2008金融危機（一）柏林牆的倒塌

02-09

It was the best of times,

It was the worst of times,

It was the age of wisdom,

It was the age of foolishness.

Dickens precisely describes the past thirty years in the modern world. The UK economy is a typical case in point. It has seen the longest continuous expansion the industrialized world--63 consecutive quarters of economic growth, referring to the Nice decade: non-inflationary continuous expansion. Yet the admirable economic achievement came to an end in August 2007, follow by a deepest worldwide recession since 1930, whose impacts are still dragging the pace of todays economic recovery.

Since 2008, an outpouring of articles tried to illuminate the root of the financial crisis, such as irrational bullish sentiment, the absence of regulation, the corruption of bankers, even the failure of idea. This series of essays gives a general overview of the crisis. And the opening chapter will explain the underlying cause of the 2008 financial crisis ( hereafter the crisis ) and how the world lost its balance--a long, long story.

In 1989, the fall of the Berlin Wall symbolised the end of communism and the triumph of capitalism. China, former Soviet Union and India have been integrated into the global market and trebled the global labour pool. China alone supplied 70million workers, outnumber the total labour force of EU and US combined by 28million.

As the diagram shows, other thing being equal, a surge in labour supply (S to S2) leads to a lower wage rate (W1 to W2). Monthly wage in China could be low as $100, a tiny fraction of minimum wage in developed countries. Those developing countries have attracted a bunch of foreign direct investment (FDI), who seek to pursue a low-cost country sourcing (LCCS) strategy—in order to cut cost, they outsource materials from countries with lower labour and production costs, such as China, India and Indonesia. While advanced economies were enjoying cheaper goods and services, China ended a 110-year US leadership in manufacturing goods. Moreover, half of the manufacturing output were supplied by Asian countries in 2007.

Before 2008, many developing economies in Asia made great use of their comparative advantages, pursuing export-led strategy, imports-substitution policy and protectionism, leading to a large trade surplus. Furthermore, there is a strong desire for Asian countries to save. Chinas national saving rate, in particular, has been persistently high, accounting for 34-53% of its GDP in the past three decades, being attributed to the absence of social safety net and one child policy. On the other hand, Western countries are full of enthusiasm to spend, which are sadly not strong enough to offset the desire to save in the Eastern world. When the global economy is functioning well, capital flows from mature to developing economies where business opportunities abound. But prior the crisis, developing countries were actually exporting capital, capital flows was reversed. The US is a telling example, who has seen a trade deficit of 6% of GDP at the height of the boom, mainly financed by capital flows from China.

In advanced economies, rising imports and declining exports lead to a hike of trade deficit, a drag on aggregate demand, calculated by: AD = C + I + G + X - M. A potential fall in aggregate demand (AD1 to AD2) means a conceivable fall in employment and output level ( Y1 to Y2 ).

Aiming to boost economic growth and keep inflation in line with the 2% target, Central Bankers cut their official interest rate to an unsustainably low level in an attempt to boost economic growth. Noticeably, in recent years, since the US benchmark rate has been less than the inflation rate, its short-term real interest rate have actually been negative.

But over longer horizons, central banks almost have no control over their long-term interest rates. The imbalance between countries and aging populations exert an unassailable downward pressure on the long-term interest rate, halved it to 2% by 2008.

The period spanning from 2000 to 2006 is telling, despite the plummet and surge in the Fed benchmark rate, the long term interest rate falls continuously and soothly. Thus, it is the balance between spending and saving that determines the long term interest rate, central banks then react to it.

The low-rate world was in readiness.