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As a result of failures to deal with risks to international stability the basis of global order has been at risk - and political and economic disorder like that that followed the collapse of 19th century globalization is not impossible.
Democratic capitalism and communism were rival Western / European styles of political economy in the Cold War. This ended in 1989 when the communist Soviet Union collapsed in the face of the greater economic strength of the US and its allies. A new global order, based on democratic capitalism, seemed likely to emerge.
However there are many competing understandings of the nature of such an order. At the same time the UN, the main institution that could have provided the political framework for a unified world, has been proving ineffectual, while the economic institutions established at the Breton Woods Conference primarily reflected US assumptions. Both have been subjected to criticism - though there appears to have been inadequate fundamental work on the causes of their problems to have allowed practical alternatives to be devised.
Moreover there are uncorrected defects in dominant democratic capitalist practices, theories and institutions. In recent decades these defects and a universal failure to consider how they interact in practice with non-Western cultural assumptions have been contributing to economic and political distress in rapidly developing East Asia, and to even worst problems in states on the global margins (eg failed, repressive or rogue states, leading in some cases to terrorism as an extremist reaction to political exclusion).
One symptom of this situation, was the launching of a terrorist attack apparently by Islamist extremists against core Western institutions in the US in September 2001. World leaders seemed unable to agree about how to manage the urgent security risk of 'terrorists with weapons of mass-destruction' and what model of political-economy could ease the political and economic malfunctions that give rise to such problems. The global response to this (which featured increasingly unilateral and militaristic action by the US) achieved very little (see Attachment on September 11: the First test).
Another major challenge to the global order arose in October 2008 when a credit crisis, which had first been recognised in the US in mid 2007, threatened to turn into a total failure of the global financial system.
Rescue operations were mounted by governments worldwide and calls emerged for the creation of a new world financial order. However success in creating this is anything but assured - for essentially the same reasons that the response to 911 attacks proved unsatisfactory.
|Fragmentation of the Global Order||
Fragmentation of the Global Order
Rather than creating a fair and workable global political and economic order based on liberal democratic capitalism, political disorder and economic collapse are a feasible alternative if political leaders do not cope adequately with diverse and related security and economic challenges. Those most likely to suffer would (as always) be the world's poorest .
International trade and investment have become more significant to the world economy over the past 30 years . It has been credibly suggested that economic globalization and accelerated rates of economic growth were partly attributable to unilateral US action in 1971 to end the Gold Standard (part of the 1944 Bretton Woods agreement which had required convertibility of currencies into gold). The subsequent emergence a (US) Dollar Standard overcame previous constraints on the creation of credit , and complemented the effect of improved transport and communication in 'globalizing' economic activity. Not only was the $US the world's reserve currency, but US monetary policy played an informal, unpublicised but significant role in counter-cyclical management of the global business cycle (eg the US Federal Reserve maintained extremely loose monetary policies at times citing the need to counter the risk of 'deflation' - though this was a problem in Japan not in the US. Thus it is reasonable to conclude that Japan (and perhaps other countries) had behind the scenes influence on US monetary policy).
Moreover since communism was generally discredited as a system of political economy when the Cold War ended in 1989, large additional segments of humanity have been drawn into market economies and democratic capitalism in its various forms has been regarded as the global 'standard' - and likely to become the basis of a world order.
However globalization has occurred before. At the close of the 19th century, in a global environment dominated by the British Empire international trade and investment were even more relatively significant in the world economy than they are now. Yet this collapsed in the frictions with Germany that led to World War I  - frictions that presumably arose from cultural differences in assumptions about the nature and role of power.
Furthermore it may have been the tensions in the 1920s and 1930s associated with attempting to modernize to adapt to the globalization of Western-style society which led Japan to try to achieve independence through aggression in Asia prior to World War II in the hope of creating an 'Asian Co-prosperity Sphere' .
In the post Cold War environment differences due to such un-stated cultural parameters have become increasingly apparent - and contributed to a breakdown of multilateral institutions.
Europe and the US have been seen to have radically different perspectives on the nature and reliability of global institutions . Similarly differences are perceived in basic values and beliefs in terms of: the value of institutional or military solutions to conflicts; focus on past or future; and the role of religion .
The European Union has been developed as a model for building economic and political collaboration amongst various nations based on a preference for collaboration and consensus. While national membership is expanding [1, 2] and an effective economic union has been created, the EU is not untroubled. For example:
And East Asia, which now accounts for about half the world economy, incorporates elements of (neo-Confucian?) models that prefer government by elite bureaucracy (rather than by democracy and a rule of law) and which tend to favour mercantilist / communitarian economic goals, rather than being driven by the return on investors' capital available from meeting consumer demands.
Elsewhere the majority of the world's people live in states that have ineffective (or even despotic) regimes and tend to be economically disadvantaged to varying degrees. A substantial minority of this (still third) world involves states dominated by Islamic traditions - from whom also proposals have emerged for the creation of a new monetary system and economic union .
Furthermore there is no effective institutional basis for globalization.
Current global institutions were created at the end of the second world war, and involve primarily the United Nations (UN) and economic organizations established as a result of the 1944 Breton Woods agreement (WTO, IMF and World Bank).
However the core institution, the United Nations, is too often of little practical value being apparently:
Of particular significance is that the UN could suffer the League of Nations' fate due to its inability to enforce its resolutions related to security breaches (eg by despotic regimes).
At the same time, global economic institutions have been heavily influenced by US interests to pursue its preferred liberal democratic capitalist model, and have attracted as much criticism as the UN system (eg see Bretton Woods project). Worldwide reactions against global economic institutions (on environmental and social grounds) have also arisen, and been conspicuous for the fact that those involved seem to be only interested in 'protest' and have no practical alternatives to suggest.
In September 2003, the WTO's efforts to arrange a new round of multilateral trade liberalization was derailed by a dispute between developed and developing nations about whether improved access to the latter's markets is appropriate [1, 2, 3]. This breakdown in global multilateral trade arrangements may be as significant as the inability of the UN Security Council to resolve concerns about terrorists with WMD that led to unilateral US action in Iraq. It must impede trade, and thus reduce growth.
Furthermore it seemed likely that global economic growth may prove unsustainable because of the financial imbalances created by dependence of recent growth on US demand, and the structural incompatibilities between various economic models which may make it impossible to overcome those imbalances.
|Causes of Economic and Political Failures||
Causes of Economic and Political Failures
While many societies benefited from the global order that emerged after the Cold War, that era has been anything but problem free. For example:
In the context of the 911 attack in America Competing Civilizations suggested:
Economic and political failures have been associated with widespread misery, and have also contributed to the risk of terrorism. The latter seems to be an reaction to real or perceived social, economic or political concerns by extremists who feel otherwise powerless. It also has the potential to transmit failure to other states .
Those who had been economically and politically successful (especially the United States which was geared for Cold War conflicts) were for a long time not directly affected by the economic difficulties and political failures (and political extremism) - so they did not become serious about examining the political and economic development issues.
The attack by Islamist extremists in America in 2001 provided the opportunity to address those broader questions, but in the absence of global agreement about how to address this the US pursued almost unilateral actions with a militarist emphasis that, though enormously costly, did not materially improve the global situation (see September 11: The First Test).
However it is likely that the global financial crisis that emerged in 2008 will force a different approach.
In the context of the 911 attack, Competing Civilizations had also suggested that defusing a potential 'clash of civilizations' required reviewing the role which money plays because, though though there are advantages in its use as a means of exchange, store of value and measure of economic success:
These issues have become critical since 2008 - though the latter continues to be put in the 'too hard' basket.
Second Test of Globalization? +
Global Financial Crisis: The Second Test of Globalization?
A global financial crisis (GFC) had become well recognised in late 2008 when:
Financial Market Instability: A Many Sided Story (2003) presented an account of the emergence of this crisis as a result of financial arrangements that had become foundational to global economic growth and development. The crisis was revealed initially (in mid 2007) when, following falls in US housing prices in 2006, losses on US 'sub-prime' mortgages created large unexpected and non-transparent losses for banks. This then resulted in a 'credit crunch' (ie: it disrupted banks' ability to lend to one another; and made credit less available and more costly for their customers).
The problem quickly spread globally and subsequently escalated, even though traditional remedies were vigorously applied (ie the US Federal Reserve responded with lower interest rates and made credit available to distressed institutions, while the US Government provided a fiscal stimulus to boost economic activity).
There appear to be many factor whose interactions contributed to the GFC including: prior asset inflation; declining US housing prices; an oil price spike; loss of effective financial regulation due to globalization; inadequate aggregate global demand as a by-product of 2 decades of globalisation; failure of post-war international financial regime to recognise unsustainable macroeconomic consequences of demand-deficient Asian economic models, and the need which other emerging economies had to export-led development to guard against financial crises; emergence of an unregulated 'shadow' banking system in US; alleged self-interest of bank executives; high levels of household debts which caused consumer spending to fall as financial losses emerged; innovations in financing and monetary policy; statisticians' adjustments to economic data which perhaps gave a misleading impression; decisions by regulators and businesses; government social policies; complex financing arrangements that rendered consequences incomprehensible (Flash Crashes); possible intrinsic disequilibrium in financial markets that was not perceived by deregulators; community irresponsibility; a lack of top-level US government economic expertise because of the 'war on terror' focus; a 'savings glut' in East Asia that was vital to economic models adopted in the region; Japan's ambitions and 'carry trades'; the way Lehman Brothers failed; very high levels of corporate debt in Europe; risky investments in emerging market economies; and policy actions by governments in reacting to the emerging crisis.
While the GFC might seem like merely a matter of fixing the financial system (a massive challenge in itself), it is in fact far more difficult because:
Economic growth and globalization had been dependent on complex and dynamic arrangements within the global economy which effectively disintegrated. Efforts to stimulate economic activity through government spending and loose monetary policies could not be sufficient - because the problem is, in effect, to 'put Humpty Dumpty back together again' (see also reference to our inability to 'restart the music' ).
Seeking a GFC Solution
Seeking a GFC Solution
Established machinery for international collaboration (eg G7, EU) made various attempts to promote a coordinated response to the GFC which would not only deal with the crisis but address its systemic causes. A forum of European and Asian leaders agreed in October 2008 on the need for such action, and arrangements were made for an international meeting in the US in November following the 2008 presidential election to find a way forward.
Much was apparently expected of the renewal of US leadership within global institutions under a new president in developing solutions to the financial and rapidly-escalating economic crises. However given the complexities of the issues (which currently render them virtually incomprehensible) and dysfunctions in global institutions it is hard to see how 'hope' (for apparently-long-overdue reform of US government programs; 'liberal' values that some cultures believe to be socially damaging; and a vacillating approach to international relations) might translate into world leadership in practical reform of global financial / economic systems.
A meeting of G20 nations (representing about 80% of the global economy) was arranged for mid-November 2008 to consider a coordinated response to the GFC. Resolutions were passed about (a) developing proposals for a coordinated response for consideration in 2009 and (b) restarting talks about liberalization of international trade under the WTO framework (which had previously failed because of disagreements about agricultural protection in developing countries).
There was however concern that: (a) the summit had not actually decided to take coordinated action; (b) the causes of the GFC were not raised in debating solutions; and the incoming US administration was not involved in the summit. There was also fairly clear differences of opinion between 'Europe' (which appeared to favour some sort of EU-style international regulatory regime) and the outgoing US administration's aversion to such arrangements.
An APEC meeting in late November again highlighted fundamental differences in approach - when China also strongly endorsed a 'new international financial order' as an alternative to the 'free markets' approach favoured by the US .
While the US administration of Barack Obama was more likely than its predecessor to favour an 'international' solution, this seemed unlikely to be enough. For example, as noted above the Obama administration's approach to international affairs has been internally inconsistent. Moreover the new president gained electoral support by promising to protect jobs in failing industries, though trade protectionism could seriously worsen the economic downturn associated with GFC - and the G20 resolved to pursue the further removal of trade barriers by revitalizing stalled WTO negotiations 
In the lead-up to the proposed G20 conference in April 2009 to discuss resolution of the crisis diverse and incompatible approaches to solutions were again very much in evidence.
Moreover unilateral action by various nations / regions acting independently seemed unlikely to lead to success.
In March 2009 a preliminary meeting of G20 finance ministers papered over pre-meeting differences between EU and US on fiscal stimulus and agreed on (a) a common framework for assessing impaired assets and bank recapitalization (b) boosting resources of the IMF and regional development banks to provide capital for emerging and developing economies (c) avoiding protectionism and (d) increase oversight of Credit Rating Agencies, transparency of exposures to off balance sheet vehicles; improvements in accounting standards, including provisioning and valuation uncertainty; greater standardization and resilience of credit derivatives markets  .
Despite hopes expressed by some, the prospects of reaching agreement that would be effective appeared dim.
Moreover it was what was not being discussed at all that seemed most likely to inhibit effective agreement.
In the absence of commitment to addressing underlying problems, the predictable outcome of international negations related to the GFC could only be:
Such 'solutions' would imply that another crisis would emerge in a few years.
Though Western leaders proclaimed the G20 meeting of April 2009 a success and there were some signs of progress, there is a real possibility that they were merely having a Neville Chamberlain moment because serious underlying problems were not being addressed.
It seemed that the economic dislocation triggered by the GFC could run much longer because: there was obvious confusion about the nature of the problem; nothing was done about the structural causes of the financial imbalances that make global growth unsustainable; correcting those imbalances is both essential and likely to make East Asian economic models unworkable; establishing global institutions to address the problem of economic management and financial regulation merely 'passed the buck'; and there are numerous market-level indicators of ongoing problems
The G20 summit was arguably a 'success' mainly in the sense that differences were papered over, no one walked out and a foundation was laid for ongoing negotiation. Many issues that needed attention were hinted at, which is at least a form of progress even though they were not addressed.
In September 2009 a meeting of the G20 decided that fiscal and monetary stimulus measures had been successful but needed to be continued (and great care taken in phasing them out) and the global financial system needed reform in terms of (a) better coordination of monetary and fiscal policies (b) higher capital requirements 
Some Observers See Why Imbalances Matter Though the G20 Officially Can't
However the issues that the the G20 avoided did not go away. Various observers noted the relationship between global financial imbalances and the GFC that was mentioned above. For example, Professor Martin Wolf (amongst others) produced useful accounts of the relationship between financial imbalances and the GFC (eg Challenges for the World's Divided Economy, 8/1/08 and How imbalances led to credit crunch and inflation, 17/6/08). Moreover:
This issue was also reflected by G20 meeting in Pittsburgh which decided that (a) G20 would be forum for global economic management; (b) tougher bank rules would be in place by 2012. It was argued that responses by governments had stopped decline in global activity and stabilized financial markets - though (a) much more needed to be done to reform financial regulation and reshape global growth; and (b) stimulus measures will still be needed for some time. Other issues addressed included: IMF reform and world trade talks. In return for getting more say emerging economies would be expected to help rebalancing the world economy (by increased savings in deficit countries and more consumption in surplus countries). Some rebalancing was already occurring as US household consumption has shrunk. .
However while the G20 was able to get agreement on financial regulation (an issue on which there is wide agreement), it was seen to be likely to have difficulty getting agreement on trade, financial imbalances and reform of Bretton Woods institutions where there are significantly different views .
These difficulties had become increasingly apparent by the time of the G20s meeting in June 2010.
In July 2010 it was being argued that global economy, artificially boosted since 2008, was headed for sharp slowdown as stimulus wanes while excesses (ie too much debt in many advanced economies and excess savings in China, emerging Asia, Germany and Japan) have not been addressed. Global aggregate demand must therefore be weak because spending was not being increased in countries that saved too much as spending fell in countries that now needed to de-leverage. At best the world would experience a long U-shaped recovery, but there were many potential sources of a shock that could make the situation much worse 
In June 2012 a former head of the US Federal reserve expressed the view that financial imbalances had played significant role in the financial crisis, and argued for a more effective effective international financial system (see below).
In August 2012 the president of the European Commission argued that the primary goal of the quantitative easing in Europe was to create a framework in which financial imbalances could be corrected (see below)
Various observers have speculated about ways of moving forward, which do not yet appear to have resolved underlying difficulties.
In June 2009 various observers noted that growth in emerging economies had remained relatively strong and that this was likely to: (a) drive future global growth; and (b) indicate the emergence of a 'new world order' . For example:
In January 2010, it was noted that though emerging economies had been initially badly affected by GFC (because of dependence on trade and capital flows) they had subsequently achieved better growth and become attractive destinations for investment - though this could prove a bubble [1, 2].
And by September 2010, consumers in emerging economies (especially the BRICs) were being viewed as the saviours of the global economy in an environment in which weaknesses in developed economies (due to high debt levels) inhibited the growth of economic demand.
However the ability of such economies to continue growth may have been little more than a temporary consequence of the shift towards export-oriented growth and the accumulation of foreign exchange reserves (see Global Saving Glut). The latter apparently emerged from a desire to seek protection against possible financial crises which had been favoured as a reaction to the Asian crisis of 1997. The ability of major emerging economies (with the probable exception of India) to do this in the past depended on the willingness / ability of the US (mainly) to compensate for the resulting demand deficits. (see CPDS Comment in Who's Got Superman?)
Though most emerging economies had been protected by strong current account and fiscal balances, the IMF pointed out that many had been severely affected by the GFC because of their dependence on foreign capital inflows (mainly from Europe). .
While economic activity could be maintained for a time on the basis of accumulated reserves, long term growth in an environment in which such economies were expected to drive global growth (ie support export-led strategies by others and run current account deficits) would require the development of effective local financial systems. Creating financial systems that could operate without current account surpluses (which requires strong demand elsewhere) may be structurally impractical in emerging East Asian economies (eg China) that have adopted variations on the economic model that was the basis of Japan's pre-1990 economic miracles (see Are East Asian Economic Models Sustainable?). China position, for example, seems to be vulnerable, as it seems to involve a 'Ponzi-like' financial system, which would be in crisis if global growth has to depend on demand from emerging economies (see Heading for a Crash?). Expectations that 'Asian capital' could provide the basis for 'financing the world' in future are fanciful, because financial institutions whose capacity to provide finance depends on cash flows (rather than sound balance sheets) clearly could not do so if those cash flows dry up (see Future of the World: Again?).
China may in fact be making determined efforts to create a new international economic and (perhaps) political order because of concern about this constraint (see Creating a New 'Confucian' Economic World?) - though such an initiative may not be durable.
A fundamental critique of the prevailing global economic and financial system was put forward in June 2009 by André Lara Resende (a Brazilian economist) leading him to conclude that establishing a new world reserve currency might allow emerging economies to increase demand and thus speed the resumption of global growth . This proposal raised complex issues including: (a) the fear of currency crises that led to export-oriented growth in emerging economies; (b) the intractable stagnation probably facing the US economy; (c) the crisis this potentially creates for emerging economies; and (d) the possibility of enabling emerging economies to boost global growth..
A BRIC forum in Russia in June 2009 sought means to ease the GFC while boosting the role of emerging economies. It called for a stronger voice in global forums; a diversified, stable and predictable currency system; and comprehensive reform of UN in dealing with global challenges .
An exchange of views with an advocate of the superior prospects of emerging economies in May-June 2010 is recorded in Emerging Markets: What about the Longer term?. It presents both that observer's reasons for believing that such economies have prospects that are stronger than those of developed economies, and the present writer's reservations.
In early 2012 concerns about currency appreciation were leading emerging economies in Latin America (notably Brazil) to express concerns about 'currency war'. At the same time it was noted that state-owned companies in other BRICs were sacrificing profits to maintain economic activity - just as China seemed to be doing 
In early 2017, it was suggested that Emirates Airlines could be in trouble. It had invested very heavily in aircraft and airport development with little concern for immediate profitability on the assumption that it could have the major air transport role as the 'Global South' developed.
In March 2010, it appeared possible that the US might respond to the economic pressures that it was facing by backing away from the post-WWII Bretton Woods international order under which the US provided allies with access to its markets on condition that the US could exert a high level of control over security and foreign policy issues. Efforts seem to be focused on now boosting US exports.
US efforts to reduce / reverse its current account deficits seems likely to (a) be unavoidable due to constraints on other sources of demand to sustain US growth; and (b) likely to adversely affect countries (especially those in East Asia) that are highly dependent on current account surpluses (see China's Economic Performance) .
This effect will be amplified by the apparent need to reduce the rapidly expanding role which financial services have played in the growth of developed economies particularly since the 1990s.
Initiatives that are likely to contribute towards reducing / reversing US current account deficits include: (a) QE2 increase in liquidity that seems likely to trigger 'carry trades' to emerging economies (and thus asset inflation and increased spending) - see Currency War?; and (b) exploration of options for significant reduction in US budget deficits 
In April 2010 proposals emerged that could have the effect of significantly changing the role that financial services play in developed economies - because of concern about the instabilities that can result.
There is an inherent boom-bust risk associated with the activities of
financial institutions due to the feedback relationship between increases /
decreases in the availability of credit, and increases / decreases in the
level of 'real' economic activity and the perceived value of assets - a
phenomenon which George Soros described in The Alchemy of Finance.
What seem like virtuous feedbacks during a boom, can become vicious when a
boom is perceived as a bubble and bursts. Authorities may be able, at
considerable cost, to rescue too-big-to-fail financial institutions after a
crisis emerges, but still apparently have no real way to judge when a
burst-able economic bubble is emerging (see
Booms and Busts: Unsatisfactory
Tools for Macroeconomic Management).
A close correlation was suggested in 2013 between escalating levels of debt over several decades to 1933 and 2007 and the growth of financial industries. This was followed after 1933 by a collapse in both overall debt levels and financial industries' share of GDP back to levels that had prevailed prior to the escalation.
Even more fundamentally, it can be noted that Western societies arguably gained strength by creating social environments in which individual rationality could be an effective means for problem solving - and thereby dramatically increased the effectiveness of individuals in all walks of life. The use of money as a means of exchange and as a store of value facilitated rational decision making by individuals. However the development of complex financial systems resulted in the creation of feedback relationships that individuals have no means for recognising or taking into account - and this reduces scope for the effective use of individual rationality. These and other reasons for concern about reliance on financial criteria as the basis for thinking about economies are suggested in Fixing Australia: Do the Econocrats have the right answer?
Concerns have been expressed that regulation of financial institutions in the US will have the effect of damaging financial services industries (an outcome which is arguably necessary).
In 2015 it was argued that the overall impact of financial innovation (eg derivatives, structured products, high frequency trading and improved communications) might be negative. For example. derivatives allow borrowing and lending with very low margin requirements - and no clarity about the real levels of leverage involved (and thus of the riskiness of the market). Traditional arrangements have been replaced by more risky alternatives - which allows trading with less capital and less responsibility for the stability of firms or the market as a whole .
In early 2016 it was suggested that the fractional reserve system which allows private banks to create money mihjt be a significant problem - so that this role in future should be played by government institutions . [CPDS Comment: Other observers would presumably point out that allowing governments that are influenced by interest group politics to 'print money' would be a formula for irresponsibility and hyper-inflation].
Clearly reforms that restricted the role that financial services play in developed economies would have consequences - because knowledge-intensive industries (especially financial services) have played a significant role in the diversification of developed economies since the 1990s as many traditional industries were increasingly challenged by emerging economies. Expected consequences would include:
The G20 Summit in June 2010 sought to find a path to sustainable global growth, at a time when the side effects of 'emergency room' treatments (ie the unprecedented fiscal and monetary stimulus measures) used to prevent the GFC turning into a depression were coming to be recognised (eg because, in the BIS's view [1, 2], they distorted economies and inhibited post-crisis adjustments).
However the risk of serious economic instability in the medium term remained severe due to the G20's failure to address most of the complex changes needed for sustainable economic growth that the GFC had exposed (eg the need to: (a) do more than recapitalise banks to overcome constraints on the availability of credit; and (b) invent new techniques for macro-economic management - given that the use of both fiscal and monetary policies seemed to have been compromised).
In particular it failed to gain agreement on ways to reduce the financial imbalances that must make sustained growth impossible for reasons that the present writer first suggested in Structural Incompatibility Puts Global Growth at Risk (2003).
In fact the G20 seemed to turn a blind eye to the limits imposed by those imbalances - just as it had done in April 2009 (see Announcing 'Peace in our Time'), despite analysts' increasing recognition of the problem. The G20 seemed oblivious to (perhaps because of Western leaders' ignorance of) the role that neo-Confucian models of socio-political-economy in Asia played in those financial imbalances, and that the latter also had a non-trivial role in generating the GFC (because the demand deficits required by the neo-Confucian economic models had to be balanced by excess demand elsewhere if global growth was not to stall, and this was achieved by easy monetary policy mainly in the US which led to the accumulation of large debts).
Rather than dealing with such complexities the G20 appeared to focus on reaching a compromise between the incompatible opinions of US and German leaders (each of which had some validity) about the role of fiscal policy in macroeconomic management - even though the limits to which fiscal policy could be the basis of macroeconomic management had been widely recognised in the 1970s.
The G20 seemed to agree that everyone would 'do their own thing' with some sort of general trend towards reducing fiscal deficits and government debts in a few years time.
This left unanswered the question of where the demand would come from to sustain global growth in a situation in which private demand seemed weak world-wide. The US was not in any position to (and said it wouldn't) remain as the 'consumer of last resort', while others made it clear that they wouldn't pick up the burden (and the associated increasing debts). This situation had clear parallels with conditions in the 1930s that led to 'beggar my neighbour' competitive devaluations, the US's Smoot-Hawley tariff and the collapse of international trade. Though in 2010 it seemed more likely that there would be a drift towards 'competitive austerity' (which the US ultimately would have no alternative to joining), the outcome would be similar.
The US President said that he expected China to significantly increase the value of its currency  apparently in the hope that this would alter international financial imbalances and in ignorance of the fact that: (a) changes in exchange rates have historically had little impact on trade imbalances (because of the importance of established production capabilities / distribution networks etc); and (b) if trade imbalances were altered to the extent necessary to make any material difference to the financial imbalances, China's economy would be wracked by severe financial crises - an outcome that China's authorities would not willingly allow.
Professor Nouriel Roubini (one of the small number of observers who anticipated the GFC on the basis of risky financial practices in the US) subsequently expanded his analysis to take account of the need for coordinated responses which would not only promote growth but also correct the financial imbalances that otherwise make growth unsustainable. And it is possible to see the influence of these ideas in the G20's deliberations.
However even such proposals contained limitations. For example:
Even if the G20's failure to deal with international financial imbalances did not result in another victory for protectionism in the US, global growth could not be sustainable.
The expectation that surfaced in (about) August 2010 that emerging economies could provide the demand to drive global growth reflected a failure to consider that such economies had been able to prosper on the basis of export-led growth because current account surpluses were needed (and adopted because they had proven successful in East Asia and been advocated by the IMF) to protect poorly developed financial systems from financial crises (see above). Economies, whose financial stability depends on current account surpluses, can't provide the demand that now-heavily-indebted developed economies can no longer provide without simply setting themselves up for financial crises.
Moreover, in the absence of Asia-literate Western leaders, managing the resulting economic breakdown and international stresses would be beyond the G20 (just as a lack of real Asia-literacy had been leading to ill-informed domestic decisions by political leaders in Australia).
The global economic breakdown through 'competitive austerity' that the G20's failure implied would seriously damage (East) 'Asia', but there was little that that region's leaders (eg in Japan and China) could do to prevent this under the prevailing international order based on Western democratic traditions (ie those that incorporate features that are unnatural in (East) 'Asia' such as individual initiative, a rule of law and economic coordination through profit-seeking by independent enterprises) - see China may not have the solution, but it does have a problem.
In the face of 'competitive austerity', China's proposal for a new reserve currency system to replace the $US (through IMF-managed Special Drawing Rights) might be seen as a way to overcome the global demand deficit by providing credit to enable emerging economies (with notionally sound balance sheets because foreign exchange reserves had had to be accumulated because of their underdeveloped financial systems) to increase demand. However the latter proposal unfortunately contained severe defects (see above).
Alternatively, initiatives by Western societies (eg those the present writer suggested in China may not have the solution, but it does have a problem) seemed more likely to provide a constructive path to sustainable growth though they needed to be extended to helping 'Asia' to cope with the consequences.
In September 2010, it was argued that the G20 would be incapable of generating solutions to any global challenges - because it incorporates the range of countries who have significant influence but these have many different attitudes towards democracy, the economic role of government and the importance of transparency in investment - and that as a result the world was entering into an age of instability 
In October 2010 IMF and World Bank meetings were no longer seen to reflect the peacefulness of G20 meetings. Countries are retreating from cooperation. Major developed economies are limping alone, and major emerging economies such as China are unwilling to do more  In the face of a possible 'currency war' the US sought to focus more directly on trade imbalances that were the source of these problems (eg by setting limits to trade imbalances) but this was opposed by major exporters - Germany and Japan 
'Currency War': A Counter-attack by the Federal Reserve?'
In late 2010, after considerable discussion, the US Federal Reserve launched a major new round of quantitative easing (QE2). This involved, in essence, printing money ($US600bn) to buy long dated US Treasury securities.
This was nominally intended to stimulate a stagnant US economy (and seemed necessary because of the risk that banking system losses would have on the availability of credit). However for reasons outlined below the move seemed to the present writer to also:
This tactic could perhaps be likened to the 'pedal to the metal' methods used by the US to break the USSR in the Cold War (ie run an arms race flat out to see whose economy fails first). Putting pressure on financial systems by boosting liquidity is one way to find out whose financial system is most at risk - and the answer to this is by no means certain.
Many of those countries (eg China, Brazil and Germany) expressed serious concern about the Fed's action - because of the likely adverse effects on their economies of large capital inflows (ie stimulating the same sort of asset inflation that the US had experienced in the past as a result of unwanted capital inflows) - and proposed measures to control capital flows. Brazil's finance minister (the first to warn of pending 'currency war') suggested that it was necessary for the US economy to recover, but that this had to be achieved by stimulating consumption in the US - eg with fiscal policy . However, given that the US seemed no longer willing, nor able, to be the world's 'consumer of last resort' (see above), this clearly was not the Fed's goal.
China in particular is likely to be significantly affected because its currency is linked to the $US - while being undervalued just as $US is overvalued. QE2 liquidity will flow into undervalued segments of the dollar economy - and this will cause further overheating of China's economy . China rejected US calls for measures to rebalance global trade (eg by limiting current account surpluses or deficits to 4% of GDP), and instead suggested that QE2 was the biggest threat to the global economy .
China, it may be noted, would be extremely vulnerable in the event that global economic growth were disrupted because its ability to avoid a medium term financial crisis associated with the poor balance sheets of its institutions seems to be critically dependent on strong ongoing cash flows (see Heading for a Crash?).
However the fact that countries concerned about the flood of new liquidity can't protect themselves by raising interest rates (as this would merely increase the 'carry trade' effect) means that capital controls are likely - and this could disrupt the global financial system . Such a disruption (which now seems difficult to avoid) will be bad news for both emerging economies and for the US (because the lead role in making risky investments with the proceeds of the Fed's monetary easing is likely to be taken by US financial institutions).
In March 2011, another proposal emerged (from the G20 with conditional support from the US Federal Reserve) that could help to reduce international financial imbalances. This involved the G20 lending 'hard' currencies to emerging economies who are experiencing short term financial crises (in the expectation that this would reduce their need to hold large foreign reserves). It was apparently envisaged that the hard currencies that the IMF might provide would have to be drawn from the foreign reserves of countries such as Japan and China . This was a variation on proposals for the IMF to issue SDRs under those circumstances (because SDRs would have had to be backed by hard currencies anyway). It was an interesting concept. The goal was presumably to reduce both the risk of financial crises in emerging economies, and the financial imbalances that arise when such economies seek to hold large foreign reserves. It would place responsibility for financing measures to counter international financial risk on countries such as Japan and China whose distorted domestic financial systems are primary causes of the financial imbalances (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy).
In early 2012, widespread concern was being expressed in Latin America about the effect that rapidly appreciating currencies were having on industrial competitiveness . And Brazil again suggested that monetary policy expansion in the US and EU constituted a form of 'currency war' 
In August 2012, much stronger proposals for quantitative easing emerged in Europe in response to market aversion to sovereign debts in countries such as Spain 
In October 2012 concerns were being expressed about the effect in Asia of the US Federal Reserve's 'pedal to the metal' loose monetary policies. Stocks, currencies and real estate markets were sharply higher, and governments were struggling to contain the inflationary pressures. Indonesia, the Philippines, Thailand and Malaysia were seen to be likely to be more affected than China which restricts capital inflows (Law F., 'Investment flood hits Asia, The Australian, 24/10/12)
In December 2012 the adverse effects of 'pedal to the metal' monetary policies were being noted, though apparently without adequate understanding of the issues involved.
In April 2012 a sudden collapse in the price of gold suggested the possibility of a further stage in the 'currency war' because of the role that gold had come to play in the foreign exchange reserves of countries such as China at the expense of $US.
Massive quantitative easing (ie roughly equal to that in a the US despite Japan's smaller economy) was initiated by Japan in early 2013 (as part of the (so called) 'Abenomics' economic recovery program which also involved fiscal stimulus and regulatory reforms).
In May 2013, it was noted that quantitative easing by the US Fed (ie the 'Currency War') had, in fact, generated large capital flows to to emerging economies with poor financial systems (because it had increased the availability of credit and reduced the scope for using it productively) and thus created very real prospects of financial crises in emerging economies when the Fed tightened and the $US thus strengthened.
In later 2013 it was noted that the prospective 'tapering' of QE in the US:
In December 2013 it was variously suggested that the Federal Reserve's quantitative easing (QE) program:
It was also suggested that Turkey had become the first emerging economy to suffer problems as QE started to be phased out 
In April 2014 it was suggested that the US Treasury had developed tools of 'economic warfare' after 9/11 - tools which it was hoped would enable the US and its allies to constrict enemies' financial lifeblood. It was also suggested that the use of these methods to constrain Russia in relation to disruptions in Ukraine could have unforeseen, adverse and global implications .
In September 2014 it seemed likely that the 'Currency War' (as a monetary counter-offensive in the undeclared 'financial war' that had apparently been started earlier by actions in East Asia) was coming to an end - and was likely to adversely affect countries that not strengthened their financial systems - see below.
In early 2015 the role that finance was coming to play in foreign and security policy was noted.
In November 2010, another G20 summit (in Korea) failed to find a solution to the problems posed by international financial imbalances. The best that could be said was that everyone now recognised the problem, and that discussions about solutions (mainly between the US and China) were expected to continue.
The G20's official optimism seemed unfounded given the intractable nature of the problem (see Too hard for the G20). More realistically, one observer noted that the international monetary system was now being run in two incompatible ways, and another argued that the issue now was who will have the ability to determine how the world works in future. Another observer argued that both the US and China were engaged in an 'economic war' (which paralleled the Cold War and pitted the US's reserve currency status and animal spirits against China's economic discipline, pegged currency and vast workforce). Both were suggested to be seeking to increase their GDPs through stimulus measures, though these must lead to long term problems (eg unsustainable government debts or inflation) 
A contest for control of the international financial system had apparently been developing for decades, though it had been invisible-in-plain-sight to Asia-illiterate Western observers (see An Unrecognised Clash if Financial Systems and Babes in the Asian Woods).
It still apparently remained invisible to the Treasuries of the US, Singapore and Australia - noting their idealised but impractical proposals to the G20 summit. They suggested that growth in future would need to be driven by domestic demand in emerging economies - and that achieving this primarily required revaluing currencies. However the real constraint for many such economies (just as for Japan) was that that financial systems were often insufficiently developed to tolerate current account deficits (eg see Who's got Superman?). For many emerging economies this problem could be overcome. But in the case of major East Asian economies (eg Japan and China), current account surpluses (and thus a mercantilist economic strategy) seemed to be vital to the systems of socio-political economy that had allowed them to enjoy economic 'miracles' (see Understanding East Asia's Economic Models) - even though those systems put global economic growth at risk.
Scenarios that were more realistic, though less comfortable than the Treasuries' proposals, included:
Scenarios about how presenting problems might be resolved (eg by international collaboration) have also been suggested, though these have not inspired confidence.
An official US investigation into the GFC that reported in January 2011 simply dealt with domestic issues, and did not even mention the role that international financial imbalances had played in giving rise to the crisis (see FCIC: Eroding Confidence in the US?). And as illustrated by an interchange that arose following circulation of the latter comments, one informed US observer argued that domestic distortions in the US's political / public administration process are the main reason that such imbalances are not being officially addressed (ie the multinationals who, together with 'Wall Street', profit from the commercial dealings that result in imbalances have a dominant insider influence). The present writer's perception is that this is probably correct, but is only part of the problem.
Variations of earlier proposals for resolving the problem of international financial imbalances through issuances of Special Drawing Rights (SDR) by the IMF have been advanced. A US observer suggested that those SDRs should be backed by the hard currency reserves of countries with large reserves (such as Japan, Germany and China), while a 'Beijing Group' suggested that $US300bn in SDRs should be issued annually by the IMF on behalf of the G20 without specifying who might back this in the event that losses were incurred.
In April 2011, a G20 meeting in Washington again demonstrated that, despite hopes to the contrary, progress was not being made in resolving difficulties associated with international financial imbalances. This implied that it was likely to be futile to further pursue solutions solely through G20 negotiations in the face of apparent obstructionism, noting that some major economies (eg those of Japan and China) appear to depend on those imbalances and thus can't easily adjust to allow them to be reduced.
Rather those who are economically constrained by imbalances (especially, but not only, the US) need to take even stronger action than that associated with the Federal Reserve's quantitative easing to put pressure for substantive reform on countries whose financial systems are structured to depend on the imbalances that put global growth at risk - even though those economies might then be disrupted. Options to increase such pressure are outlined in China may not have the solution, but it seems to have a problem.
Increased concern was also expressed from 2010 about the unsustainable debt levels facing peripheral governments within the Eurozone, especially the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain). This was seen as potentially leading to sovereign defaults that could trigger further international financial and economic instabilities.
However other governments faced (especially Japan) faced very high debt / GDP ratios, while the US's ability to maintain very high government deficits and high debt levels (see below) appeared to depend on the $US's status as the world's reserve currency.
It was the the present writer's expectation in mid-late 2009 that further stages of financial and economic crisis were likely which had been overlooked in coordinated efforts by governments through the G20 to deal with the GFC (see Unresolved Problems and Coming Crises)
Factors in generating the problem in Europe apparently included:
In August 2012 the president of the European Commission suggested that Europe would seek to overcome problems associated with financial imbalances within a 'firewall' created by expansion of the European Stability mechanism
In October 2013 it was argued that Europe was sliding into a deflationary trap with debt ratios in several countries becoming unsustainable and making a mockery of the EMU's debt crisis strategy. Deflation may be benign in low debt countries, but is very serious in those with high debt levels. When total debt exceeds 300% of GDP it becomes lethal - and this is now the situation across most of Western Europe. Heavily indebted states are being forced to regain competitiveness by internal devaluations - which has the effect of increasing the risk of deflation. Countries such as Italy and Spain face rapidly rising debt / GDP rations despite draconian cuts. The alternative would be to allow higher inflation in Germany and thereby resolve problems of competitiveness differences within eurozone in a different way 
In late 2013 concerns about the risk of sovereign defaults also extended to the US federal government (see below)
Further observations about political aspects of the situation are in Saving Democracy.
In early August 2011, the US government finally accepted the need to constrain the growth of US government debt. Soon thereafter the US government lost its AAA credit rating because the adjustments to its budgetary position were seen to be inadequate and the US political process was not handling the challenge well.
This seemed likely to result in serious consequences for the global economy because poorly developed financial systems in major East Asian economies, and in emerging economies elsewhere, had been protected from financial crises by limiting domestic demand and reliance on current account surpluses largely at the expense of the US, the world's 'consumer of last resort'.
In late 2012 there was a great deal of global debate about the so-called 'fiscal cliff' in the US which reflected the need to bring US government debt under control. However the international dimensions of this issue seemed to be entirely overlooked.
In late 2013 concern about the apparent inability of the US political establishment to deal with the federal government's growing debt levels heightened further. Following a partial 'shutdown' of government as a result the refusal of the Republican dominated Congress to approve legislation providing necessary funding approvals (because of concerns about health reforms that had been labelled 'Obama-care'), there was further disputation about approving the federal government's 'debt limit' which was likely to be exceeded in mid October. If an increase was not approved, there was a risk that (as a worst case) the US government might default on some of its Treasury bonds - an outcome that would have severe implications for the global financial system / economy (because the credit rating of T-bonds might be down-graded, thereby requiring many institutions who use these as highly secure capital to sell - thereby driving up interest rates). This was significant because:
In November 2011, the US President announced an intention to shift the US's national security focus to the Pacific, involving in particular:
The incompatibility between such US expectations and East Asian practices clearly lays the foundation for ongoing international tensions.
From 2011 disputes grew between US and China about the apparently poor accounting practices of Chinese companies with US operations (and the suspect auditing of the Chinese operations of US companies) - and this (like the US Federal Reserve's so-called 'Currency War') seems likely to start getting at the root causes of those international financial imbalances that have their origin in East Asia.
In June 2012, a former chairman of the US Federal Reserve, Paul Volcker, suggested that the global economy would be unable to rely indefinitely on high levels of consumption in the US, and on associated financial imbalances. He put forward some suggestions about how a more effective international financial / monetary system might be created in order to reduce the risk of financial crises.
However, while this recognised that not all countries could afford to have a market-based floating exchange rate (by implication countries such as Japan and China), there was no obvious reference to, or necessary recognition of:
In early 2013:
In 2009 the present writer had speculated that the GFC was likely to be a three stage process, involving:
However in early 2013, the expected third stage had not happened and there was growing optimism about global economic recovery.
However this seemed likely to be misplaced because nothing had been done to resolve fundamental problems in the global financial system (eg those that give rise to large financial imbalances) and 'recovery' was being expected in an environment characterised by 'Ponzi-like' financial systems. Europe most notably remained mired in recession and threats to the solvency of some governments and banks (eg in Cyprus) were proving hard to resolve.
Moreover many observers expressed concern that improved real-economy conditions might be more artificial than real, eg reference was being made to:
In some respects the situation seemed like a return to 2007 in terms of the vulnerability of financial systems to potential crises - a vulnerability that was not necessarily obvious to those who focused only on conventional business / economic methods of analysis drawing upon 'real economy' variables.
However the problem was arguably more severe because it was hard to see how a serious global demand deficiency could be avoided - because:
To achieve economic growth in this environment 'everyone' needed to rely on either: (a) even more credit - which reserve banks had been seeking to provide; or (b) increasing net exports . It was clearly impractical for 'everyone' to increase net exports, and this raised the risk of 1930s-style 'competitive devaluations' to seek greater export competitiveness at others' expense.
In fact concern was widely expressed about monetary easing - namely that it might constitute a form of 'currency war' to drive down exchange rates so as to boost trade competitiveness. In particular there was concern that Japan might seek to directly interfere in currency markets by buying foreign bonds to weaken the yen. Quantitative easing had been accepted as economically useful providing it was primarily aimed at stimulating the domestic economy (ie to head off deflation and drive down unemployment) 
In April 2013, an unexpected crash in the value of gold (which had been becoming increasingly strategically significant) suggested the possibility that a new dislocation of the global financial system could be imminent (see Interpreting the Canary in the Gold Mine). This possibility was reinforced in April 2014 when the establishment of a physically-settled gold futures market in Asia was seen to indicate that the Western makers of paper-gold futures markets (whose physical gold holdings had disappeared) might be bankrupted  - though by that stage it was likely that significant institutions had eliminated their exposure to losses from failure of 'paper gold' markets.
In mid 2013 there was increased speculation that quantitative easing was of uncertain benefit because of its apparent contribution to asset bubbles. However by that stage the build up of global debt levels (due to the combined effect over several decades of international financial imbalances and easy money policies) that there was a real risk of debt deflation and a major crash that would be far worse than anything in recent decades.
In July 2013 the IMF warned of the consequences for the eurozone of the ending of quantitative easing by the US Federal reserve. The onset of a tightening cycle in US had already led to rising bond yields in the eurozone. The resulting increase in borrowing costs could damage demand and growth - unless European Central Bank takes countervailing action. There is a high risk of stagnation on the periphery, and this could lead to a debt-deflation spiral 
Stimulating demand through quantitative easing (ie boosting access to more credit) to overcome demand constraints due to high debt levels could lead to a severe financial crash followed by a prolonged and global 'balance sheet' recession and deflation. Quantitative easing is a method for counter-cyclical macroeconomic management that comes with risks, and those risks are compounded by by international financial imbalances.
There is no obvious way of averting such a financial crisis. However it is clear that financial system stresses can not be resolved without finally addressing the challenge of international financial imbalances which:
However, though some now understand that the financial imbalances that have grown in recent decades have to be reversed before growth can be sustainable [1, 2], most analysts (like the G20) continue to put this in the 'too hard basket'.
And in October 2013, it was suggested that there was no need to do anything in particular because imbalances were merely a transitory phenomenon which would disappear as China (for example) increased the role that domestic consumption played in its economy - a suggestion that seemed overly optimistic.
To create an environment in which economic growth can be sustainable there is arguably a need to:
In the unstable environment that will exist in the meantime countries would arguably reduce their risks by seeking: political stability; a future oriented economy; and sound balance sheets for households, businesses and governments.
And the financial system reforms to create an environment for sustainable growth are complicated by the need to simultaneously resolve of other challenges facing the global community such as:
In September 2013 it was reported that over the previous year there had been a resurgence of protectionist measures which would impede global trade - largely because of the credit difficulties that emerging markets face. This poses a threat to economic recovery. Emerging markets now account for 50% of global output - but seem to be turning their backs on free trade. Particular attention has been drawn to actions by Argentina, Brazil, India, Indonesia, Russia and South Africa - with less concern now about China 
In June 2014 it was suggested that: "In the immediate aftermath of the 2008 global financial crisis, policymakers’ success in preventing the Great Recession from turning into Great Depression II held in check demands for protectionist and inward-looking measures. But now the backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that came with it – has arrived. " 
An Approaching Crisis - From Late 2013?
Finding What You Might be Looking For: Diverse views on issues affecting the international financial system have been referenced below over several years. Material on the same general topic can thus appear in different places. The following overviews the issues addressed here and identifies in time order the various places that related material appears.
In late 2013 there were increasing and accumulating signs of an approaching slow-motion crisis - one possible outcome of which was that the 'second failure of globalization' that this document has speculated about (ie a breakdown of international political and economic order - equivalent to that at the end of the 19th century that preceded and arguably caused WWI) might become a reality.
At the same time there were signs of constructive business and policy initiatives that could reduce these risks - though whether this could be sufficient to overcome the 'drag' from accumulated bad debts, resource constraints and geopolitical tensions was anything but certain.
In February 2014 agreement was reached through the G20 that all members would seek (before the end of that year) to identify actions that could be taken to boost economic growth by 2%. However it was not at all clear that the financial / economic obstacles and geopolitical tensions which could disrupt such an outcome were being recognised.
Economic indicators of the possibility of a catastrophic but slow-motion crisis initially included:
In late 2014 there were clear signs of changes in the primarily monetary-policy methods being used to to try to stimulate sustainable economic growth, and debate / concerns about what was needed and its implications;
Following the official end of quantitative easing (QE) by the US Federal Reserve in late October 2014, there was considerable debate about the potentially-disruptive implications of this transition.
The OECD warned that investors seemed to be ignoring the risk of financial instability 
A rapid decline in oil prices in late 2014 was seen as posing risks
Concerns about risks to international financial systems were widely expressed in early 2015. For example:
Conditions seemed to be emerging which could force the US Federal Reserve to raise interest rates and perhaps even the rapid unwinding of past QE. Maintaining easy money policies poses little risk of an inflationary surge if it was only feeding into asset prices, but could prove very dangerous if its started to feed wage / price growth in the real economy. A shift to higher rates would have a highly disruptive impact on global financial markets by: accentuating yield-seeking capital movements towards US; and creating capital shortages elsewhere (thereby creating pressure for increased interest rates worldwide in an already almost-deflationary environment). The relatively self-contained US economy implies that, while a stronger $US would erode trade competitiveness, this would have a much smaller implication for US economy than for many others.
The effectiveness of low interest rates in stimulating the economy was increasingly disputed while their adverse consequences were highlighted.
Global Bond Market Crash?
In this context there seemed to be an urgent need for the G20 to finally face up to the problems associated with structural incompatibilities in the international financial system that had given rise to the need for easy money policies to sustain global growth in the first place (ie those related to international financial imbalances that the BIS had also highlighted - see above) - but perhaps little prospect that this would be achieved. See CPDS comments in:
However progress may be eventually be achieved because China was nominated to lead the G20 in 2016. See CPDS comments in:
In mid 2016 a suggestion by the Reserve Bank of Australia (involving international regulation of the quality of lending and of the total amount of credit in an economy) seemed to offer prospects of significantly increasing financial stability in future (see International Regulation of Lending Standards).
In May 2015, the former chairman of the US Federal Reserve who had initiated its QE response to the GFC (Dr Ben Bernanke) indicated that he believed that a lack of complementary stimulus measures was the reason that easy money policies had failed to create a basis for sustainable global growth - a suggestion that indicated a lack of understanding of the risks created by international financial imbalances (See CPDS comment in Sharing the Blame for Global Economic Failure).
It was also suggested that a bond market crash might trigger a new financial crisis. Bond yields in Europe had surged in April. In US both labour market and consumer spending signaled sustainable recovery. Markets anticipated a rate rise in September 2015 - though it could occur at any time. If rising yields spur corporate bond market sell-off, those who want to sell may be unable to. Tight post-GFC regulations have reduced dealers ability to hold corporate debt. This lack of liquidity could trigger a future financial crisis 
In June 2015 the IMF warned of danger to emerging economies from expected tightening by the US Federal Reserve - and this probably had particularly severe implications for China.
This highlighted the geo-political implications of any new international financial crisis (see CPDS comment in Geo-political Implications of a New Financial Crisis).
Indicators emerged in mid 2015 that emerging economies faced very real risks
Also it seemed likely that a resolution of Greece's debt crisis would involve both increases in taxes and reduced spending in Greece and a (say) 30% haircut for its creditors (achieved without any obvious write-off by extending loan terms and reducing interest rates). Recognition that Greece could never recover without debt relief had forced Germany to change its opposition to this .
It was also noted that the euro had been designed as a political project to promote unity in Europe. But the debts of member countries were not consolidated. Banks were required to lend to all member countries. This worked as long as Europe was growing - but not during recent stagnation. Greece was bankrupt - and this must wipe out someone's assets and potentially have a contagion effect elsewhere 
In July 2015 it was being suggested simultaneously that:
A CPDS comment on this inconsistency is in Global Financial Salvation from a Near Bankrupt China?
In August 2015 the world was seen to suffer a 'glut' of money, savings and oil (according to a PIMCO analyst) - and a high savings rate was seen as a serious limitation on future growth.
Currency depreciations had been underway in most Asian countries for years (which would raise the cost of servicing external debts). This could be seen to parallel the problems that gave rise to the Asian Financial Crisis of 1997-98. However the risks seemed much less than they were at that time (eg because of slower devaluation and greater foreign exchange reserves) 
In late 2015 there was increased speculation that a global recession could be looming.
And problems in financial / monetary systems were seen as a major factor in the risk the global economy faced - for quite complex reasons.
Changing demographics (which result in a decline in working age populations) could invalidate past economic trends and assumptions about ongoing deflation.
It was suggested that it would no longer be possible in future to drive global economic growth by increasing spending in excess of incomes through continually reducing interest rates (see CPDS comments in Low interest rates may be 'gifts' that keeps on taking)
Increasing economic nationalism was seen to be choking trade and threaten global growth. After 30 years rapid growth, trade was declining fast as a share of global GDP. In the past it had only been this weak in periods of global recession. The rise of globalization after 1990 was a source of world peace - as economic integration and political cooperation made conflicts less likely. This lifted hundreds of millions out of poverty. 
On the other hand concerns about a global recession were suggested in late 2015 to be becoming inappropriate because of stronger monetary and fiscal stimulus measures .
It was also predicted that the era of low inflation could be over because of: (a) large increases in money supply were a likely consequence of declining foreign exchange reserves in China and elsewhere; and (b) changing demographics.
Savings gluts were seen (see article outlined below) to be a major cause of the world's increasingly severe asset bubbles and financial crises - and as likely to make it impossible for reserve banks to play an adequate role in dealing with the world's next major financial crisis (See CPDS comment in The Cultural Background to East Asian Savings Gluts and Escalating International Financial Crises).
Fundamental changes in global economy were seen as likely because: (a) recycling China's large current account surpluses into foreign assets will shift from China's central bank (which has preferred US Treasuries) to private businesses; (b) volatility in China's markets will affect the world; (c) globalization has been completed (ie value chains are now fully in place) - and world trade peaked in 2008; and (d) services will be the new driver of global growth 
Problems in economic management in China were seen to be both a cause and a consequence of problems in the broader global economy.
Overall the risk of a 'credit crunch' (ie a lack of the credit that has been required to sustain global growth) seems very high despite the fact that: (a) the global 'real economy' is still in fair condition even though growth is slow; (b) investors have large cash deposits with financial institutions world-wide; and (c) there are many potential drivers of new economic activities / industries. (see A Credit Crunch is Possible Even if the 'Real Economy' is Growing )
Policy options to deal with a credit crisis are now limited. QE programs are now recognised to have little 'real economy' impact. They also have adverse social / political side effects which analysts may eventually recognise and take into account - See Do Low Rates Help? And more aggressive monetary policies to delay a credit crisis may exist but would seem extremely hazardous.
Alternatively it may be that losses in the global financial system (which are not transparent and which observers seem to believe will be very large) might simply not be containable by any further monetary policy options.
2015 was the worst year for global trade since the GFC. The $ value of trade fell 13.8% - the first contraction since 2009. This was mainly due to slowdown in China and emerging economies 
In March 2016 core inflation was seen to be rising in US and thus supporting Federal Reserves belief that raising interest rates will be necessary 
Real interest rates in US are negative and falling further each month. US Fed is now trapped. It dare not raise rates because of fear of what this would do to financial markets (and the $11tr of offshore debt denominated in $US). It has been forced to try to manage a fragile global financial system struggling with unprecedented debts. Average debt ratios are 36% of GDP higher than they were in 2008 - and emerging markets have been drawn into quagmire. However while it would be dangerous to prevent US economy from achieving 'escape velocity', there is already a risk that this could lead to an inflation breakout. People who know what they are talking about are starting to challenge what the Fed is doing 
In late March 2016, Fed chair indicated that rate rises would be delayed because the international environment seemed fragile. At the same time there were increasing signs of inflation risk in the US - perhaps leading to stagflation  [CPDS Comment: While the actual risk of significant inflation while economies are stagnant is hard to assess (and it is hard to see what would drive a high rate of inflation - apart from QE which fed directly into economic demand), when this occurred in the 1970s a high rise in interest rates and a severe recession were needed to overcome the problem]
The US presidential primary debates are changing the global economic debate. There is no longer general agreement on trade and business. Issues that are being raised include: nature of capitalism; social equality; poor prospects of next generation; benefits or otherwise of free trade; balancing shareholder returns with other considerations; strategic competition with China; global tax issues; outlook for future 
In late 2016 concerns were expressed about the breakdown of increasing global economic integration that had long been the foundation of rapid economic growth.
In early 2017 there was a significant further illustration of the financial / economic risks faced by emerging economies. It was suggested that Emirates Airlines could be in trouble because it had invested very heavily in aircraft with little concern for immediate profitability (and the Emirates Government had invested massively in airport development) on the assumption that the Emirates (airline and state) could have the major air transport role as the global 'South' developed.
Since the GFC there had been a presumption that emerging economies would play a major role in the future world economy (see A New World Order: Leadership by Emerging Economies). There have also been many indications that this might not be sustainable (see Problems in Emerging Economies which included reference to the particular exposures of the so-call Fragile Five - India, Indonesia, South Africa, Turkey and Brazil). Arguably emerging economies' problem arose mainly from the same source as Emirates Airlines potential problem - ie the adoption of a variation of the methods of financing development with little regard for return on / return of capital that had been the basis of real-economy 'miracles' (and ultimate financial crisis) in East Asia (see An Even Scarier Story for Emerging Markets, 2014).
US Fed is poised to lift interest rates after ending its bond-buying program in 2014. But Japanese, European and British central banks are still doing so (about $125bn / month). This means that borrowing costs for governments (eg Australia's) are low because of artificial demand, Fear of deflation or weak growth has prompted funded shift of funds to bonds with low but fixed returns' (even if these are negative - a total of $US10tr). After years of QE about 1/3 of outstanding $US32tr in outstanding government bonds (in US, euro area, Japan and Britain) are owned by government authorities. Over half of US Treasuries are now owned by government agencies. This is a long way from a free market. Fed has to be careful about whether market thinks it might sell bonds - as this would cause prices to collapse. New regulations introduced since GFC require major banks to hold government debt. Again this is artificial demand. As interest rates have fallen the actuarial value of insurers' pension funds' liabilities (ie their future payments to policy holders) have exploded. Their obligations to hold bonds have also distorted global bond prices. Insurance companies had only 12% of government bonds in 2014 but made 40% of new purchases. It is impossible to tell free market interest rates 
Interest rate increases by the US Federal reserve are likely to collapse bond prices - just as happened in 1994 
US Fed has tried to tighten monetary policies 3 times since 2013 - each of which sent shock waves through global financial system forcing it to retreat. It is in effect world's central bank and can't set liquidity conditions for US alone. It has been monitoring situation and now thinks coast is clear, Capital flight is under control. Europe's shift to bond tapering reduces risk of rocketing $US. Yet can the world handle 6-7 rises in 2017 and 2018? Highly leveraged financial system could explode. 1% rate 8 years into economic expansion is too low and negative in real terms. Savings are being whittled away. Actual tightening (if include withdrawal of stimulus) has been significant already. Post-war world is leveraged to $US as never before. Offshore $US debt has risen 5 fold to $US10tr since 2002. This is the effect of globalization, and Fed policies. When Lehman crisis hit, China and emerging markets could buffer the global economy. They now face credit exhaustion. This is an accident waiting to happen - for which strong $US could be the trigger. Fed must be careful. US economy seems already to be slowing and M3 money supply has been trending to 55 month low. Raising interest rates will be risky. Fed fears being left behind the curve. But commodity rebound has stalled. Core inflation is up a bit - but not a lot. Real wages are falling. Fed may puncture asset bubbl just as it did from 1928 to 1929 
There seemed to be no consideration of the real possibility that constraints on obtaining the resources required to maintain traditional patterns of economic growth seemed to: (a) potentially lead to an inflationary surge, and economic disruption, like that in the 1970s; and (b) require urgent innovation if that risk were to be avoided. For example:
It should be noted that:
The potential for a global public health disaster associated with the spread of the Ebola virus was raised in October 2014 as yet another source of a possible crisis. The disease, which emerged from West Africa, had an escalating infection rate and was suggested by the UN to be probably uncontainable if success in doing so was not achieved by December. The transmission of the disease in first world hospitals where advanced precautions were taken (despite some teething problems) suggested that understanding of the disease's transmission mechanisms might be inadequate 
The extremely rapid increases in populations in Africa could not only make that continent more populous than Asia but increase the world's risks of starvation, pollution and wars - according to UN Population Division 
The world is facing an unprecedented demographic shift - to a situation in which there are more elderly than young people 
There is seen to be no greater risk to the global economy than dwindling water supplies 
Significant future problems were foreseen as a consequence of the increased use of reinforced concrete - because rust can limit structures' useful lives to 50-100 years and thus impose large future costs 
The earth could be facing a mass extinction of wildlife. WWK and Zoological Society of London suggest that global populations of fish, reptiles, birds, mammals and amphibians fell by 58% between 1970 and 2012 - and this could be 67% by 2020. A mass extinction event is possible for the first time since demise of dinosaurs 65m years ago. Human misuse of nature resources threatens habitats, pushes species to the brink and threatens climate stability 
Humanity is facing the sternest test in its million-year ascent. This involves 10 huge man-made threats that combine to imperil our future (ecological collapse, resource depletion, weapons of mass destruction, global warming, global poisoning, food insecurity, population and urban expansion, pandemic disease, dangerous new technologies and self-delusion). All these could be resolved with wisdom / cooperation / technology. The greatest challenge is people's concern only with things in their own minds (eg non-material things like money, politics, religion and the human narrative). Two trends suggest the possibility of progress - namely the start of thinking as a species by sharing knowledge / values / solutions via the Internet and the increased role of women - who tend to be more concerned with children and the future 
Human influence on earth life support system is of concern. In 2000 the emergence of a new epoch was suggested - the Anthropocene to replace post post-end-of-ice age Holocene. For last 10000 years earth's system has been stable - and this allowed human development. Change is now very quick - in terms of losing biodiversity / mass extinctions / all time high CO2 emissions / faster temperature rise / rapid changes in global nitrogen cycle . In 1950s and 1960s human influence rivaled great forces of nature - now it exceeds them. For most of earth's history it has had climatic extremes (hot - a greenhouse world or cold - an ice age world). For the past 2.5m years earth has been uncharacteristically stable - varying from cold to gentle warmth. There is a need for the rate of human-generated change to return to zero 
An oil crunch is likely in a decade - and this will mean the end of the world as we know it. The EROI (Energy Return on Energy Invested ) on resources that are being developed has been falling and will make investments in oil production non-viable. The EROI when oil was first discovered was 100. In 2000 it averaged 30 and 10 years later was 17. Oil is increasingly scarce and harder to find / develop. Deep water sources average 10, while unconventional sources such as tar sands are about 4. For shale the return is 1.5-2.8. Capital expenditure has skyrocketed to produce oil. It trebled over 10 years while production declined. AS EROI falls increasing amounts of oil must be diverted back into producing oil. Global economic slowdown is related to declining quality of fossil fuel resources. It is estimated than an EROI of 6-8 would be the lowest tolerable. How long will this take given a fall from 30 to 18 over 10 years. Oil is currently $50/ barrel - but production costs are over $100. Many companies carry large debts / go bankrupt. Global debt / GDP levels have risen from 2 in 1994 to about 6. This can't go on much longer. Debts can only be repaid if real economy is strong - but it has been weakening. Only financial sector is strong. The financial sector will eventually realize that loans are not going to be repaid and will stop lending leading to massive financial crisis. However an immediate crisis exists in the Middle East - related to: peaking of oil production in some countries; rapid population growth; rapid decline in water, land and food resources - requiring oil revenues to be increasingly spent on food; oil exports are likely to be unavailable to big oil-consuming countries; the affected desert countries have nothing else to export; governments will be able to provide less for people producing social instability; the situation is made worse by IMF / local authoritarians / corruption 
Shell's CEO has warned about declining oil demand as early as the 2020s because of public concerns about climate change. Oil demand will peak because social acceptance is disappearing. Regulators are starting to insist that fossil fuel companies account for stranded assets and financial risks from climate change. Oil and gas industry needs to take an activist approach to renewable energy 
There were at the same time indicators of potential threats to the global political and economic order that went beyond those associated with financial and economic systems. For example: