Interesting times indeed, and bound to stay so. Amid the commotion, some perspective again is due.
One of the most bizarre ideas to emerge from this crisis-related era, yet routinely expressed by mainstream economists, is that a drop in oil prices, though it reduces transport costs to industry and adds to the discretionary income of consumers in importing countries directly and indirectly, is bad for their economic growth.
Why? Because it reduces the inflation rate and therefore the downward pressure on the real value of accumulated debt, and discourages hasty purchases of goods and services. That is how warped some of the regular analysis is behind a lot of policymaking theory and practice today.
It might be music to the ears of those looking for higher prices, such as the oil-exporting nations obviously, except for the fact that the fundamental thinking is so wrong that the stimulus-based and credit-based strategies for growth around the world in modern times have simply not propelled growth in a sustainable way (in economic and financial not environmental terms).
Which means that the responsible authorities in the leading economies are befuddled, as the resources and/or methods to promote prosperity and either alleviate or bypass the natural business cycle are near enough depleted. The whirlwind of fallout in international markets last week denoted the realisation of this fact. The penny, and much else, has dropped.
While a lot of this reasoning has been available and aired from time to time, it takes a sharp and meaningfully felt reversal in the fortunes of investors, as well as in the numbers confronting policymakers, for the uncomfortable reality to hit home: that overspending of one kind and another, before and after the shakeout of a bursting bubble, is no good strategic way forward.
We live in a world now virtually locked in a low interest-rate trap, epitomising the erroneous stance of trying to foster growth by sheer momentum and encouraging everyone, by penalising saving, merely to recycle oceans of liquidity. That is the condition evidently visible in the US, China, Japan, Europe, dollar-linked emerging markets and all the commodity producers dependent on those sources of demand. How many countries of any weight does that leave?
The result which now threatens is that those participants in the merry-go-round of reaching for market share in this interdependent world will try the exchange-rate route to competitiveness (as some feel China may have done with its partially-disguised currency devaluation in the past fortnight). Domestic monetary and fiscal room for manoeuvre has widely been usurped, and structural (supply-side) reforms to liberate product and labour markets are simply way too difficult politically to institute among peoples ingrained with the easy-money modus operandi.
Something of the flavour of these overarching trends of course made its way into the story of the Gulf in the past decade, whether in absorbing the overspill of cheap global credit into local business environments, or maintaining the dollar peg that links the GCC to the interest rates prevailing elsewhere, or permitting a culture of roller-coaster investment behaviour (not least in real estate) that clearly draws on the same well of habitual impetus.
It’s a sad fact that the costs of the original policy malpractice (perceiving the long term as only a succession of short-term situations to keep ignited) has so markedly distorted the economic and financial environment. In particular, it has diverted the scarce resources that define economics — in principle and in practical application — from those households striving to work and put money aside to provide for themselves and their families, towards financial practitioners who have been the ultimate beneficiaries of too much money sloshing around in an officially-sponsored, dysfunctional system.
It’s gloomy, no doubt, as the pummelling of markets represents potentially only the thin edge of the wedge of the difficulty which has been so engineered. We are back in uncharted territory again — to which the ructions within Opec, pending Greek elections again, and the all-encompassing fear afflicting US and especially China watchers bear witness.
For the Gulf economy, the buffer of reserves attained in previous years can keep the worst of these intractable dilemmas at bay, as can the inherent, catch-up dimension of the region’s development path. The originality of the offering presented by business oases such as Dubai accords another degree of protection.
Yet, as equity and fixed-income markets locally have demonstrated in the past week, there is a bigger tale to tell internationally that virtually swallows whole the incidental variations exhibited from one region to the next, and which simply cannot be ignored or relegated in any comprehensive discussion of relevant events whether at home or abroad.
On that note, we have to perceive that the door to one phase or chapter of history may be closing, and the one opening could be somewhat different. It could be an awesome autumn.
