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having the hots

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Old 20-04-2006, 07:45 AM   #1
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having the hots

Market capitalism, when having the hots, doesnÂ’t do things in moderation. And today global market capitalism certainly is having the hots.

Indeed, when market capitalism isnÂ’t going off the rails into deepest despair, it is steadily working up a credenza of the hots. As forecasts go, all one really needs to know is whether we are going off the rails shortly, or whether the hots will prevail.

This is a profound question, despite its formatting.

Over the past 135 years, the world economy has known three long periods of despair.

Following financial speculation and failure, a disastrous two-decade global depression got underway in 1873, mainly because policymakers didn’t know how to handle ‘simple’ global collapse.

Following WW1 (1914-1918), America entered the Roaring Twenties on a roll. Its expanding domestic markets, deep confidence and backlog of technical innovations fed its growth process (like China/India in years to come).

Elsewhere the picture was quite different. Europe had bled heavily during WW1. Transition from war to peace economy was badly handled, attempting balanced budgets and re-storing the gold standard anchoring exchange rates to its pre-1914 condition, despite enormous relative inflation undermining trade competitiveness. Policymakers proved clueless about ‘complex’ global failure.

Deepening underperformance marked Europe in the 1920s. US speculation eventually overheated, markets failed, policy failed and a global vortex marked the 1930s (those departing the gold standard or starting rearmament recovering early).

The third failing occurred in the 1970s. Overburdening governments, falling productivity, accelerating inflation, overheating systems, and explosively higher energy costs dented global growth. It lasted nearly a decade (1974-1982). Unlike earlier episodes, growth continued. Disruption was relatively short, with no deep prolonged depression.

In between these malfunctioning episodes, manic growth runs can be observed. Especially La Belle Epoque (1894-1914) and the post-WW2 growth flowering (1948-1973).

In contrast, the post-1970s saw two very varied decades (1982-2002), with bewildering experiences, good and bad.

The post-1970s at times saw good growth in the US, de-bubbling in Japan, structural malaise in Europe, explosive growth in Asia, reform in emerging markets, and spectacular financial crises. There was the Latino debt explosion (1982), the global equity implosion (1987), another Mexican detour (1994), Asian contagion (1997), Russian and LTCM default (1998), and 911 terror (2001).

These two decades were out of character, neither marked by global depression or outperformance. Though regionally the malfunctioning and shocks at times were bad, policy reactions were mostly magnificent.

In an underlying sense, meanwhile, a couple of things were shaping positively. A case of the hots was under construction, with new management.

China started on its modern capitalist road in 1978. Its growth story took time to acquire critical mass. IndiaÂ’s reform of its Hindu growth engine dates from 1994.

Together they entered an extended high-growth phase from 2002, with ChinaÂ’s industralisation overwhelming the global commodity pipelines, hugely benefiting commodity producers (Russia, OPEC, Brazil, Australasia, Canada, South Africa), reliving earlier global high-growth eras.

The US nearly lost its footing, following the ending of another roaring equity boom, and terror, but aggressive policy action turned the corner by 2002.

Emerging markets in Latin America had been fundamentally reforming since 1982Â’s debt explosion, in Eastern Europe since communism and RussiaÂ’s collapse in 1989, in South Africa already long predating apartheidÂ’s collapse in 1994 and in Asia following the 1998 Contagion. By 2002 all these emerging parts had a much better act together.

Japan took 15 years of stagnation to overcome its 1980s excesses. By 2005 it was finally again ascending, both Japan and Europe benefiting from US and Asian growth.

Thus the early stirrings of synchronised global high-growth can be traced to 2002. A new phase of the hots was shaping, marked by fast global growth (4%-5%), commodity price explosions and strong emerging asset markets.

This first (imperfect) round of global synchronization matches the US economy trough-to-trough (2001-2007). The next round (2008 onward) could be more synchronized as Japan and Europe should be more fully participating, with many emerging markets at full speed.

High global growth is marked by strong demand, good supply responses, low inflation and accommodating policy. Asia and other emerging markets are adding aggressively to global supply and savings, while net capital absorbers (America and others) consume strongly.

Although monetary policies in leading economies are turning neutral, this may not derail the new high-growth era. With pipelines slow in responding, commodity prices may stay high for many years. With some global parts net savers, others enjoy strong capital inflows, though roles should evolve over time (affecting exchange rates).

High global growth could remain in the ascendancy for a long time, unless cut short by geopolitical conflict or massive institutional failure. Looks like the global hots are back, its momentum enduring, as is its nature.

This new global high-growth era is still very young, promising major opportunities for reforming modernizers, such as South Africa.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on
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