[OPE] Martin Wolf on the legacy of the financial crisis

From: Jurriaan Bendien <jurriaanbendien@online.nl>
Date: Wed Feb 02 2011 - 14:25:42 EST

How the crisis catapulted us into the future
By Martin Wolf

FT February 1 2011

"(...)With the crisis fading into memory, how will historians assess its
legacy? (...) The crisis was neither the beginning of a depression nor the
end of capitalism. But it has caused a tightening of financial regulation,
particularly of banks, though this has occurred within the pre-existing
intellectual and institutional framework. After three decades of
deregulation, movement is in the opposite direction, though not without

The crisis has also marked a turnround in private leverage in high-income
countries. The ratio of private gross debt to US gross domestic product rose
from 123 per cent in 1981 to 293 per cent in 2009. By the third quarter of
last year, the ratio had fallen to 263 per cent. The financial sector led
the way in both directions: gross financial sector debt rose from 22 per
cent of GDP in 1981 to 119 per cent in 2008. It was down to 98 per cent in
the third quarter of 2010. Deleveraging will probably continue. Even if it
does not, another such period of rising leverage seems inconceivable.

In the short term, at least, the crisis also marked a reversal of the
"global imbalances", as the WEO update notes. The IMF expects a partial
backtracking, though the scale of the imbalances should not be what it was
before the crisis. One salient feature of those imbalances - the
accumulation of foreign currency reserves, particularly by China - has not
altered: between February 2009 and October 2010, foreign currency reserves
rose by $2,004bn, of which China alone accounted for $849bn. This is

The crisis also revealed the vulnerability of the eurozone to excessive
accumulations of private and public sector leverage, caused by floods of
surplus savings into bad investments via undercapitalised financial
institutions. Managing the deleveraging will be very hard, particularly
without internal exchange rate flexibility.

Now let us move to where the crisis has been far more an accelerator. The
most obvious change is fiscal. Every well-informed person knew that ageing
would generate a fiscal squeeze in high-income countries as spending rose
and growth slowed. The crisis has brought this forward by a decade.
According to the IMF, general government net debt of the Group of Seven
high-income countries will jump from 52 per cent of GDP in 2007 to 90 per
cent in 2015. This does not mean hyperinflation or default. But managing
public finances will govern politics for the foreseeable future. It will be
a miserable experience.

Just as important is the accelerated shift in the global balance of economic
power. If one were to set GDP at 100 in 2005, it was 105 in the US in 2010,
104 in the eurozone and 102 in Japan and the UK. But in Brazil it was 125,
in India 147 and in China 169. "Crisis? What crisis?" That must be the
response in China and India.

According to the IMF, the share of advanced countries in global GDP at PPP
was 63 per cent in 2000. It was 56 per cent in 2007, on the eve of the
crisis. It was 53 per cent last year and will fall below 50 per cent in
2013. China and India account for 80 per cent of the rising share in world
output forecast for emerging countries between 2000 and 2013, with China
alone accounting for 63 per cent. The growth of these giants has been
accompanied by pressure on natural resources. That also can only grow.

Curiously, Mr Wolf completely ignores the impact of the slump on the world's
labour force, namely the human beings who create all the wealth capitalists
trade in, and their families! How about the 30 million extra unemployed? How
about the stagnation and fall of real wages for the modal majority? Not a
word about that... It seems to be a sort of "collateral damage" that's
quitly swept under the carpet.


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Received on Wed Feb 2 14:28:56 2011

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