An impending tsunami

It began with what was hoped would be a one-off hit. As the US economy caught a bad one, economies around the world began to sneeze and shiver. So it was that a pitch Black Monday last January wiped away hundreds of billions of dollars off the value of global stock exchanges. The nightmarish day’s free fall was not to be the first nor the last as subsequently, market after market has gone into a sustained dive. From Bombay to the NYSE, the UK’s LSE, the Paris Bourse, Germany’s DAX to Korea’s KOSPI, stocks succumbed to shortsighted financial strategies adopted by the finance barons, who have played dangerous games with outlandish finance structures.
What is happening to the world’s economy is one of several things, according to certain financial wizards and ‘soothsayer’ economists. The first theory is that there is absolutely nothing wrong or unexpected happening as the current global slump is simply the market self-adjusting after an extended period of very robust (therefore unsustainable) growth. Let’s hope this theory holds because the alternative rationalization, a global free-fall led by the U.S., is too ominous in its multiplicity of adverse potentials. So frightening in fact, that the U.S. Federal Reserve and the financial markets can hardly dare use any word beginning with ‘R’, lest they betray their sub-conscious pre-occupation- Recession!
Certain others have other, more practical fears. They maintain that historically, extended periods of bullish growth used to occur mainly due to advances in science. The Industrial Revolution and its wondrous inventions for instance fueled global growth based on those new products. In more recent times, the Internet is an example of a technological development that has created a huge industrial dimension. However, it is inevitable that any industry undergo The Cycle – Boom, Stagnation and then the Big Bust. This, claim the more lucid economists, is the true and classic form of a case of the market self-adjusting. The present crisis is not as innocuous because it is not dealing with tangible products. It is basically a paper money crisis. The global financial system and how it entered its current morass is described by Nouriel Roubiini, who manages to clearly illustrate in layman terms, exactly what is happening or has been allowed to happen.
“We went from a system where banks held mortgages, and into a system of distributing risk by getting the risk of holding mortgages out of banks and into capital markets and out of the United States and into the global economy. Of course, as we see now, with sub-prime (U.S. housing crisis), it has brought a massive contagion in financial markets that is affecting the real economy.” (Professor of Economics and International Business at New York University’s Stern School of Business.)
The economic influence of the United States is more powerful than its political and military weight. This is being observed in stark terms as the world’s largest economy creeps to a virtual halt. U.S. growth for 2008 according to the Federal Reserve is forecast at a snail’s pace of 0.6% - down from a robust 5.4% just two years ago.
U.S. allies, its economic partners and its rivals in the various social, political and economic spheres – the whole world; does not welcome a slowdown let alone a recession in the U.S economy as that vast dynamo is the engine driving global activity.
The U.S. economy has been propelling Japan, China, India and Korea, to name just a few nations that are now automatically switching down as U.S. consumer confidence takes a plunge.
The overall situation does not at all bode well for African economies. The continent and our nation must re-examine their projections in a myriad of ways. In a country such as ours which depends for up to 40% of its budgetary requirements on donor largesse, a global recession will impose tremendous hardships. What with the price of oil shooting past 101US$/barrel and oil producing nations set to cut production next month, the risk that the donor community will be unable to meet its pledges to Ethiopia and others is a distinct possibility.
It is high time that Ethiopia’s and the continent’s respective leadership appraise their constituents on the potential fallout from a global recession. Official statements on the issue will serve to boost public confidence in financial institutions, provide a reference for the business community to adjust its business projections and in general set up mechanisms that will, if not prevent, then at least mitigate the looming disaster.