The global economy is changing dramatically before our eyes—but whether for better or worse isn’t yet clear. That’s the thesis of an insightful WSJ piece on the current instability of international markets:
For the past few years, the global economy, struggling to recover from a financial crisis, has relied on a few constants: The U.S. would print plenty of money and keep interest rates very low. China would provide a lot of demand and vacuum up commodities from around the world. And Japan was largely irrelevant.Suddenly, all three of those are being questioned in markets, triggering paroxysms in stocks, bonds, commodities and—particularly, in the past couple days—the currencies of emerging markets.The big questions hanging over markets and the global economy now: Is this is the inevitably bumpy beginning of a welcome return to normal—a world in which the U.S. economy doesn’t need big and repeated doses of monetary stimulus, Japan grows again and China’s economy gently slows to a sustainable speed?
Some of these “paroxysms” include a big drop in “creditworthiness” of bonds, massive fluctuations in the stock markets: the Dow Jones Industrial Average is all over the place, as is the Japanese Nikkei, and a dramatic shift in currency prices as currencies across the globe are fall against the dollar. Concerns about a slowdown in developing markets ranging from China to Brazil are adding to the chaos, as is the uncertainty surrounding the future plans of the Fed.Read the whole thing; it’s a balanced and thoughtful attempt to take a step back from the day-to-day fluctuations of economic data and look at the trends facing the global economy as a whole.For what it’s worth, we at Via Meadia think that instability and volatility are here to stay — and that while that can be disruptive and difficult, it is ultimately not a bad thing. Capitalism is about change: when the system is working well, new industries, new technologies and new patterns of trade and exchange constantly appear. Financial markets themselves are subject to change as computers get smarter, as traders respond to new opportunities with new strategies, and as regulators, investors and financial companies learn from past experience.The transition from an industrial to an information economy that we keep writing about is one that accelerates the pace of change and makes markets even more volatile than usual. That is partly because big changes like the industrial revolution or the information revolution test the world system and lead it into major changes in ways that create more unknowns and therefore more risk. It is partly because the information revolution has a particularly strong effect on financial markets themselves as computerized strategies and trade programs accelerate changes within the markets themselves.The great shift through which the world is now passing could not take place without causing more market volatility, but the turbulence we are seeing is due to a rising tide, not an ebbing one. The system is volatile because it is changing and growing, not because it is withering away.Investing skill is going to be at a premium in this brave new world; we wish our readers success as they surf the ever changing waves on this boisterous sea.