The Great Reset -- How To Regenerate World Growth?

London, UK - 7th December 2009, 05:30 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

The World Trade Organisation (WTO) recently held its first major ministerial meeting in Geneva, since Hong Kong in 2005, as it sought to find some way to get world trade liberalisation back on track, post 'The Great Reset'.

What is the Great Reset?

The Great Reset occurred between the third quarter of 2008 and the second quarter of 2009 when global demand for durable products collapsed abruptly leaving a vast gap relative to supply capacity worldwide. The Great Reset is colossal -- the steepest fall of world trade in recorded history and the deepest fall since the Great Depression of the 1930s. World demand experienced a sudden, severe and synchronised plunge on an unprecedented scale in the last quarter of 2008 after the insolvency of Lehman Brothers in September. Signs are that we might be turning a corner in the second half of 2009. However, According to Pascal Lamy, Director General, WTO, "Despite some evidence that trade volumes grew over the summer this year, global recovery has been patchy -- and so fragile that a sudden shock in equity or currency markets could once again undermine consumer and business confidence, leading to a further deterioration of world trade."

Severity and Speed

It took 24 months in the Great Depression of the 1930s for world trade to fall as far as it fell in the 9 months from November 2008 to July 2009. The seven biggest month-on-month drops in world trade -- based on data compiled by the OECD over the past 44 years -- all occurred since November 2008. Global trade has dropped before –- three times since WWII –- but nothing when compared to The Great Reset we are going through at present. Those three recessions were the oil-shock of 1974, the inflation-check of 1982, and the DotCom bust plus 9/11 in 2001. The Great Reset of 2008-09 is much worse; for two quarters in a row, world trade flows have been 15% below their previous year levels. "Driven largely by collapsing domestic demand and production levels, but also by a shortage of affordable trade finance, trade volumes are likely to fall by a further 10% this year. Whether world trade will recover next year is an open question," states Pascal Lamy.

Scale and Synchronicity

All 104 nations on which the WTO reports data, experienced a drop in both imports and exports during the second half of 2008 and the first half of 2009. Imports and exports collapsed for the European Union's 27 member countries and 10 other leading nations, that together account for three-quarters of world trade. Each of these trade flows dropped by more than 20% during that period; many fell 30% or more. Why did world trade fall so much more than GDP? Given the global recession, a drop in global trade is not surprising. The question remains: Why so big? During the four large post-war recessions -- 1975, 1982, 1991 and 2001 -- world trade dropped nearly 5 times more than GDP. This time the drop is far, far larger.

Trans-national Supply Chains

Evidence shows that the world trade-to-GDP ratio rose steeply in the late 1990s before stagnating in the 21st century right up to the start of The Great Reset in 2008, when it fell off a cliff. The rise in the 1990s is explained by a number of interlinked factors including trade liberalisation and trans-national supply chains. Essentially, geography became history! Manufacturing was geographically unbundled with various modules of the value-added processes being placed in the most cost-effective or time-efficient nations on the planet. This unbundling meant that the same value-added item crossed national borders several times. In a simple trans-national supply chain, imported sub-components would be transformed step-by-step into exported components which in turn would be assembled into final goods and exported again, so the world trade figures counted the final value add several times over. The presence of these highly integrated and tightly synchronised production and distribution networks has played an important and unprecedented role in precipitating the severity, speed, scale and synchronicity of The Great Reset worldwide.

The Great Reset is manifest as a gigantic drop in international sales and is mostly a demand shock -– although supply side factors did play some role. The demand shock operated through two distinct reinforcing channels. 1. Commodity prices, which tumbled when the price bubble burst in mid 2008. 2. The production and exports of manufacturing collapsed as modern trade in durable manufactured goods fell dramatically. In the face of financial crisis and uncertainty, consumers and corporations postponed purchases of anything that wasn’t needed immediately.

Conclusion

If we carefully study world events in the 17th, 18th and 19th centuries, as well as the Great Depression in the last century, we can see that Globalisation has had a long and cyclical propensity to generate bubble after bubble followed by collapse and whiplash. Clearly, the greatest danger of The Great Reset we are living through, is not simply the destruction of demand, wealth and living standards, however unpalatable that may be. It is also the destruction of "value" in the ethical and moral sense of an interlinked system of trust, commitments and social obligations, which allow trans-national capitalism to operate in harmonious concert. When in 1931 there was a collapse of confidence that resulted in the proliferation of beggar-thy-neighbour policies regarding currencies, trade and immigration, there was "De-Globalisation" that damaged economies around the world and ultimately led to geo-political upheaval and confrontation. If we do not pay heed to shore up that core system of values and global trade agreements and descend into tit-for-tat tariffs and penalties -- as in the Great Depression of the 1930s -- we may be truly on the edge of an abyss within The Great Reset of 2008-?

[ENDS]

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