Globalization and the Current Crisis

Prime Minister Gordon Brown is fond of saying that the current crisis for the British economy originated as an offshoot of the sub-prime debt problem that erupted in the United States. Although this claim seems a bit like the “Not me guv, nothing to do with me,” line taken by accused villains, there is some truth in it. To understand how far it is true it is necessary to take into account the way in which the current recession differs from previous recessions, specially the two most recent ones in the early 1990s and the 1980s. What is not different is that like the recession of 2007–2008, both these recessions had a worldwide coverage. They were recessions of a globalized world economy. This was so even when, as with the bursting of the dot.com bubble, the United States was the leading driver of the downturn. The typical story of past recessions is that a booming economy displays increasing indications of inflation. Central banks raise interest rates, bubbles burst, and economies go into recession. This soon moderates inflation and recovery follows after two or three years. The 2007–2008 recession deviates from this typical story. At its start inflation was not high; it was at an unprecedented low level. There were bubbles, notably in stock markets and in housing markets, but this is now more obvious with the benefit of hindsight than it was at the time.