Yesterday, the Dow Jones Industrial Average ended down 30.49 points. Yet both the S&P 500 and the Nasdaq Composite posted gains, and market signals indicate the Dow will turn back up today to continue the advance started on Friday. But even with the recent uptrend, no one thinks the global sub-prime lending crisis is over.
The recent turmoil in the world’s equity markets is a symptom of greater dislocations. There are many causes for the recent problems—such as the mispricing of risk caused by too much liquidity—and none of them have been solved by the recent gyrations in global markets. At some point, the great economic bull run following the fall of the Soviet Union must end. There is a rhythm to economies that governments can moderate, but not eliminate.
Since the end of World War II, the United States has taken the lead in developing mutually supporting systems—embodied by multilateral institutions such as the International Monetary Fund and the World Bank—to ensure prosperity. Yet, if the shocks to this global system are too great, the network’s interconnectedness, normally a strength, becomes its weakness, as one part brings down another. As in an overstressed electrical grid, problems can first ripple and then cascade. So, for the first time in history, virtually all societies can move in sync due to the very nature of the international system we have created.
If a serious global recession hits the world now, how will it affect geopolitics? For one thing, governments will have fewer resources to pursue their ambitions. A general downturn, for instance, might accomplish what Democrats in Congress and insurgents in Baghdad have failed to achieve so far: an end to the American involvement in Iraq. The war, costing about $2 billion a week, has been affordable in a booming economy. In a recessionary one, it could become a burden the public might not be willing to bear, at least at present levels. Other members of the international coalition, whose commitments already are not firm, undoubtedly would pull out. Funding for the conflict in Afghanistan could be scaled back to unacceptably low levels.
Not all the foreseeable consequences of a severe recession would be bad, however. A fall in oil and gas prices most likely would dent the plans of Russia’s Putin, Venezuela’s Chavez, and Iran’s Ahmadinejad. A decline in global consumption could mean that China’s export markets might dry up, the Chinese economy might spiral downward, and the Communist Party might lose power. The Doha Trade Round would probably fail, and globalization would stop for a long pause—as it has done so many times in the past. Countries would insource and international commerce would decline.
The biggest imponderable is how people around the world will react in a deteriorating economic environment. In today’s hyper-connected society, private citizens have more say in what goes on, even under rigidly authoritarian governments. At this point, no one knows what the mood of global citizenry would be. All we know is that if a severe recession comes, the world will still be dangerous, but the dangers will differ from the ones we face today.