Understanding the impact of international politics/power
As we have covered in earlier chapters, economic ecosystems are not bound by geopolitical boundaries. There are some instances where they are almost the same, and some isolated attempts to contain economic ecosystems within geopolitical boundaries, both from within (North Korea and Zimbabwe) and without (Apartheid South Africa, 1960’s Cuba). Regardless of the intent, economics, like nature, tends to find a way through.
In many ways the 2008 Global Financial Crisis illustrated how pervious physical borders are to modern financial markets. With the volume of financial trade many times greater than the physical trade and a million times faster, it has proved to be beyond the control of individual countries. However when the system broke down it was countries that stepped in to repair it, and many of these countries are still carrying the burden of this repair.
When we look back at a number of the previous crises, the seeds for each of them were unwittingly sown as part of the solution to a previous crisis. Unsustainable levels of government debt are some of the seeds sown as part of this solution that will grow into the cause of the next crisis. There are a number of ways that this could happen.
The most direct cause of the next crisis is through government default on loans. This is not a new phenomenon. In the second half of last century it was something that a number of South American countries were infamous for. Their example also highlights the danger of going down this path as it fundamentally undermines the value of money, effectively destroying the catalyst to trade. Without a functioning catalyst to trade, economies go into rapid decline. A key indicator of the level of trust in money is the value of gold. Gold is the default catalyst for trade as it:
- has a consistent value,
- is able to be stored indefinitely, and
- is accepted by those an individual is trading with.
The most likely cause of the next crisis is governments redefining their responsibilities. Even without the burden of bailing out the global financial crisis, western governments were finding it increasingly difficult to fund the escalating cost of an aging population. With the extra burden of this debt and economic slowdown, they are under pressure to either increase revenue (through taxes) or decrease costs by adjusting their promises to the population. This is already happening in some countries with long-standing government funding commitments to education, health, transport, infrastructure and social welfare being eroded by successive governments. The short term nature of governments also increases the tendency for decisions that have short term gain resulting in long term pain when the opposite is usually more appropriate. These sorts of changes and adjustments often result in people being disillusioned with their politicians. Widespread dissatisfaction with governments can provide an opportunity for extremist politicians to gain power. This usually ends in blood and tears.
Recap
- Reward for effort – economically active people often question the value of supporting those that are not economically active
- Value is relative – different people value different things
- Trade requires difference in value – different circumstances create unequal values
- Money is a catalyst – If money is not trusted it fails as a catalyst to trade
- Trade creates economic ecosystems – economic ecosystems have different boundaries to countries
- Economic measurements are incomplete – economic measurements are distorted by geopolitical boundaries