The crisis marks the end of pre-eminence in the financial sphere and the lasting decline of the City and Wall Street

This chapter of GEAB N°43 is adpated from an article prepared at the request of Annales des Mines, the oldest French scientific publication (established in 1794), for its next edition.

It is a geopolitical, as much as an economic, financial and monetary approach which led LEAP, in February 2006, to announce the imminent arrival of what we have called « the global systemic crisis ». This same approach now tends to confirm that, in the « world after the crisis », the real economy will, once again, take on a central role, whilst these last few decades have been marked by a virtual economy in the financial sector being at the centre of affairs.

In considering in 2006 that the present crisis was going to be a « global systemic crisis », we wanted to show that, fundamentally, the event reflected a collapse of the world we have known since 1945, of the Western-centered form inherited from the Second World War and reinforced by the fall of the Iron Curtain in 1989. The financial, monetary, economic, social, political and strategic forms would take during that the various phases of this systemic crisis would take, would only be expressions of geopolitical change of historic proportions, the growing incapacity of the United States to take responsibility for all the obligations it took upon itself during these last few decades, and the rapid loss of influence of the two principal pillars of Anglo-Saxon power on world affairs, i.e. Wall Street and the City.

Developments taking place since 2006 seem, in fact, to show that the break up now upon us requires a much deeper calling into question than originally envisaged. It is now likely that we are currently suffering the shock of the ending of a period which began two or three hundred years ago, with the beginning of European global domination and the birth of Anglo-Saxon financial domination, first only in London, then jointly with New York.

A year ago we detailed in the GEAB a number of signs showing a leaving of this secular reference period. For our more recent readers here is a quick reminder:

1. In 2009, the Bank of England base rate reached its lowest level since the bank was inaugurated (0.5%) in 1694 (in 315 years of existence).

2. In 2008, the Caisse des Dépôts (Bank for Official Deposits), the French State’s financial arm since 1816 and under all forms of governance (royal, empire, republic) suffered its first annual loss (in 193 years).

3. In April 2009 China became Brazil’s largest trading partner, a position which, for centuries, has correctly anticipated major scissions in world leadership. Since, two hundred years ago, the United Kingdom brought an end to three centuries of Portuguese hegemony, it is only the second occasion that this has happened (the United States indeed replaced the United Kingdom at the beginning of the 1930’s as Brazil’s major trading partner).

4. After a continual fall in their share of the world economy starting at the end of the XVIIIth century, China and India have now seen, over the last two decades, their share increase once more, and very rapidly. These two countries indeed used to represent around 50% of the world economy up to the middle of the XIXth century. Their share subsequently fell regularly, reaching around 15% in the second part of the XXth century. During the last decade it has now increased to more than 20%. Outside of a reversal in the trend of the last two centuries, one must take note of the fact that the Chinese and Indian economies are essentially « real economies ». Their renewal in strength thus automatically marks an expansion of the real economy compared to the virtual financial economy (the American one particularly).

The crisis has brought lasting weakness to all the factors which allowed the virtual economy to expand exponentially for several decades

The reversal of very long term trends now taking place accompanies the collapse of the most recent « bubble » which formed progressively since the 1970’s and which one can characterise as « the excesses of the last days of the empire ». It is, of course, the global financial sector, which has steadily emerged, over almost forty years, as a virtual economy « worth (1) » more than the real world economy. Knowing that a historic crisis is, above all, a formidable time-contraction, changes can take just a few years which would normally be spread over decades, even centuries.

So, since the beginning in 2008 of a series of bankruptcies of the Wall Street giants, the US government saving the rest and the emergency takeovers of the British banks by the UK government, we are now witnessing the collapse of the two “anchors” of the « world financial bubble ». If we chose the term “anchor”, it is for the purpose of showing that this « bubble » has no other value than that given it by these two centres of world finance, New York and London, at the heart of a network of share and bond issuers, market pricing, rating agencies, international financial media, and the issuer of the currency « par excellence » of the virtual global economy, the US Dollar; and that its interaction with the real economy is essentially effected via these two centres which truly perform their role as anchorages in the reality of the world financial bubble. The other financial centres are of little importance compared to these two giants, in particular for the management/creation of all the financial instruments of these last decades which constitute the basis of the virtual economy.

These two centres of the Anglo-Saxon empire, « haute époque » London and « basse-époque » New York, are splitting apart before our very eyes:

. the London centre still only exists due to huge, direct support from the British government. Without British taxpayers’ money, the ornaments of the City would have disappeared in 2008; and they are only surviving thanks to the continued provision of this support, which will last no longer than the next two years due to the crisis in the country’s public finances. The country’s budgetary constraints weakened the City to such an extent that it wasn’t strong enough in 2009 neither to prevent a big tax rise on financial movers and shakers making London, from then on, one of the least attractive fiscal spots on the planet (2), nor to block the European regulatory process, putting the City, for the first time in three centuries, under the supervision of non-British institutions.

. the New York centre is also on a government drip, and is only alive thanks to the policy of money at no cost which the Federal Reserve has followed for almost two years now, as well as the trillions of securitised loans which the latter has bought to avoid a complete collapse of the whole of the US real estate market which stands charged as a major participant in the US financial bubble. As in the United Kingdom, 2010/2011 will mark the end of most of these policies leading Wall Street to a new phase of weakness.

. at world level, regulation of the sector moves forward, paradoxically, by the development of a trend of its slicing up: more and more countries or regions (like the EU) are putting in place oversight procedures, the banning of certain practices, or their own regulations which, de facto, breaks the « global » order which has characterised the financial sector since the end of the 1980’s and its exponential growth. Its slicing up is, in fact, the most efficient way of deflating this « bubble » because it deals directly with the « modus operandi » which makes it possible.

. lastly, the geopolitical « reason for being » of this « bubble » has entered the terminal phase. In effect, this world financial sector began its unbridled growth in the 1970’s (see the chart below) partly because of the US decision to let the Dollar float and partly because of the need to recycle the huge financial surpluses of the oil producing countries. This is the first major signal that the United States was no longer capable of taking on the role of supporting the world order which it awarded itself in 1945 (3), which marked the unleashing of the « irresistible upsurge of the virtual economy ». However, in order to keep this fiction as far away as possible from the real world economy, the United States spontaneously facilitated the emergence of players, financial instruments and products allowing the connection to be made between their stated and their actual strength: the virtual economy was engulfed in this « niche » which turned into a bubble (4).

In a way, as regards the Euro, Greece has done the same thing for ten years, on a small scale, as the United States has been doing for forty years: it has hidden the true weakness of its budgetary and financial situation by having recourse to the same banks and financial techniques as those used by Washington (or London) for many decades to hide the true state of their economies. But due to the crisis, the constraints of the Euro suddenly impose stringent requirements on Greece to re-establish the link between the fact and fiction of its finances and wealth. The United States, facing a world which increasingly mistrusts the Dollar, is unwillingly compelled to follow the same path, which will mark the final implosion of the world financial bubble, essentially made up of Dollar based financial assets.

From this point of view, the increasing speed of developments of which the crisis is both the symbol and the calalyst, is contributing to burst the « bubble » of the virtual economy by causing a weakening in all the factors which have allowed it to exist and develop, and by making its players and their conduct more and more suspect.

To close on the subject of the end of the domination of the virtual economy, let’s quickly consider the answer to this question: which politician today would still be prepared to have his photograph taken with the chairman of Goldman Sachs (5)? Probably none amongst those who have to shortly run for election. However, just two years ago it was this « Davos » style photo which symbolised « modernity ». Such a radical change, in less than two years, shows the strength of the contrary winds which the virtual economy must now face. These « high-priests » are becoming outlaws and, in losing their ability to stay close to political decision-makers, the players at the heart of the virtual economy are losing control over events, even over their own affairs: regulatory control, regulatory authorities and opinion makers which allows them, on the one hand, to arbitrarily give value to something which is only a virtual asset, totally disconnected from any social or economic use and, on the other hand, to post incredible profits created by an excess of de-regulation.


Mario Draghi, whose attempt to succeed Jean-Claude Trichet has completely sunk due to his former role at the head of Goldman Sachs in Europe, is a good example of what the routing of the virtual economy will cause, here and there, throughout the world amongst the elite: the captains of high finance, worshipped until now, become suspect, allowing particularly the return of the engineer. Today’s students are already aware of these changes: finance’s now scarred social role, coupled with massive job losses and the sector’s rewards cuts have had the effect of stopping the flow of the brightest who were leaving science, engineering, or other sectors of the real economy to throw in their lot with investment banks and other hedge funds. A sector which is losing its attractiveness in terms of human resources, which is seeing the power of its major centres disappear, which can no longer control its regulatory environment, and whose profitability is falling, has its future behind it. Such is exactly the plight of the virtual economy.

By the way, isn’t China, which appears to be one of the big winners from this crisis, led by engineers, whilst the United States, the big loser, by financiers?

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Notes:

(1) Just as virtual, as the crisis and its 30 trillion USD ghost financial assets shows.
KPMG has just carried out a comparison on the taxation of financial institutions in eight world financial centres (Dubai-which now has everything as a phantom financial centre, Hong Kong, Zurich, London, New York, Geneva, Paris and Frankfurt). The result is clear: in only one year London has fallen from fourth to last place for a banker with a family, and to sixth place for a single banker. Source: Wall Street Journal, 03/08/2010.

(2) In 1971, by closing the window of convertibility on the Dollar and gold, the United States decided to give a virtual value to their currency and economy of which this currency is the marker.

(3) Especially when the pretence of being the sole world power has only increased the gap between its actual and self-declared strength.

(4) The way in which Goldman Sachs is embroiled in Greece’s problems clearly illustrates the times are changing. That which was a « routine job » for the virtual economy, financing sovereign debt two years ago, now carries serious risks clearly fixed in political, social and economic reality to which the crisis now accords pre-eminence; or, if one prefers, the re-establishment of that pre-eminence caused the crisis.

(5) And the coming years will only strengthen these contrary winds simultaneously and proportionately, in which the consequences of the crisis will become more painful for everyone.