Saturday, 6 August 2011

The end of an empire

As you would expect an intense debate is ensuing this weekend about the impact of the S&P downgrade on the markets. Will the markets fall sharply on Monday? As you would expect the articles being written and comments being left on financial blogs are largely from those either caught unaware going into the weekend or those simply talking their book.

A downgrade is a downgrade and at the margin, it should result in a net selling of treasuries and a rise in yields, whether this occurs on Monday morning or takes longer. The search for alternatives to the dollar will also accelerate.

If the asset markets fall precipitously, no doubt acrimonious accusations will be levelled at the S&P for their "irresponsible" action. No-one should be distracted by this. Their actions address squarely the dysfunctional political and economic thinking which have infected the rich west. The financiers that rule the world capped by their biggest benefactor, Mr Bernanke have long believed the solution to conjuring wealth is cheap money and continued borrowing and, as the tea-partiers seem to believe, without their own citizens ever needing to pay it back. It is not. Ultimately it is, as we still teach our kids, hard work. But for the west it may be too late. We have gotten lazy. In the meanwhile, all the nasty, dirty work over the last two decades has been progressively pushed to industrious foreigners, whether it is cleaners from eastern europe, nurses from the phillipines, manufacturers in china or telephone helpdesks in India. Continued specialisation to develop comparative advantage is fine but what is that we in the west specialise in? Whatever it was, it has become smaller and less significant on the global stage. For example our touted western financial innovation, retains a centre stage, but for all the wrong reasons, such as the danger it poses to the world economy.

The downgrade is a historic, watershed moment which may well be remembered as a marker of the decline of the west coupled by the rise of the east. This process has been a long time coming but we have been lacking in meaningful symbols. S&P may well have provided it on Friday 5 August 2011.

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