Thursday, 16 October 2008

It's surely not 1929 over again

As I write, stock exchanges throughout Europe are registering falls again. On a local level, small businesses are finding their credit tightening and losing their overdraft facilities. Some proprietors are reported to be using their personal credit cards to keep their operations going.

It seems to me, however, that there is a major difference between the 1930s and now. Then, virtually the sole source of world finance was the United States. Europe was still suffering from the effects of the Great War and indebted to the US. No new major economy had arisen.

Since the 1950s, petroleum has enabled several states, mainly in the Middle East, to build up substantial treasuries. Some of this money has been channelled into "sovereign wealth funds". These are investment organisations which operate commercially, but are ultimately controlled by the state. The first one of these I was aware of was the Kuwait Investment Office but others have since followed its aggressive path of building up stakes in businesses world-wide and even acquiring companies in the West.

So there is now this potential counter-balance to Wall St and Zürich which should help the world avoid repeating the mistakes of the 1930s. (These included the rise of the great dictators, Hitler, Mussolini, Stalin and Mao, let us not forget.) Judicious injections of capital and public support of key Western institutions should get the wheels turning again and restore confidence.

However, the SWF managers seem to be sitting on their hands at present. Whether this is out of excessive caution or a calculation that, if they wait longer, there are even bigger bargains to be had, they run the risk of letting the whole system collapse.

2 comments:

Frank H Little said...

Lessons should have been learned from 1929. Listen to the "Thinking Allowed" podcast interview with Richard Dale.

Frank H Little said...

It is not so easy ... see Paul Grignon's 47-minute animated presentation of "Money as Debt". It aims to tell in very simple and effective graphic terms what money is.