How the world has changed since Lehman crisis

Mumbai: “I think the numbers are going to be outstanding. We’ve accomplished an economic turnaround of historic proportion,” US President Donald Trump remarked last week, hailing his country’s latest GDP (gross domestic product) figures. With economic growth picking up in the epicentre of the global financial crisis of 2008, it would seem that the global economy is back on track 10 years after the crisis was triggered by the collapse of Wall Street giant Lehman Brothers.

However, the celebrations might be premature. The current recovery, both in the US and in majority of the rest of the world, is built upon banking bailouts, fiscal stimulus and aggressive quantitative easing (QE) by central banks. This has created a menace that can disrupt the very recovery: a mountain of global debt.

The world’s debt load has risen from around 200% of GDP in 2008 to 244% by the end of 2017, according to the Bank for International Settlements. This could severely impair the ability of countries to respond to another financial crisis.

The biggest victim of the ‘debt overhang’ created by the crisis is China. As global demand dried up during the crisis, export-dependent China responded by announcing a huge fiscal stimulus of 4 trillion yuan in 2008, amounting to 14% of its GDP, to sustain its growth.

The stimulus, which relied on bank credit, eventually led to a huge pile-up of debt. It also led to excessive infrastructure investment without creating the required demand, leading to ‘overcapacity’ in the Chinese economy and slowing the wheels of China’s growth engine.

China began to dump goods in other economies at cheaper prices, eventually escalating to the current round of global trade war.

Another casualty of the global crisis was commodity exports. As the world’s biggest commodity consumer—China—suffered a growth downturn, the global demand for commodities started to dwindle. It marked the beginning of the end of the commodity super cycle.

Only a few years ago, Brazil was considered the global economy’s ‘shining star’. But the optimism surrounding economies of commodity exporters such as Brazil, Russia and Indonesia is now lost.

The fact that commodities are no longer in fashion today manifests in investors’ perceptions. The most valued companies today are technology companies, not energy companies, as was the case a decade ago.

No wonder then that technology entrepreneurs such as Jeff Bezos are stealing the ‘oligarch’ title from Russia’s oil tycoons.

With the growth of technology, there are concerns of worsening inequality due to tech’s winner-take-all approach. Digital innovation and disruption has mainly benefited the rich and worsened inequality, noted a recent research paper by Dominique Guellec and Caroline Paunov of the Organisation for Economic Co-operation and Development (OECD).

Not surprisingly, concerns around inequality have risen in recent years. A survey conducted by Pew Research Center in 2014 showed that about 65% Americans agreed that inequality increased since 2007 even though available data suggests that inequality might have plateaued after the 2008 crisis.

Perhaps, the economic slowdown after 2008 brought to fore the growing divide between the elite and the rest. Rising anger and mistrust against elites are manifesting themselves in populist and anti-establishment politics. It can be argued that Trump and Brexit are by-products of popular revolt.

Another manifestation of this mistrust in the established system is the growing popularity of financial alternatives such as digital currency.

The financial crisis arguably gave impetus to alternative currency like bitcoins which thrived in an environment where people lost confidence in the fractional banking reserve system. Votaries of cryptocurrencies have often criticized QE by central banks as being unfair to savers while favouring big banks.

The global economy is no longer the same place 10 years after the collapse of Lehman Brothers.