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Global financial crisis: an overview

STWR
16 May 2008

Soaring capital flows, a debt-based consumer culture and unbalanced trade between countries all contributed to the worst financial crisis since the Great Depression. The question now is whether governments follow a 'business as usual' model based on self-interest and inequality, or one that promotes equitable development based on moral and social principles. Below is a brief overview, some key facts and further resources that relate to the global financial crisis.

Contents

Overview

Over the past 30 years the globalised economy has been predicated on unending expansion, and many argue that the resulting wealth is in fact illusory. Whilst economic expansion remains the goal of a growth-based economy, inflation - its antithesis - is paradoxically an inevitable consequence of economic growth. The battle to keep inflation low has become a major preoccupation for governments the world over.

Financial Speculation 

Financial speculation on the world's stock markets has increased dramatically over this period, particularly foreign currency speculation, as have the number of financial products and funds available to speculators looking for rapid returns on their investment. The movement of capital around the world now accounts for a large percentage of economic growth, although this growth is increasingly detached from the production and consumption of goods.  It remains based on the assumption that the increasing levels of debt can always be paid because the economy will always expand - and this applies equally to people, corporations and governments.

Economic destabilization

As recent history confirms, the rapid flow of capital in and out of developing countries often destabilises their economies.  Since the financial crisis which began in Thailand in 1997, the inherent instability of capital flows has been globalized with disastrous consequences for other countries in S.E Asia, Latin America and Russia.

The credit crunch in the US and UK is the most recent manifestation of this international financial instability, and is a direct result of under-regulated international speculation using sophisticated debt-based financial products. The phenomenal hikes in food prices that are widely reported at present can also be attributed in part to stock-market activity, as traders buy up huge quantities of scarce agricultural produce, not primarily for consumption, but to speculate with - which increases demand and inflates the price of these essential goods.

Currently, the specter of prolonged recession haunts the US and many European countries as productive industries stagnate in the face of strong industrial advancement in the developing world. Given the primacy of the ever-weakening US dollar, mounting levels of personal and national debt, and the credit crunch, progressive analysts maintain that a full-blown international financial crisis is inevitable, and has only been temporarily delayed by swift but costly government intervention and strong economic growth in India and China.

Who Benefits?

This state of affairs suggests that the main beneficiaries of speculation in a debt-based globalized economy are financial traders and the lenders of credit, who recoup significant profits, as well as multinational corporations who thrive on this credit to expand their commercial activities and promote consumption. The bulk of humanity, on the other hand, continues to struggle with mounting levels of debt, diminishing opportunities for employment, and higher food prices.

The continued expansion of commercial activity that the endless availability of credit affords has other dire consequences for the planet which have only recently been taken seriously.  These include the over-consumption of natural resources, climate change from ever-expanding production and consumption, and the cultural homogenization of society around the world.

Downsizing the Market

As financial instability plays out on the world stage, it is likely to become increasingly apparent that a stable and more equitable system of finance must be a key feature of a sustainable future economy. The role of money should be overhauled so that it works to facilitate the global exchange of goods and services without unduly rewarding those private interests which control it. A small tax on financial speculation, such as the Tobin Tax, would go a long way to reducing the damaging effects of short-term speculation whilst simultaneously creating a fund which can be used for any number of humanitarian purposes.

A further suggestion would be to limit the type and quantity of resources which are traded and speculated upon in financial markets. If essential resources such as oil and gas, and basic agricultural produce such as rice and wheat, are produced not primarily for profit but to ensure that basic needs are secured around the world, then the market speculation and price fluctuations of these essential resources would be significantly reduced, imparting a particular benefit to those in the developing world.

Key Facts

The value of the world's financial assets

In 1980 the world's financial assets, comprising banking assets, stock market capitalization and bond market value, amounted to 108% of the value of annual production, more or less in line with each other. 25 years later the total value of global financial assets amounted to $165 trillion, nearly four times the size of global GDP of $45 trillion.[1]
 

In 1980 bank deposits made up 42%of all financial securities. By 2005, this had fallen to 27%, the remaining deposits were being used by capital markets and investment banks to fuel corporate development.[2]

Foreign Exchange Trading

In the year to April 06, overall turnover on the foreign exchange markets averaged around $2.9 trillion a day. That's around 60 times the value of the world's GDP for the whole year, and more than 10 times the size of the combined daily turnover on all the world's equity markets.[3]

Foreign exchange trading increased by 38% between April 2005 and April 2006, and has more than doubled since 2001.[4]
 

Debt in the US

Outstanding consumer credit, including mortgage and other debt, reached $9.3 trillion in April 2003, representing an increase from $7 trillion in January 2000. The total credit card debt alone stands at $735 billion, with the household card debt of those who carry balances estimated to average $12,000.[5]

The US, being the consumer of last resort, also has the largest Gross National Debt in the world. In December 07, it stood at over $9.153 trillion, amounting to over $30,000 per person. This has been increasing on average $1.45 billion per day since September 29, 2006.[6]

The biggest chunk is held by foreign governments. Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion).[7]

In the US, the poorest 90 % of the population have debts equal to 75% of their financial assets, while for the richest 10 %, debts amount to only 7 % of their assets.[8]

Debt in The UK

In June 2007, the UK as a whole owed more to the banks (£1,345 billion) than the value of everything produced by every office and factory in the country in a year (£1,330 billion).[9]

 

Further resources

Organisations

Campaigns

Reports

Articles

Books

Resources

References

[1] Gerry Gold & Paul Feldman.  A House of Cards, Lupus Books (2007). p.36

[i2] Ibid, p.36

[3] Ibid, p.38

[4] Ibid, p.38

[5] Joanne Laurier. US consumer debt reaches record levels (World Socialist Website, 15 January 2004)

[6] U.S. National Debt Clock (figures sourced from U.S. Department of the Treasury and the U.S. Bureau of the Census' Population Clock) accessed April 2008 <www.brillig.com/debt_clock/>

[7] John W. Schoen. Just who owns the U.S. national debt? And is growing foreign investment in the U.S. bad for America? (MSNBC, 4 March 2007).  See also figures at Major Foreign Holders Of Treasury Securities (U.S. Department of the Treasury) accessed April 2008 <http://www.treas.gov/tic/mfh.txt>

[8] Ann Pettifor. Real World Economic Outlook (Palgrave Macmillan, 2003) p. 34.

[9] Gerry Gold & Paul Feldman.  A House of Cards, Lupus Books (2007). p.42

Filed under: 
Finance and debt