Some 500 years ago, at the dawn of the renaissance, no less an authority than Copernicus confirmed that the earth was flat.

Nearly 500 years later, on entering the 21st century, no less a modern authority than Steven Friedman, acclaimed New York Times columnist, wrote a book affirming that the earth was indeed flat.

Level playing field

According to Friedman, the earth could be compared to one huge level playing field where all now had an equal competitive chance of participating and winning due to the unfettered delights of globalization, making all the world connected, with nowhere to hide.

No matter that in the intervening centuries enlightened citizens had made off such ravings as eccentric, for the truth about earth was something even Copernicus’ tormentors couldn’t suppress forever.

No matter also that modern trade theory offers voluble proof the earth is not flat, but indeed highly unequal terrain. This was due to the manner in which global players can differentiate themselves, acquiring competitive advantage.

In today’s world, technology allows information to be disseminated very effectively, becoming widely available to market participants worldwide. However, the true value of information depends on the value-added that is created through interpretation and who is doing it. Who gains such superior knowledge? Certainly not all.

Courtesy of technology

The world might be flat today courtesy of technology, with everyone potentially having access to information. But in terms of interpreting information effectively and using such knowledge to best advantage, the world is an unequal place.

The greater world is in fact becoming an ever more unequal place where imperfect information rules as clever, powerful entities can create differentials. And this despite the wrecking ability of new technology’s creative destruction (new knowledge steadily replacing old knowledge, often in revolutionary shocks).

Something similar applies today to the claims regarding recession.

No recession talk

President Trichet of the ECB has until now succeeded in not talking about recession, even though just about everybody else is describing the global condition as recessionary, and a reality in the US, UK, Europe, Japan and quite a few smaller countries.

Instead, President Trichet prefers to talk of inflation risks, which although reduced are still elevated. He apparently prefers not to dwell on deflation likely becoming evident next year, as it will be mostly a matter of base effects and can therefore be safely ignored by monetary policy.

The betting is that President Trichet has had his last chance this past week to officially recognize the coming of recession by way of official ECB pronouncements. The next time he speaks, probably to announce the third 0.5 percent ECB rate cut in as many months, the European recession will be undeniably in the data.

Similar dramas are probably playing out elsewhere in the world today.

Exceptions are the US and the UK, but also Aussie and Kiwi, where reality has been recognized early in the way this latest global financial crisis has shattered long-standing macro-economic relationships, requiring strong-armed responses to prevent disorderly collapse.

Old-line thinking

This in contrast to Europe, where old-line thinking prevailed until very recently, indeed still delivering an interest rate increase as recently as last July. In its way this was an attempted affirmation of the world still being flat, and equally wrong.

Since then the policy response in Europe has changed, but the true dawning of a new day awaits the acknowledgement of deep recession, the drastic remedies this requires, the three percent budget line preventing European governments to do much fiscally, and a great burden therefore being placed on the ECB to lower interest rates to historic lows.

Talk is of European interest rates going to two percent, but could they also go as low as one percent? Also, the Euro may have to weaken further as shock absorber of last resort relative to America and Japan where fiscal responses remain possible.

It’s a new world we live in, and it ain’t flat no longer.

That should have ramifications for South Africa also, especially in the momentous political year ahead of us.

Cees Bruggemans is chief economist of FNB.


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