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Study: Globalization magnifies economic risk contagion

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Globalization of finance, economics and trade is sold by some as more stable.  Interconnectedness is good, they say.  However, there is growing realization that the nation-state is key, because you can actually control fiscal, monetary, economic policy fully within the borders.  This is not an isolationist statement, but a governance statement.  Growth, the ability to manage growth, and the ability to make an impact on the increase in quality of life for citizens… that all happens at the nation-state level.

The European Union tried partial union with a common trade and economic region and common currency, but not common fiscal policy or common laws and regulations.  It is failing.  Greek currency cannot fall in value to spur export sales, German currency can’t rise to slow export sales (thus its locked in a net export status to EU countries, to its benefit), and there is no understanding that rich states will subsidize poor states through internal fiscal transfers.

The U.S. tried a full union of the states and that generally worked well.  A single currency, single fiscal policy, common rules, etc.  We have long resolved the issue of fiscal transfers between rich and poor regions, so New York and California (federal) taxes subsidize Mississippi and Arkansas.

This is a prelude pointing to an interesting new study called “Trade-Off: Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse.”  Metis Risk Consulting & Feasta sponsored the report.  I don’t know either entity.  But the large report makes these findings, which nobody is talking about…

This study considers the relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy. It outlines how contagion in the financial system could set off semi-autonomous contagion in supply chains globally, even where buyers and sellers are linked by solvency, sound money and bank intermediation. The cross-contagion between the financial system and trade/production networks is mutually reinforcing.

It is argued that in order to understand systemic risk in the globalised economy, account must be taken of how growing complexity (interconnectedness, interdependence and the speed of processes), the de-localisation of production and concentration within key pillars of the globalised economy have magnified global vulnerability and opened up the possibility of a rapid and large scale collapse. ‘Collapse’ in this sense means the irreversible loss of socio-economic complexity which fundamentally transforms the nature of the economy. These crucial issues have not been recognised by policy-makers nor are they reflected in economic thinking or modelling.

As the globalised economy has become more complex and ever faster (for example, Just-in-Time logistics), the ability of the real economy to pick up and globally transmit supply-chain failure, and then contagion, has become greater and potentially more devastating in its impacts. In a more complex and interdependent economy, fewer failures are required to transmit cascading failure through socio-economic systems. In addition, we have normalised massive increases in the complex conditionality that underpins modern societies and our welfare. Thus we have problems seeing, never mind planning for such eventualities, while the risk of them occurring has increased significantly. The most powerful primary cause of such an event would be a large-scale financial shock initially centring on some of the most complex and trade central parts of the globalised economy.

One Response to “Study: Globalization magnifies economic risk contagion”

  1. robert says:

    Illustrates why INDEPENDENCE is so important and why the resource rich United States should cultivate it economically as well as philosophically.


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