markets, depreciating weaker currencies and causing hikes that will hit hardest the shrinking middle class and working people in the West; and even more severely the emerging and developing economies.
Last Friday, the Philippine peso sank to a record low relative to the US dollar. At the same time, headline inflation amounted to 6.3 percent year to year in August, while core inflation inched to 4.6 percent. The increase in public transportation fares will ensure more of the same starting in early October.
The Philippine central bank is committed to bring headline inflation down to the 2 to 4 percent range. However, given the Fed’s expected rate hikes in November and December, the BSP will have few alternatives but to follow up with new rate hikes in both cases, which in turn will cause more currency and fiscal pain, among other things.
The worst is still ahead.
The Marcos administration and its economic managers seem very unprepared for the coming economic crisis of epic proportions. It has already begun. This is the reason why the US working visit was very ill-timed and just confirmed how out of touch with reality the government is.
Marcos can’t afford to fail and this is why there is the fervent hope that he comes to his senses before its too late. He may have won the people’s mandate but that can easily change when economic hardships are on the people and there is little he can do to alleviate their plight.
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