T5 Adapters — Calex Global

Things are looking up; we have passed the worst; green shoots are emerging. Or are they? Despite a sense that the mood is changing, not everyone agrees – some commentators see the current good news as a false dawn; that far worse is to come over the next few years. We may be facing a second, deeper downturn, rather than the bottoming out of the crisis or even the beginning of an upswing of the cycle.

What is changing?
Business and consumer confidence is gradually rising; business commentators and politicians have been talking up ‘emerging green shoots’ based on a number of indicators. Stock markets are rising again, albeit slowly and still far below the highs of the recent past; banks are lending again; investors are buying bank shares; house prices are falling less quickly, if not yet stabilising; numbers of job losses too are slowing, although many thousands more are still expected to face unemployment; business confidence indexes have risen several months running; oil prices are rising on the back of increased demand. All are possible indicators of improvement. However, the potential for a catastrophic failure of the system is still there.

Proponents of Kondratieff long wave theory are some of those most concerned about further decline. According to them, we are in the ‘winter’ of the fourth wave. The time when past excesses, accumulated debt and the loss of momentum from the last wave of technological innovation combine to create catastrophic system failure; and we have a way to go yet.

Even if the economy and the financial system do stabilise and improve, there are still many unknowns and other ‘things waiting to happen’, which could combine to make the so called ‘perfect storm’. California is in deficit, by some $16 billion. In the wake of the voting down of new tax measures, that deficit may soon rise to $21 billion. Whereas nations can ‘ease’ money supply, states cannot. What if California, the world’s 8th largest economy, defaulted?

While major western banks seem to be stabilising, and ‘stress tests’ are providing transparency, other banks may still have high levels of toxic assets, which may yet implode and cause a major failure. Major reforms of the financial system remain a slow and somewhat distant prospect.

‘Quantitative easing’, as printing money has been renamed, on an enormous scale combined with unprecedented levels of national debt and bailouts may result in a return to inflation, or stagflation. Away from the immediate pressures of the economic and financial problems, many other issues are sufficient to destabilise and reverse any progress. Climate change remains a major threat. Despite calls to action, new targets and green initiatives, experts continue to express concern that irreversible damage has been done, and that the effects will come sooner than we think. Food security is a growing concern, especially if rainfall becomes more unpredictable and creates even more refugees. Concern about the flu pandemic has, for now, subsided, but it remains a potential threat to that all important confidence if it builds over the next months, and re-emerges in the autumn.

Why is this important?
According to the Kondratieff framework, we may not see any real return to growth for five or six years, possibly longer. Before that, we will have to move through a period of ‘creative destruction’ as the old system gives way to the new on economic and technological fronts. An easing of economic tensions now may result in less pressure for reform, less willingness to recognise the need for change – thereby, ironically, reinforcing the likelihood of a second downturn. But is total system collapse what is needed for genuine system reform to emerge, new rules, new indicators, new structures, new consumer behaviours, a new technological underpinning to our economy? Given the levels of national debt, at what level of unemployment might social security systems and unemployment payments cease to be viable? Or would quantitative easing simply continue to foot the bill – with what long term effects?

Despite all the discussions of consumers downsizing, how resilient are we as citizens and consumers? Many of us have far higher expectations and standards of living than people had in the 1930s depression. Economists and other commentators often ignore the less rational aspects of economic behaviour. The amplifier effect of 24 hour media, which intensifies popular and market mood, can lead equally well to the ‘madness of crowds’, as it can to the wisdom of crowds. The levels of unrest last year and earlier this year may pale to insignificance if things get worse.

Faced with such uncertainty, contingency planning and innovation are critical. While we may be seeing ‘green shoots’, equally we may not be; hoping for the best while preparing for the worst may be the best form of defence.

This entry was posted on Wednesday, June 10th, 2009 at 7:43 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.