The financial crisis has now been with us for well over two years, and going on three. A variety of exceptional measures, never before attempted, have been taken by government authorities around the world. For most of the second half of 2009 it seemed that these had their effect: some small, but consistent signs of recovery were appearing.

This tentative improvement is now being brought into question. As many commentators have pointed out, the primary policy of governments has been, through deficit spending and a series of liquidity enhancing measures, to rescue and “reset” the global financial system. This has in effect transferred the financial institutions’ liabilities to sovereign governments, some of which are now looking at the possibility of default.

At this time, default threatens only those countries with the weakest finances. The large countries such as the U.S. are assumed to be still immune. This argument, however, has been heard before: in the summer of 2007 the collapse of a few over-leveraged hedge funds was declared to be “contained” with no further threat to the rest of the system.

This proved an illusory assurance, as one institution after another was shown to be a house of cards and the crisis grew to its full extent.

It is therefore worthwhile to probe deeper, and to ask whether there is not a more fundamental issue at the heart of this apparently continuing crisis. Is the globalized financial system, with or without government support, basically viable? And, if not, what is to be done before the crisis deepens?

The goal of the measures taken to date, particularly in the United States, has been “to avoid a second Great Depression”. This assumes that the situation, now and then, is in the main similar, and would respond to the same remedies. These have now been applied, so problem solved.

The hitch is that in the 1930’s economies were national, whereas now they are globally interconnected. In other words, the lessons of the 1930’s are irrelevant, our situation is different, and a new analysis is required, one taking full account of globalization.

Globalization has been taking place on two levels: finance and trade.

Financial integration is the most advanced, and at this time can be considered to be nearly complete. This has two major consequences in the way the financial system operates: synchronicity and overwhelming mass.

Synchronicity means that financial movements propagate instantaneously throughout the planet. A sell-off of equities in favor of commodity futures, for example, can begin in Asia and be repeated everywhere else within 24 hours, often even faster.

Mass means that, as all financial assets worldwide tend to become fungible, the entire monetary mass in the world can theoretically be put to use at a single point. Furthermore that mass can be multiplied several times over through the use of leverage and derivative products. This amplification, coupled with the separation of money from any fixed standard such as gold, means that the amounts available for financial operations tend towards the infinite.

The globalization of trade, on the other hand, goes in the opposite direction. Because it tends to locate fixed assets in the area of lowest cost, it gradually decreases the total value of these assets. Globalization thus has the specific effect of increasing the amount of money or equivalent instruments in circulation while simultaneously reducing the total amount of assets this money can buy or be otherwise applied to.

Within a national economy the monetary mass and the amount of fixed assets must remain in rough balance for the economy to keep operating. Within a globalized economy they tend to diverge. One increases while the other diminishes. A systemic unbalance is created. As the profit motive continues to operate, this unbalance directs it along the path of least resistance, favoring speculation over productive investment and further increasing instability.

A sufficiently globalized economy will therefore tend to be unstable, alternating between boom and bust with an increasing amplitude and a quickening periodicity. These fluctuations will overwhelm any attempts to control them since the global monetary mass will in every case swamp the resources available to national governments.

Theoretically, such worldwide instability could be dampened and controlled through the use of truly global measures implemented through a supra-national institution. But neither the necessary knowledge nor the means to apply it are even remotely available. The world is still structured on the basis of the nation-state or its various equivalents, and power is distributed accordingly. Within that real, as opposed to theoretical, context, globalization is a vast and dangerous overreach.

The continuing crisis is a manifestation of this very overreach. It leaves the government authorities with a stark choice: reducing globalization down to the level where national means of control can effectively operate; or continuing on the present course and eventually driving over the cliff at an ever greater speed.

The current crisis is the hinge, or the point of critical choice. It is the third one of its kind, after the 1997 Asian meltdown and the dotcom bust. A realization is growing that somehow control has to be improved, that some blind force is shaking the current global arrangement, and that a decisive step must now be taken.

There are two paths to choose from. One is to continue driving half-blind with the hope that globalization is indeed the next stage in the development of economic man. The other is a return to the manageable, to sanity and logic within the framework of viable national economies.

The choice is ours.

This entry was posted on Wednesday, February 10th, 2010 at 8:00 pm and is filed under Our Money, The People's Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.