Supposedly the world ended in 2008, and we are now seeing the birth of a new global paradigm, regarding saving, credit usage and leveraged investment.

The Anglo-Saxons are going to save more, be more moderate about credit and keep financial leverage contained forever more, a true blue break with the past.

But perhaps we aren't fully there yet, and may not even get there at all. Instead, are we merely shuffling deckchairs for a while, with long-running trends (behaviour) ere long reasserting?

Is inflation truly dead?

A crucial question is whether inflation is truly dead, reduced to insignificant levels, also for years to come?

The corollary questions are as simple: are interest rates going to be permanently low and will leverage be high to very high?

For low inflation begets low, low interest rates, which in turn begets risk-taking and it leads to blue yonder leverage. At least, it did in bygone cycles.

When one looks at 40-year global graphs of inflation and interest rates, whether short or long, something jumps at you rather forcefully.

The 1970s were a disruption, in the process taking the world from low single-digit 1960s inflation to high double-digit inflation, with very few countries escaping this general step change.

After reaching peak levels in 1980-1982, global inflation entered a long decline nearly everywhere. Its modern trough dates in the US from 1998-2003, shaped as it was by the exceptional conditions of that period (Asian contagion suppressed US import prices and the 911 US recession suppressed domestic US prices).

Micro, macro, turbo

These two decades of falling inflation globally had mainly two turbos driving them: good macro policy, and good micro policy.

Monetary policies were anti-inflationary, maintaining real interest rates, and opportunistically during mild recessions/slowdowns keeping rates tight a little longer than strictly necessary, cyclically netting small step-downs of inflation.

This was a least-costly way of structurally reducing inflation over time through policy measures.

Fiscal policies aimed at reducing deficits and national debt ratios, supporting the macro discipline.

Trade, labour and infrastructure policies supported what came to be known as modern 'globalisation'. World trade expanded rapidly, supporting especially Asian industrialisation and Western capital goods specialisation.

It furthermore allowed Asian industrialisers to keep their domestic consumption back in favour of boosting savings, fixed investment and exports.

Especially Anglo-Saxon industrial countries were happy to promote credit cultures, accept low savings ratios, and high consumption growth and trade deficits.

All of this made 1980-2000 a historically important period. Good global growth, falling inflation and interest rates, rising asset prices, and the progressive catch-up of many Asian industrialisers and other commodity producers.

Overgenerous petro-dollar diets

The period wasn't without its hiccups. Latin America bellied in the early 1980s after indulging on overgenerous petro-dollar diets. And much of emerging Asia (excluding China and India) bellied in the late 1990s for similar reasons.

These, though, were minor sideshows in a bigger picture. The bigger global context was growth, greater globalised economies of scale, good policy, falling inflation and expanding asset markets.

Just as Mexico's 1982 bankruptcy and Thailand's 1997 detonation, and everything that followed in either wake, didn't fundamentally disrupt the overall picture, so we now have to extent the picture by another decade, and another financial crisis.

Why should we conclude differently now about the underlying super-cycle still extending into the future?

A non-sustainable marginal credit complex came into existence for the third time in three decades, and like a real volcano blew its top in 2007.

Only this time the main problem wasn't located in an unsophisticated emerging market region, but in the US.

Third World component of US society

Still, the rot did start in the Third World component of US society (subprime housing borrowers). Even so, the political encouragement and actual banking changes feeding this phenomenon ultimately went much farther in changing overall behavioural rules and practices, to the point of eventually bankrupting US banking, pulling many global banks and other financial institutions (in Europe, UK and elsewhere) with it.

This now, we are led to believe, will change the world. And it will. But let's take a rain cheque for now.

As in Latin America in the 1980s, in Asia after 1998, and in global corporate governance after 2002 (another little micro implosion), the cleanups each time dictated that a repeat wouldn't reoccur soon of that particular localised misbehaviour.

But this didn't change the overarching world trends. It merely addressed a localised weakness, making repeats of similar hiccups less likely. In the process, the overall global trends may have become reinforced.

Why should the current episode be different?

We are currently still midway in containing the global financial crisis of 2007-2009. Once asset losses have been fully written off, banks fully recapitalised, and credit lending systems repaired, with capital markets fully operational, implying return of trust and risk appetite, and central banks and governments receding into the background once again, how will the world go forward?

The main change will presumably be in credit cultures, bank capitalisations and financial instrument transparency.

Like the Latino, Asian and corporate reforms, this should strengthen the global financial system in its future workouts and central role in sustaining global progress.

But while we are all taking time off to participate in this great repair and reform effort of the moment, what is happening to the great global themes of the past 30, 70, 300 and 800 years?

Too big to die

These are big themes. They don't get demoted quickly.

In other words, globalisation (a 800-year phenomenon), market capitalism (a 300-year phenomenon with rich earlier antecedents), modern macro- and micro government intervention (a 20th century innovation) and a modern return to low inflation accompanied by high growth (macro global discipline coupled with the latest episode and historically biggest emerging market growth catch-up).

We tend to become mesmerised by dysfunctional credit systems and capital markets, falling housing, equity and commodity prices, and the deepening global recession currently on our doorstep.

But this same global crisis is giving a new leash on life to the global tendencies dominating since 1980.

After reaching exceptional low inflation and interest rates in the aftermath of the Asian contagion, the IT bubble, the Millennium crossover, the 911 debacle and the corporate governance scandals during 1997-2003, two things got leveraged off all this unhappiness.

Firstly, the Asian growth engines took off, China aiming for sustained 10-12 percent growth, and India for 10 percent, with the rest of Asia in tow, and ultimately pulling most commodity producers along as well.

This was a super-growth episode in the making, pushing global growth eventually beyond five percent as in the late 1960s, with roughly similar results.

With many commodity producers guided by resource nationalism (limiting investment in new supply, wishing to maximise wealth over time) and consolidated global mining companies similarly induced to prevent oversupply, the strong demand growth steadily outstripped supply, giving rise to explosive commodity price inflation.

Old credit cultures

Secondly, financial innovation undermined the old credit cultures while boosting new forms of risk packaging, much of it untested and under-regulated.

During 2005-2008 it seemed increasingly if some of the long-term trends were breaking down under the pressure of breakneck growth. The huge pools of cheap Asian labour were shrinking, China and India were appreciating their currencies, and commodity prices were rocketing.

Besides, lower unemployment levels in the US and Europe suggested to some that underlying inflation in these countries could be rising structurally. Such concerns were less widespread in the US, non-existent in Japan, but Europe's traditional rigidities caused the greatest localised concerns.

Indeed, the low point in global inflation lay behind us during 1998-2003, in headline and core inflation. Since then inflation had been rising, with increasing anxiety that too much demand growth and too little supply response would trigger even bigger step-ups in inflation, reinforced by the remarkably easy monetary policy stances of especially the American Fed.

In 2003, a cyclical low following the serial follies of a bursting IT bubble, uncertain Millennium crossover, 911 suppressant and the corporate debacles (Enron), the growing fear was of falling inflation to the point of transforming into deflation.

The Fed allowed fed funds to reach one percent, and the 10-year US Treasury bond yield reached 3.1 percent before the cyclical turn came, thereafter transforming the overall picture once again.

Economic revival was underway anew, inflation was back, and policy gradually tightened.

No great watershed

But instead of this being the great watershed, the great break in long-running trends, it was really nothing of the sort, though with one proviso.

The supercharged Asian growth catch-up underway since 1950 (Japan), reinforced by the South East Asian Tigers (1960s and 1970s) and further extended by China's belated start (1980s), acquired a new critical mass in the late 1990s as China and India steadily made bigger and bigger annual contributions to global GDP growth.

This growth phenomenon, ultimately reinforced by and surely reinforcing other regional growth phenomena, was exceptionally strong and could in its own right eventually have broken the long-running global financial trends.

In other word, this Asian growth momentum could have more permanently turned the global inflation trend, the interest rate trend and ultimately the asset leverage trend, as some (Greenspan amongst them) had started to speculate about.

Upstaged by the US upstart

Only this growth engine wasn't given enough time to test its strength of doing so. The reason was simple. It was upstaged by the US upstart.

The US banking implosion, taking much of the industrial world with it, broke the bank at Monaco. Its feared spillovers into the real global economy abruptly broke the commodity inflation from July 2008. And from September 2008 credit and capital market dysfunctionality equally abruptly pushed industrial sectors worldwide into the severest recession since WW2.

The combination of commodity price collapses (between 40 percent and 70 percent price declines within five months) and severe underperformance of global GDP potential implied a major falloff in inflation during late 2008 and 2009.

Having risen from a low point of one to two percent in 1998-2003 to a high of five percent by mid-2008, OECD inflation was being pulled down towards two percent by late 2008 and is expected to be seriously negative (deflation) during 2009 (about -1.5 percent everywhere and not only because of commodity price base effects).

In the process, but mainly due to exceptional monetary policy actions in the US and many other countries, with central bank intervention rates converging on zero, and safe haven flight in crisis and quantitative easing by central banks pulling the remainder of the yield curve steadily lower, the US 10-year yield reached a new secular low of 2.5 percent, and has potentially further to fall.

Thus, during 2008 private leverage has become interchanged with public leverage in some countries, especially the US, as central banks and governments massively commenced leveraging off their public balance sheets to keep their respective economies functional.

This was necessary as private banks had to reabsorb their shadow asset holdings back onto their main balance sheets, with their capital impaired due to mounting losses, inviting massive deleveraging.

Similarly, the falloff in asset prices and losses incurred by hedge funds and other investment managers invited steady withdrawal of capital in favour of remaining safe havens (mainly cash, guaranteed bank deposits and government paper). Other parties (insurers, corporates) also were engaged in deleveraging.

Yet another asset bubble

What thus, probably unintentionally, came into being was yet another asset bubble.

After the Latino bubble of the early 1980s, the IT and Asian bubbles of the 1990s and the housing, commodity and emerging market equity bubbles of the early 2000s, we now have a global bond bubble in 2008-2009.

So let's not yet fool ourselves. The great inflation decline since 1980 has not been broken, but in fact is going to yet lower levels.

The declining interest rate trend piggybacked off the falling inflation trend has also gone to yet lower levels across the full yield spectrum.

Leverage hasn't died

Leverage hasn't died, but has temporarily been transposed from private to public persona. Central bank and government leveraging currently underway is as breathtaking as what private actions ever created.

So what next?

Look for continuity in human affairs rather than breakdown or trend breaks, unless one has genuine reason to believe something deeply fundamental has changed.

Thus, US five and ten year fixed income futures signal inflation expectations of 2.5 percent, very much in line with the modern long trend, aside of temporary deviations below and above that level.

This presupposes a return to GDP trend growth in the US of about 2.5-3 percent within the next two years.

If this condition is copied elsewhere, after allowing for minor regional differences, the global tendency to low inflation (one to three percent) has not been fundamentally broken.

As central banks and governments recede once banking systems have been repaired and financial systems are functioning normally again, with full private sector participation, the bond bubbles will deflate as excess liquidity is withdrawn and interest rates rise to more normal and sustainable levels over inflation.

Thus the great public leveraging of 2008-2009 will end in 2010-2012. But will it again be replaced with rising private leverage?

Disciplining effect of so much mayhem

Increased regulatory oversight, and the disciplining effect of so much mayhem as recently experienced, will presumably curtail excessive speculative inspirations, at least for a while.

But as growth returns, appetite for risk-taking resurfaces, the heavy hand of oversight erodes, and new financial innovation surfaces, one can assume that leverage will be back in an environment marked mainly by low inflation, low real interest rates and relatively low yield. Little will have changed in the underlying human behaviours over time.

Still, just as following the Latino, Asian, IT, and corporate governance episodes, the re-established disciplines following this latest crisis should give good returns for some years.

This brings into focus the ultimate overarching context.

Periods of instability and underperformance beget policy action and renewed stability. Just so, periods of stability and high performance carry within them their own seeds of destruction and decay over time.

But before such inner workings can derail the global picture once again, one needs to vote on one other candidate capable of taking the world to the limit of its performance endurance again relatively soon.

Great Asian catch-up growth engine

Is the great Asian catch-up growth engine being broken by current events, or is it merely shifting gears while temporarily having to accommodate slower global growth through reduced exporting?

I suspect global roles will not change as much as now foreseen in the midst of global crisis and deepening recession. US savings revival will probably only be temporary (cyclical). Global producer specialisations, as much among highly industrialised countries (Germany, Japan, Switzerland) as among upcoming industrialisers (China, India, South East Asian Tigers, commodity producers everywhere) will probably endure more than what they will change.

It is possible that consumer participation and fixed investment (infrastructure) efforts in key emerging markets will be boosted to attain greater domestic demand contributions even as the world is marooned in its pit stop, with export potential reduced.

But this may also only be a temporary deviation in a long-term transformation of such industrialisers.

The great globalisation theme has much further to run, as much the potential catch-up growth still to be harvested as the global specialisations that are possible, as much regarding production, saving, export as consumption and wealth accumulation.

More globalisation harvesting

There is potential here for at least another generation or two of more globalisation harvesting, and beyond that we simply don't have enough imagination. Except, perhaps, to note an old reality that market capitalism allows technological innovation and per capita productivity improvements at about 2.5 percent annually. Being still far removed from natural limits, there may still be many centuries of growth ahead, with of course the necessary episodic social, environmental, geopolitical and financial disruptions as we have seen in the past.

Yes, there will be more regulatory oversight, a return of more disciplined credit culture, and more transparency in financial instruments.

But no, the recent losses and the consequent reforms will probably not break the major historic trends in progress, or even deviate them significantly, except for a relatively minor short-term interruption (2007-2009).

Cees Bruggemans is chief economist of First National Bank.