The Bipolar World ?

When I was still in junior school and was being mildly dieted on the dosage of world changing events of the last century, I always thought that our forefathers had seen a lot of action and whether we will ever be lucky enough to witness something of that scale. The two World Wars, the Great Depression, independence of the colonies, the Cold War, fall of the Berlin Wall and the disintegration of the Soviet block were definitely the events that redefined the world. Of course, I had the advantage of being a (naive) kid then (while in school) and considered these events as interesting adventures in the real world. Today with some worldly sanity at my disposal, I understand the ramifications of these events on the humanity as a whole, but at the same time I also recognize the fact that in terms of action we will probably be luckier than our forefathers.

The new millennium started with a bang with the Y2K scare becoming the talk of the day and crashing IT-tech stocks the nightmare. Although, both the events were more prominent in the US but the intertwined world felt the tremors all the same. The interest rates across the globe spiraled downwards encouraging borrowing to revive the economies. Who knew then, that this mini crises was just for the starters and the main course waited to be served yet. With globalization having firmly established its foot hold across the planet and the surge of flight to quality after the demise of the Asian TIGERS, coupled with the inauspicious Tech-bubble burst, there started the rat race to hoard the US debt instruments.  Fueled by the need to pump quick money into the economy  the Fed relaxed the terms of lending to trigger domestic spending and investment. Although in hind-sight, it seems that Mr. Greenspan hit the gas paddle too hard - the economic automobile which went into acceleration initially, went out of control finally and tore apart not just the US but the whole world. The banks were incentivized for lending to ridiculous high levels; so much so, that there was emergence of the Jumbo, the NINJA (No income - No Job - No Asset) and the teaser-rate loans literally. To exacerbate the issues - the money making acumen of the investment bankers led to the financial jugglery of colletralized  products such as those of the CDO's, the CMO's which wiped clean the books of the commercial banks to favorably alter the debt-equity ratios and enable them for further lending (all within the norms!). Due to the consequence of which there was an iterative increase in the haziness of the grey area of where the responsibility sat. In the process, the circular relationships between the lender (through the CDO's and CMO's) and the borrower (through home loans) got so entangled and complex that the subsequent failure of the borrowers to  meet the debt servicing demands in the realm of increasing interest rates made the whole financial system collapse. The first to die was Bear Sterns, but it was the demise of Lehman that broke the camel's back. The repercussions were such that the economies across the length and breadth of the globe tottered and the negative indicators rose to unprecedented levels. An estimated of 500,000 people directly related to the financial industry lost jobs, trillions of dollars were wiped off in market meltdowns and the butterfly effect of the same are still unfathomable. A full two years after the bankruptcy of Lehman, the effects have still not vanished. The recent demise of the Greece - a country which is credited with the birth of City-States in Europe and its global dominance, the country which gave birth to language of the financial derivatives - is a live example of the same. 

The question is - "Is this the end of the story? or is there a lot more to come ?". The way I see it is, is that, we should not jump the band-wagon of the claims of sustainable recovery and should carefully look at the changes that the recent crises has brought in the world order. China has been seen flexing muscles in the international forums for the first time in the world history. It is sitting on the stock-pile of forex reserves to the tune of 3 trillion US dollars including the bond investments etc. The massive reserve gives it the flexibility and power to keep its export driven giant economy floating and thriving by deflating the currency artificially. The US on the other hand is squatting on the time bomb of debt which it has amassed. The talks of regulation of fiscal deficit and cutting the spending are not hoax cries but of significant impact (read destructive) if the word goes foul. What hit Greece and Dubai are not too different or rather, the same debt servicing concerns, that the US will face if not for the investor's confidence. To me what keeps the investor's confidence going is just the historical graph of the US success since Chirstopher Columbus landed there in 1492. I do admit it lends (not in the sense I have used the word earlier!) a credibility, but history, as they say, is not always a mirror of the future events. With China growing at a nimble two figure growth rate against the phenomenal (pun intended) 1.6% that US witnessed this quarter, and with the dying European economy, chances are, that the balance might shift in favor of the south-east Asian economies. The US is already trying to woo China into deregulating its currency, so that it can boost an internal demand. Though the deregulation might fuel the US domestic demand in short term but if the dollars that Asian dragon has got hold of come into the free market I see an inevitable erosion of the value of dollar which might consequently lead to other impacts such as that of a shifting of Oil trading to Euro or some other asian currency (currently majority of oil is traded in dollars), withdrawal of international money invested into the US treasury or it might even lead to the burst of Chinese property bubble which is being discussed a lot in financial circles these days. But as we know, the dragon is too smart to let that happen and had been stealthily letting the Yuan / Renminbi appreciate slowly along with managing to keep the production costs low with its unique (human rights don't matter much to those people) model of mass production. 

The questions are numerous but no one has seen what lies in the future. I surmise a shift towards the balance of world power … I mean something which last century has seen in the form of Russo-US cold war may now translate into Sino-US economic balance in this century. All in all, I believe there is a lot of action to be seen and there is not going to be any dearth of adventures in the coming times.