A few months ago the FTSE 100 stood at over 7,000. It’s now 5,707 and dropping, which is rotten news, and not just for people on fixed incomes.
The knock-on effect of the turmoil in financial markets is a slowing manufacturing output and plummeting prices of commodities, including oil, which is now 80 per cent cheaper than just over a year ago.
All this brings into question certain ironclad economic presuppositions, such as the benefits of globalisation and service economies.
Globalisation is supposed to work miracles by shifting manufacturing and services to places that can do those things most efficiently. The system is perfect, or would be if economies were run by computers rather than people. And that stubborn species tends to frustrate the best-laid economic plans with predictable regularity.
This is mainly because its life isn’t determined by economics to the extent economists, Marxist or otherwise, want us to believe. Economic performance is only one part of human behaviour, and often not the most important part.
Religion, culture, politics, social life are all vital. Each can at times trump economics individually, and they always do so collectively.
The habitation of much of the human race is in China, which is run by a communist regime. And every communist regime introduces a strong element of slave labour into the economy.
China is a prime example of that irrefutable law of history, with billions of Chinese subsisting on what used to be called coolie wages. (In Russia, whose regime is typologically still communist, 26 million live below the poverty level of a whopping £120 a month.)
Observation going back to the days of the Roman Empire suggests that slave economies can’t succeed in the long run. They’re like a house built on termite-ridden foundations – looks good for a while, but then everyone inside is buried under the rubble.
Sure enough, the Chinese economy is slowing down precipitously, especially if we make allowances for the mendacity of China’s statistics – another ever-present feature of a communist regime.
Alas, the nature of globalisation is such that China’s troubles become ours. When Chinese shares tumble downhill, ours are caught in the avalanche, bringing into question the wisdom of tying our economic destiny so closely to an evil regime.
The slowdown in the world’s second-largest economy reduces the global demand for oil and, since the law of supply-demand has never been repealed, its price too.
That alone, however, doesn’t explain the immense drop. Another explanation is the policy pursued by another evil regime, that of Saudi Arabia.
The Saudis think that by bumping up their oil production, thereby driving the price of crude down, they can combat all three threats to themselves, those coming from America, Iran and Russia.
America has made a huge investment into developing cost-effective techniques for exploring the world’s almost unlimited reserves of shale hydrocarbons, thereby threatening the Saudis’ position. This is a long-term investment, but in the short term the US fracking industry is saddled with a $250-billion debt.
The speed of getting into the black depends on the oil prices: the lower they are, the less cost-effective fracking becomes, the longer it’ll take the industry to repay its crippling debt.
Following the removal of economic sanctions Iran, the Saudis’ mortal enemy, has just begun to market its own oil. Its ability to threaten Saudi interests also depends on the prices staying at a reasonably high level.
Russia’s urge to be an active player in the Middle East, in a role that doesn’t suit the Saudis, also depends on high oil prices. When they linger at around $30 a barrel, Russia’s economy becomes a basket case, and her ability to flex her military muscle is significantly downgraded.
All these factors explain the Saudi-driven drop in oil prices. They also indirectly explain why the Bank of England has reversed its planned policy of raising interest rates to the historical average of 2-3 per cent.
Conservative wisdom says that low interest rates and inexpensive fuel are good for the economy. The former makes it easier to finance research, modernisation or expansion; the former lowers the cost of manufacturing and transportation.
So it would be – in a real economy. Ours, however, isn’t real; it’s virtual.
Since we don’t make much of anything, the benefit of cheap fuel is trivial. Since our economy hugely depends on the stock market, the inevitable dip in energy-company shares hurts us for real.
Low interest rates also make it easier for the government to borrow promiscuously and drive our sovereign debt up beyond its present, already stratospheric level. Yet another adverse effect is the anaemic performance of our pension funds, which are bigger than in the rest of Western Europe combined.
Nor can we rely on the EU to bail us out. In France, a state of economic emergency has just been declared; in Germany the industrial growth rate has dropped down to zero.
Suddenly we discover that in our virtual world economic verities no longer apply. But actual reality never disappears – it lays underwater mines to blow to kingdom come virtual reality and everyone who has the misfortune of living within it.