“Market volatility”. This is the conventional description of the period of intense turbulence that financial markets have been going through these past few weeks. The main stock markets saw share prices fall sharply, though these subsequently recovered most of what had been lost.
Much more serious was what happened to “emerging markets”, economies in the Global South that have been growing quickly. Endless chatter about the so-called BRICs – Brazil, Russia, India, and China – as the future of the world economy, has become the counterpart of euphoria about dotcom companies at the end of the last decade.
The result was a huge surge of money into the emerging market economies. This is a familiar pattern for those who remember the hullabaloo about Mexico in the early 1990s or about East Asia a few years later. It looks as if the emerging markets bubble has now burst, as these earlier bubbles did.
The Financial Times said, “The MSCI emerging markets index has fallen 14.8 percent in dollar terms since 9 May, with Turkey falling 30 percent and Brazil, Pakistan, and India all around 20 percent. Those who bought on the back of the BRICs thesis have seen how quickly BRICs can sink.”
There is enormous confusion about what’s going on. Most of the big economies are growing relatively robustly (Britain is one of the weakest), with corporate profits in the US and Europe bulging.
So why are financial markets so nervous? The most plausible explanation has to do with the kind of policies pursued by the US central bank, the Federal Reserve Board, to keep the US and world economies going.
One feature of neo-liberalism is the greater influence played by increasingly globalised and deregulated financial markets in steering national economies. This has meant that Alan Greenspan, until recently chair of the Federal Reserve, sought to boost the financial markets as a way of ensuring economic growth.
In the late 1990s he encouraged a stock market boom to keep affluent households spending. When the bubble burst in 2000 and the US economy went into recession, the Federal Reserve cut interest rates to the bone and George Bush’s administration slashed taxes for the rich.
The US therefore refloated on a great surge of consumer borrowing and spending. Combined with the rapid growth of the Chinese economy, which exports the cheap manufactured goods bought by US and European consumers, this was enough to stave off global recession.
Investors have become edgy about the problems these policies have created. One of these is constituted by the “imbalances” in the world economy. The US imports far more than it exports. It finances the resulting balance of payments deficit by borrowing massively from the central banks of China and the other East Asian economies whose goods are feeding the US market.
The International Monetary Fund recently agreed to launch an inquiry into these imbalances. But there are other problems. The prices of raw materials have been rising sharply for the first time in two decades, thanks to the growing appetite of the big economies – now including China.
The most visible sign of this shift is the surge in the oil price to $70 a barrel. This means that inflation has become a serious worry. The financial markets are scared that the Federal Reserve will either allow inflation to get out of control or will clamp down too hard, precipitating a recession.
There is now talk of “stagflation” – rising inflation and unemployment, the economic disease of the 1970s – returning. These contradictory fears are symptomatic of the underlying fragility.
In an effort to reassure the financial markets and shore up his failing administration, George Bush has appointed Hank Paulson as his new treasury secretary. Bush’s previous treasury secretaries were industrialists, but Paulson is boss of Goldman Sachs, the most powerful investment bank on Wall Street.
But it will take more than such gestures to keep the world economy afloat. The devices the managers of global capitalism used to stave off slump are coming back to haunt them.