While convalescing after a traumatic bicycle accident that resulted in a broken face, nose, hand, etc, I read Niall Ferguson’s Ascent of Money. Going back to the glorious age of Mesopotamia and concluding with an updated analysis on the current financial crisis, the book’s historical perspective instills both confidence in the long-run resilience of the global financial system and pessimism for the viability of the current financial paradigm. In other words, the core concepts of the financial system will endure e.g. people will borrow, companies will borrow, people will lend etc; however, the system will experience important structural and relational transformations that will render certain people and entities obsolete while new entities will emerge, better able to meet the needs of the real economy.
Call it survival of the fittest and a form of financial Darwinism. For example, expect hedge funds as an industry to shrink, a bias toward allocating large shares of wealth to real estate to be reassessed, and the West’s relationship with China to be strained from what has been an unhealthy, imbalanced, unsustainable relationship for the last 10-15 years. Anybody understand the link between the housing crisis and the Chinese government’s struggle to maintain legitimacy after changing development models in the 1980s? Between rural/urban migration, job creation pressures, corporate profits, currency management, easy credit, and the home price inflation? Anybody wonder why China is “locking up” sources of energy, natural resources, and commodities? Will this create a “clash” in the future? Is conventional war between nations really obsolete?
The debate and the execution of global economic policies in the next 12-18 months will impact both the pace and the pain of these changes. The deficit hawks e.g. Trichet, Merkel will accelerate the speed of change and cause more short- and medium- term pain while the more welfare oriented defenders e.g.Krugman will have the opposite effect.
More thoughts when my left arm cast is removed in two weeks. I believe this financial crisis is far from over and that the financial system will change for the better. Forget about who moved your cheese – time to change your diet. Accept and embrace change – or be left behind. You may even lower your bad cholesterol.
More to come…
