Economic calm is always the precursor to a storm.

Economics says stability is the sign of a healthy economy. There may be shocks that temporarily knock an economy out of its stable equilibrium, and the equilibrium itself may evolve over time. But underlying it all is a network of trading relationships which, over the long term, is resilient to shocks and responds positively to technological advancements. Firms come and go, but trade is eternal.

But economic history tells us that stability is illusory. Our economic system is prone to storms interspersed with temporary periods of calm. Economists like to believe that the periods of calm are the normal state of the system and storms are aberrations that can be prevented with the right policy settings. But storms are as much part of the system as calms. They cannot be prevented, though they can be delayed or displaced by shutting out, repressing, evicting or murdering people perceived as disruptive or dangerous.

Humans have traded with each other since prehistoric times. Transporting goods and people over land was difficult and costly, so prehistoric humans often used water. For thousands of years, boats dominated trade. Cities grew up around ports and river crossings, and people waged war to seize and control those cities.

Wars prevented trade, of course. But once a ruler had gained full control of a city, or better, a series of cities, trade would return, and the destruction and bloodshed of war would give way to economic and political stability, which would usually prevail until the ruler was dethroned. For empires with dynastic rulers, this process could take centuries.

Control of scarce resources is also a classic political and military objective.

To this day, control of the means of transportation remains a military objective. President Putin’s desire to control the warm water ports on the north side of the Black Sea is a major, though under-reported, reason for his war of attrition in Ukraine. And the Ethiopian government regards access to Red Sea ports as so crucial that it is prepared to risk war with its neighbours.

Control of scarce resources is also a classic political and military objective. Countries that are not self-sufficient in key resources such as water, basic foodstuffs, raw materials (including fertilizer) and energy must buy these products from other countries, just as landlocked nations must buy access to the sea through other countries. Too often, the threat to deny access to the sea or cut off the supply of key resources is used as a political weapon to keep unfriendly neighbours subservient. 

Military might be one way of restricting access to transportation links and key resources. But another, equally important method, is financial control. Even when a country has access to transportation links through its own sea and airports, businesses can only trade with that nation if the financial world allows them to. The US’s financial dominance has made the US dollar ubiquitous for global trade. But trade in US dollars always involves US correspondent banks, and if they can’t or won’t facilitate US dollar payments involving certain countries, businesses in those countries are effectively denied access to transportation links. After all, if you can’t obtain finance, you can’t pay for shipping services or water supplies. No wonder larger developing countries such as China and Russia are trying to develop their own systems of finance that bypass the US dollar.

In the aftermath of the Covid pandemic, Western nations caught a glimpse of how disrupted transportation links cause economic instability, and what that instability looks like: high inflation, shortages of essential goods, rising real interest rates and civil unrest. Western economists regarded this as a short-term shock that would temporarily knock economies out of their stable equilibria. Get monetary policy right, they said, and stability will return.

For developing countries, the post-Covid trade disruption and supply shortages were all too familiar. For them, these are a constant threat.

But for developing countries, the post-Covid trade disruption and supply shortages were all too familiar. For them, these are a constant threat. All it takes is US correspondent banks to run for the hills, and many developing countries are deprived of the finance they need to obtain essential imports. When the US tightens its stranglehold on international finance, developing countries suffer economic crises.

The fact that developing countries suffer frequent economic crises – and that these crises are often triggered by US policy decisions – passes largely unnoticed in Western punditry. The period from 1992-2008 is known in the West as the Great Moderation, because during this period, inflation in OECD economies declined and output growth became less volatile. But there was no great moderation in developing countries:

  • the beginning of the period saw the collapse of Eastern European states after the dissolution of the Soviet Union in 1991;
  • the mid-1990s were scarred by banking crises in emerging Eastern Europe and the growing instability of the Russian economy;
  • the Asian crisis and Russia’s default dominated the world in the late 1990s; and
  • in the early 2000s, there were severe economic crises in Latin American and Middle Eastern countries.

The West may have been stable, more-or-less, but the rest of the world was experiencing its usual economic instability.

Anyway, the “Great Moderation” in the West carried the seeds of its own undoing. The debt bubble that maintained the illusion of stability after the dot.com crash of 2000-1 and the 9/11 terror attacks on New York collapsed disastrously with the fall of Lehman Brothers in September 2008. Instability was back with a vengeance.

Immediately after the 2008 financial crisis, central banks successfully prevented a global depression. For the next ten years, moderation returned in major Western countries, though not of a kind that anyone wanted: persistently low inflation, low output and low productivity amounted to a depression of a sort.

But elsewhere, economic and political instability continued to haunt the world. Rising food prices triggered political crises in the Middle East and North Africa. Smaller countries in emerging Europe, such as Latvia, suffered massive economic collapses. Then, as the, so-called, peripheral countries of the Euro area were laid low by a sovereign debt crisis, economic and political instability rippled out to engulf the whole of Europe. For a while, it even looked as if the Euro – the currency that united all those countries – would collapse.

Now, in 2024, the world is reeling from another series of shocks. Unusually, these shocks have particularly affected Western countries.

But once again, central banks and the International Monetary Fund rode to the rescue. The Euro survived, and the worst affected of the peripheral countries, Greece, swallowed its bitter medicine. Staying in the Euro cost Greece a depression that was longer and deeper than that of the US in the 1930s, but better that than the catastrophic economic collapse that would have ensued if it had been forced out of the Euro.

Now, in 2024, the world is reeling from another series of shocks. Unusually, these shocks have particularly affected Western countries. The rolling shutdowns in the Covid pandemic disrupted supply chains, causing price spikes in key resources, while exceptional monetary and (in the US) fiscal stimulus led to rising inflation to which central banks took some time to respond. The Ukraine war caused sharply rising inflation in countries with high energy needs. And now, piracy by Houthi rebels in Yemen sympathetic to the Palestinian cause is once again disrupting supply chains.

In Western countries, people are talking about “instability economics”, as if this is something new or different. But this is just the order of the world. The illusion of stability that some Western countries have enjoyed because of their military and financial dominance is crumbling. And their increasingly desperate attempts to shore it up by closing their borders and shutting out people they consider a threat will only make the instability worse.

The illusion of stability can only be maintained for so long by exploiting others, and when they rebel, by repressing them, evicting them, and waging war on them. The Pax Romana ends with the fall of Rome.

Frances Coppola

Frances is a writer and commentator on banking, finance and economics. Her blog Coppola Comment is widely read and her writing has featured on the Financial Times, City AM, The …

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