Cause and Effect
By Ian Munroe • Aug 3rd, 2009So you don’t think they’ll become any less influential?
Well the trouble is, no matter how much people say “I don’t really trust the rating agencies,” it is nonetheless very difficult for institutional investors to ignore what they say. If the rating agencies put a downgrade on your country’s debt, then your sovereign debt spreads will rise because there are so many players who are more or less mechanically forced to divest themselves of holdings of your debt because of that action.
How do you see the crisis changing the global economy?
I think we’re going to see substantially bigger financial regulations, and with that, substantially reduced financial globalization. A lot of the international penetration of markets was part and parcel of the growth of this unregulated banking sector, and I think that’s going to be reigned in. A lot of things we’re seeing countries do as part of their rescue are also pushing finance towards a home focus. So in a way, the world is going to get bigger again. International finance will be less of a factor than it was.
Will developed and developing countries be pushed further apart?
We may actually have some of the decoupling that people thought would happen in this crisis and didn’t. Now for what it’s worth, we had a perverse situation in these past 10 years where many of these developing countries were actually exporting to a lot of the advanced countries. I don’t think anyone foresees that coming to an end. I don’t think we’re going to have a lot of global protectionism or that trade is going to be cut back very much. There is obviously some pressure there, but I don’t think it’s going to be at the center of the story. It’s going to be a little hard to see how this plays out, but I think it’s probably just going to be a calmer sort of world - less wheeling and dealing, less adventurous finance.
How will people and companies behave differently?
Eventually we hope that there will be a revival in business investment. One of my big concerns is what it will take to get that going. But in the end I think it will happen. In terms of the debt position, non-financial corporations haven’t behaved in a particularly over-the-top way. They’ve actually behaved relatively responsibly, so I don’t think there will be major changes there. Households in the United States, and to some extent in several European countries, are probably going to have much higher savings rates for a sustained period. They were leveraging themselves off, taking on a lot of debt, and relying on capital gains to provide for retirement. That’s not going to happen, so there’s going to be a serious change in consumer behavior.
Will the global services sector grow larger than it was before the crisis, or will it shrink?
Ultimately the reason we shifted to a service-based economy is a combination of saturation in the demand for goods … and higher productivity growth of the goods-producing sector, that pushes us towards services. One of the reasons we have so few farmers is that the farmers we do have are so productive. I don’t think that’s going to change. The only big thing is, I don’t think that financial services is going to come back. We went from financial services bringing in 4 percent of GDP to 8 percent of GDP and it’s not clear there was any social gain from that extra 4 percent of GDP, so that sector’s going to shrink.
