Tectonic Economics- A Macro View As any trader knows, it is good to start with the big picture to identify the long term trends and then work to shorter time scales to give the current reality a context. The history of world powers is an interesting starting point and generally the economics have followed the then holder of the ‘baton’. Looking back over the last two millennia, the Romans, Chinese, Moguls and Ottomans were all world powers in their time and the last 2 centuries have pretty much been presided over by the Brits and the Americans respectively with Russia and Japan also featuring to lesser degrees. Looking ahead one of the main future contenders would have to include China (where about one quarter of the current 6 billion plus world population resides) although it has to be immediately recognised that China faces material indigenous, growth related, demographic and international social, political and economic issues that will take the best part of a generation to overcome. It is very probable however that they have the ability, the strategic intent and the patience. The ‘hand over’ periods have often lasted for decades and have frequently been punctuated, if not preceded, by war and significant economic and socio political change. The Chinese have been there before and few nations today have that heritage in their pedigree. Focusing in, one can look at international capital flows as an indicator of where world investors believe future growth (and security of returns) is. It is no surprise to learn that capital has slowly but surely begun to turn towards China and the Asiatic region and, in 2002, such flows outstripped those into the US for the first time. The destinations of these flows can often also be measured in decades and, much like a river altering its course over time, both give life where present and take life where absent in equal measure. Whilst trade agreements, embargoes, currency pegging and other tools can influence matters in the short term, they probably have no long term relevance when it comes to the consequent economic growth and (relative) decline which itself is reflected in the related rise and decline over time of world currencies. Focussing in again we get to the reality of the current economic situation. Until 2000, the main Western economies had enjoyed 20 years of growth which served to forge the economic habits and outlook of a generation of people and also of the institutions designed to service and protect them. Since then, Western economies and the US in particular have arrived at an inflexion point. Growth has declined although it remains to be seen whether this is a necessary short-term adjustment (characteristic of any long term growth process) or the onset of a more serious downward trend. Despite this, Western nations have continued borrowing to the point where, in the absence of growth, the deficits are simply unsustainable. In the case of the US the deficit is at an unprecedented level, the main creditors being China and Japan. A weakened dollar (catch 22), rising energy and war costs, the presence of extensive LTCM style leverage in the financial infrastructure and the implications of the possible collapse of the current property asset based bubble, add materially to the conundrum. Continued growth will, if it occurs on a sufficient scale, assuage the impending problems. The absence of such growth will, at best, serve to transfer significant power to the main holders of Western/US debt and at worst force a financial disaster and restructuring comparable perhaps to the events of the Great Depression. In this regard we also have to be open to the fact that we may be on the threshold of a period of tectonic change and that, in a generation’s time, the ‘baton’ of power may have passed to the next incumbent. If this is the case, we might sensibly expect that significant change on many levels will both precede and accompany such events. As the wise old trader said: “the markets can stay irrational far longer than you can stay liquid!” July 2005 J.M. London, England back to archive index