One must not be fooled by Russian analysts' optimistic reports of new records for oil prices and jeering comments about the economic problems of the United States and the declining dollar. The global economy is like an oversized bubble and with the cheap dollar and expensive assets threatening to burst it, everyone may be hit.
On March 17, the dollar registered its lowest exchange rate since the euro started trading in 1999 - $1.59 per euro, the lowest exchange rate against the Japanese yen in the past 13 years - $1 per 95.7 yen, and the lowest rate against the ruble in eight years - 23.44 rubles per $1.
Gold and oil have never been so expensive in absolute terms. On March 17, oil rose to $112 per barrel on Asian exchanges and gold hit $1,021.75 per troy ounce in London, compared with $998.20 last Friday.
Some of the records are only temporary. Global markets, which ran a fever for barely a month during the 1987 and the 1998 financial crises, have been in the red for more than six months now, and nobody can say when the decline can be reversed.
For the first time in 30 years, the U.S. Federal Reserve met on a Sunday (March 16) for an emergency meeting. In an attempt to stop the national economy from falling into a recession, the Federal Reserve cut the discount rate it charges on direct loans to banks by 0.25%, to 3.25%.
The rate has been cut several times since last September, when it was 5.25%, and it may be reduced by another 1%-1.25% on March 18. The Fed announced on Sunday that it would directly lend funds to companies trading in securities at a rate that had previously been reserved for regulated banks.
There is also a problem of ailing companies. Bear Stearns, the fifth largest investment company on Wall Street, which has been a success for 85 years, went under on Friday. JPMorgan is buying it for $240 million, one-tenth of the company's price the week before.
All of the above are highly alarming instances, proving that the global economy has overheated, and assets are overpriced. Figures show that the world is drinking enormous quantities of champagne, but on a beer budget.
The fourth annual report on world financial markets published by McKinsey Global Institute early this year writes that global financial assets reached $167 trillion in 2006 and were worth roughly 3.5 times the global GDP. The think-tank arm of the consulting firm defines financial depth as the ratio of financial assets to the GDP. The deeper the financial market, the more liquid it tends to be.
The figure was 3.16 in 2005, 2 in 1995, and equaled the global GDP in 1980. The 2006 financial depth figure turned out to be larger than McKinsey predicted a year before when it wrote that global financial assets would be worth 3.4 times the global GDP only in 2010.
It is now believed that financial assets provide an adequate assessment of real assets. But the gap between the relevant figures is a sure sign of excessive liquidity, which means risky investments and subsequent shocks.
These new economic shocks will not be confined to a single sector of the economy, such as the U.S. real estate market in 1990 or the Internet companies at the turn of the 21st century. Today all states (but above all the United States, the eurozone countries and Japan, which account for 75% of global financial assets) are contributing to overheating the market.
Does this mean that the global economy will take the final plunge?
It is true that the current chaos on global financial and commodities markets has exceeded the limits of ordinary crisis theory. Yet this is not a death sentence, although this time the shock can dramatically change the current operating principle of the global economy, where the United States is the manager, Asia and Latin America the production sites, and Russia and the Middle East, the energy suppliers.
A few decades from now, economic historians will describe the current developments as the first global crisis of post-industrial economies that spawned a new economic management system with the center in Asia or with several centers around the world.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
