Global Vulnerability

A couple of weeks ago, I listened to a talk on public radio by Nicole Foss of the Automatic Earth. She argues that peak oil and the collapse of the banking system will bring about a collapse of global trade, which will seriously damage the world economy. She had some interesting things to say about how to respond to a decline in global trade, but I think she is wrong about banking failure being the cause.

The modern banking system is rotten, but it will not collapse in the short term. Modern banking has two major vulnerabilities.

1. Bad loans
2. Bank runs

The Global Financial Crisis was caused by bad loans due to poor risk management. The events of 2008 have given the bankers a fright that they will not forget for at least a decade. We are more likely to see cautious lending.

Since the Great Depression, government have understood the dangers of bank runs and now act a lender of last resort to the banking system. They will always intervene to stop bank runs.

Neither of these two vulnerabilities can bring down world trade, so what are the real dangers.

1. War
The uneasy peace that has prevailed since the end of the World War 2 has allowed international trade to flourish. Globalisation has supported a huge increase in specialisation and division of labour that has produced a huge increase in prosperity. If peace that has been enforced by the American Empire falls apart, international trade would collapse and prosperity with it. (The previous long peace was enforced by the British Empire. It was ended by the First World War).

2. Middle East
If the war is centred in the Middle East, and oil supplies are disrupted, the economic crisis will spread even quicker. Peak Oil is unlikely to be a threat to world trade, but war in the wrong place could do more harm.

3 Sovereign Debt
Modern governments have been on a power binge. Democratically elected leaders have to solve every problem that arises in society. Most have already made commitments to expenditure programmes that go beyond what taxation can afford. The gap has been filled by extensive borrowing. The chickens have come to risk in Greece, which lead the way on spending money it did not have. However, the party is still underway in the rest of the world. Profligate governments will eventually collapse under the strain, when the loans dry up. (Peter Schiff says that this would manifest in a blow out of the bond market, which has become the latest economic bubble). A real sovereign debt crisis would cause tremendous dislocation in local economies.

4. Sickness and Plague
Modern medicine has made huge advances, but one vulnerability remains. International travel and transport mean that an epidemic disease can spread round the world in a few days. A serious plague would disrupt travel and transport, as countries put quarantine barriers in place to prevent the spread of sickness and disease.

5. China
The expansion of global trade into China has brought huge benefits to the western world. Party Leaders have now held China together for sixty years, but the stresses caused by rural poverty clashing with the growth of capitalist wealth in the cities. Leadership is currently in the process of being passed to the next generation of leaders, but there is no guarantee that they can keep things on an even keel. The world economy would change dramatically, if we lost access to cheap Chinese clothing, electronics, phones and computers.

I do not know the likelihood of any of these events occurring, but any one would do serious harm to global trade. If several were to occur at the same time, they would reinforce the harm.