Fragile recoveries and 
continued risks

19th March 2010 By: Seeraj Mohamed

We have lived through the worst financial crisis since the Great Depression, but activities and 
attitudes in financial and economic markets seem far too normal. It seems to me that big business and finance are trying so hard to put the crisis behind them that they are not giving enough consideration to existing risks. We now live in a world where unregulated misbehaviour before the global financial 
crisis and government adoption of private debt and risk to mitigate the impacts of the crisis have left many countries’ economies weaker.

However, activities in financial markets and speculation in currency markets, which decide on exchange rates, show us that the speculative behaviour focused on short-term returns continues to drive the actions of 
people working in financial markets.

The focus this week is on Greece and whether the country can stay afloat. This concern has led many people in financial markets to bet against Europe and the euro and to put their money back into the US and the dollar. 
They seem to forget how risky they deemed the US economy and its rising fiscal deficit a few weeks ago. This fear drove them into Europe and euros. Before that, they were worried about the fragility of the Japanese economic recovery. They monitor industrial 
outputs and exports and forget to look at 
internal weaknesses. For example, sentiment about China seems to be high again because of high expected growth.

However, the Chinese government is fighting a serious battle to limit speculation in Chinese real estate and financial markets. At the same time, there is a realisation that Chinese economic growth, which depends on a very high level of investment, cannot carry on. While South Africa, Ireland, Spain, Greece, Portugal, the UK and the US were going on debt-driven consumption splurges, the Chinese were investing. Very high levels of investment may sound good to us South Africans, where investment levels have been under 20% of gross domestic product (GDP) and household consumption over 60% of GDP during most of the period since 2000.

Chinese investment was over 80% of GDP and when the Chinese government put in place measures to stimulate the economy in response to the crisis, investment levels grew close to 90% of GDP.

Just as South African investment levels are too low to be sustainable, the high levels of 
investment that supports strong Chinese GDP growth are also not sustainable. One thing is clear: the financial crisis has not resolved 
imbalances within countries and at global level.
 The Chinese may be diversifying their 
export destinations, but they are still dependent on US consumption. 
The size of the US trade deficit is still a global problem. Private business and government policymakers still continue to ignore these huge risks in the global economy.

Many governments have taken on huge burdens in their attempts to rescue their financial sectors. They have printed tons of money. The increase in government debt in developed and developing countries has led to increased industrial output and even increased upward pressure on inflation. Government bail-outs and injections of liquidity into financial sectors give the impression that many countries are quickly recovering from the financial 
crisis. These actions by governments may well have saved the world from many of the economic disasters that could have occurred, but, unfortunately, they are not dealing with the high levels of global unemployment 
adequately or rapidly enough.

Another serious risk is that the fragile stability in global markets and the impression of recovery are leading to a precrisis style of ‘business as usual’ in finance around the world. They may be underestimating risk and reflating asset bubbles. 
We may be heading for another crash, but this time with economies already weakened by the last crisis and overindebted governments. 
One cannot rest easy until governments 
adequately regulate finance to change the short-term profligate behavior that is still very much part of their global culture.