The current financial crisis has created a media conflagration that feels like a combination of the bird flu epidemic coverage in 2004 and the OJ Simpson trial coverage in 1994. So hot has the media fire burned that OJ was found guilty last week of a subsequent crime and received almost no coverage at all.
The question asked at the end of many of the articles covering the financial crisis is “Is this the end of American hegemony?“
I have a follow-on question: Is this a serious question or is it the media making the most of a great story? There’s no doubt that the financial crisis has all of the elements of a great news story. First, it’s so global that it is a local story almost everywhere. Nearly every stock exchange can be the source of pictures of traders collapsed in dismay.
Secondly, there’s a villain and plenty of highly respected members of the business world willing to indict the villain using astonishing sound-bites: Tom Murphy, former director of private wealth management at Deutsche Bank in Sydney was on TV yesterday saying:
I don’t think it would be an exaggeration to say that there has been a massive fraud perpetrated on the American people by the investment banking world.
From the media’s perspective, it doesn’t get any better than this. It has allowed them to do full page spreads on the history of the stock market and on the intricacies of hedging. There has never been a time in history when more people could define “naked short selling”. But can it be described as the end of an era or is this a media beat up?
Whilst these are serious times with many people in serious pain, I think it is too early for the media to say that these events will be looked on in years to come as marking the end of American hegemony.
To see why, it’s instructive to look at the last major shift in economic dominance – the shift in commercial dominance from the Muslim world to the European world.
World commerce in 1347 was a fairly stable affair. Europe wanted spices, the Asians wanted certain European goods and the Muslims wanted conscripts for their military expansion. And everything needed to pass through Muslim controlled territory.
From 1347 to 1497, all this was to change [1]. Firstly, the plague disrupted a stable commercial system; secondly, Vasco de Gama’s discovery of an ocean-going spice route created a paradigm shift that dramatically transferred commercial power from one group to another.
The Plague: During the 1300’s the speed of commerce had increased sufficiently for people and rats traveling on the Silk Road across Asia to reach European ports diseased with the plague but not yet dead. Once the living carriers of the plague bordered ships and carried their flea-bitten carcasses through Europe and the Middle East the disease spread rapidly and fatally. In Europe, perhaps 1/3 of the population died from the disease. In Egypt, the numbers were probably much higher. Whilst population numbers are difficult to estimate, by the 1500’s the Egyptian tax levy was reduced to 20% of the level in the early 1300’s. The disease significantly weakened the transaction of commerce across the Middle East and disrupted a supply chain that had effectively conveyed goods between Europe and Asian for 600 years.
Ocean-going spice route: In 1497, Vasco de Gama rounded the cape of Africa and allowed Europeans to transact directly with India without traveling through Muslim controlled lands. It was the end of the Islamic dominance of trade between Europe and Asia and the beginning of a new era in commerce. Once Malacca fell 50 years later, the end of Muslim dominance was truly at hand.
This turning point in world commerce was marked by significant disruption across the market (the plague) followed by a paradigm shifting event (ocean-going route to India).
Are we, as the media suggests, at a similar turning point with America and Asia? Are the media reports correct that we may be witnessing the fall of America and the rise of Asia.
Perhaps we are – the current financial crisis has created a disruption – but where is the paradigm shift?
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[1] As described by William J Bernstein, “A Splendid Exchange“.
