Meanwhile, in China, authorities were making less credit available in an effort to let some of the air out of the bubble in Chinese banking, which has been fueled by the aggressive practices of the shadow banks. This spooked Asian markets and later world markets, which were already uneasy because of Bernanke’s comments, and the results were big stock market losses, bond market turmoil, and jitters that remain through today.
But this past week’s tremors only hint at the problems to come. These problems take several forms. The first is purely economic — the consequence of reversing the stimulus. Taking $10 trillion out of the economy will inevitably force up interest rates and, if not timed properly, could easily derail fragile recoveries. (Indeed, if Bernanke, who has managed much of this crisis masterfully, misplays this last phase, his repeated signaling of a coming turn in policy will rank right up there with Bush’s “mission accomplished” in the pantheon of premature declarations of success.)
The United States, where a recovery seems to be gaining steam and the economy is fundamentally strong, might be able to withstand a little bad timing or market skittishness. But other economies — economies that have benefited from the unprecedented global stimulus that was led by the Fed and the accompanying coordinated weakening of the major global currencies — might be much more vulnerable to such missteps. Places like Turkey, Brazil and Indonesia, not to mention weaker emerging markets, could feel the pinch more severely. Investors are already wondering aloud how much of their recent success has been a stimulus-fed sugar high. And because those countries are just now on the way up, still home to real inequality and unresolved structural challenges, the political consequences of the coming shift in global economic momentum could be quite serious. The political fragility in Turkey and Brazil, whose recent protests have important economic drivers (as did, of course, the Arab Spring uprisings), suggests how ominous this development could be. That reversal of the stimulus policies could negatively impact global commodity prices (as demand slows) will only compound the problem in emerging economies that depend on resource exports.
Of course, the most important emerging economy is China’s. The government there has begun — with remarkable swiftness for a new regime — to dial back its irrational-exuberance-with-Chinese-characteristics. But should it move too quickly or not quickly enough and/or should U.S. tightening increase pressure on the economy (as there are fewer dollars in the system to invest in potentially risky places like China), one of China’s several internal economic bubbles (banking, real estate, etc.) could burst. The resulting disorder could, in turn, spook global markets and particularly hurt emerging economies. And, again, economic crunches often produce political unrest. If that unrest were among disgruntled Chinese citizens in Chinese streets, it would have repercussions far beyond the borders of China. Indeed, a “Chinese Spring” would instantly be the biggest story in the world, a potentially epochal game-changer that would have the planet holding its breath. While Egyptian- or Turkish-style unrest may not seem imminent in China, President Xi Jinping seems to be conscious of the stakes, and his policies — like those of Brazil’s President Dilma Rousseff — suggest that he recognizes the need to address popular complaints about corruption, cronyism, and enduring inequities.
Nonetheless, even with enlightened leaders, the international system has not evolved to the point that there are anything but informal mechanisms to help coordinate such a massive policy shift. We may all be in the same worldwide economic boat and leaders may be in touch with each other more than ever before, but domestic factors drive how monetary policies like these will play out, and therefore the possibility of misalignments is real.
In other words, change is on the horizon — change that could have economic and political consequences that touch every corner of the world. How the current crop of international leaders manages it will likely determine how history judges them. And the degree to which they realize that they are dependent on one another may be the decisive factor in their success or failure. That may be why I can’t get that damn shark music out of my head.
David Rothkopf is CEO and editor at large of Foreign Policy. He is the author of “Running the World: The Inside Story of the National Security Council and the Architects of American Power.”