Dictionary of the new world economic order
Some concepts are fundamental to understand why we are on the brink of a recession, where the new world economic order is heading and who will be the major players.
The Great Reset is the name of an initiative of the World Economic Forum that sought to rethink the capitalist economic model once the ravages of the pandemic had been overcome. The reality is that the health crisis has been compounded by a debt crisis and an inflationary crisis that have brought us to the brink of recession.
In the current context, the “great reset of capitalism” called for by this international body is more necessary than ever. We review some key concepts to understand how we have reached a situation close to collapse and what factors will condition the economy’s near future.
The axis of the global economy is shifting from Europe and the United States to Asia. According to a study by the consulting firm McKinsey, by 2040 Asia will account for more than half of the world’s gross domestic product and 40% of consumption. Europe’s loss of prominence is evident and the IMF predicts that at least half of the eurozone countries will enter recession in the coming months.
Global warming has forced us to move away from the idea of unlimited growth at the expense of depleting natural resources and has given way to the idea of the circular economy, with opportunities in the field of the “green” economy. As COP27 has shown, it now remains to be seen to what extent industrialised countries will bear the economic cost of the climate change they have generated and what measures they are prepared to take to slow down warming in the context of economic crisis.
Large multinationals have growing power in the face of declining state influence. Many of these corporations oversee huge supply chains, sell their products around the world and have revenues exceeding those of many governments. In fact, if it were a country, Walmart would rank tenth in terms of revenue. Globalisation has reversed the balance of power and in many cases large corporations are allowed to avoid paying taxes with impunity.
New technologies are enabling the emergence of products and services beyond the control of states and large corporations. As James Sène, chairman of 11Onze, pointed out in a session at Fintech Talks, we are facing a “transition from the old model, totally dominated by a few, to a new model that reaches more people and is decentralised”. Decentralisation of money creation, for example, has been one of the great pillars of cryptocurrencies.
Faced with the advance of cryptocurrencies, which propose a totally decentralised monetary model, states are working against the clock to develop digital currencies controlled by central banks (CBDCs) in order to maintain a centralised financial system. In China, more than 260 million people have already used the digital yuan (e-CNY). In Europe, the European Commission expects the regulation on the digital euro to be ready by the beginning of 2023 and the digital currency to be operational by 2025. The initial aim is that the digital euro, managed and supervised by the European Central Bank, will not replace cash, but complement it.
Data from the World Inequality Report 2022 show that since the mid-1990s, the richest 10 % of the world’s population has accumulated 76 % of the wealth generated in the world. In fact, 38% was concentrated in the hands of the top 1% of the world’s population. And the poorest half of the population has had to make do with the crumbs: barely 2% of the wealth generated during these last decades. Unfortunately, this gap between the super-rich and ordinary mortals has only widened during the pandemic. And experts agree that this growing inequality is a brake on global economic development.
After 11 years without an increase, the European Central Bank began raising interest rates in Europe in July. For the time being, they have already reached 2 % and the forecast is that they will continue to rise in the coming months to cool the economy even more and curb inflation. The ECB has aligned itself with the majority of the world’s central banks, which are also raising their interest rates to combat rising prices. This measure will directly impact the pockets of many citizens, as mortgage and variable-rate loans will become increasingly expensive.
Printing fiat currency
It is estimated that the total amount of money in circulation worldwide, including banknotes, coins, cheques and promissory notes, exceeds 60 trillion euros. The problem is that a considerable part of these banknotes have been put into circulation in recent years. For example, in 2020 alone, the US money supply increased by 24%. Most central banks have been printing money to cope with galloping public debt. And this increase in fiat currency has been mainly responsible for the current inflation.
The world’s public debt has soared in recent years and is strangling economic growth. Although the limit set by the Maastricht Treaty for EU member states is 60 % of their GDP, the eurozone countries as a whole have been above 100 % for more than a year now, according to Eurostat data. The situation outside Europe is no better, with the International Monetary Fund estimating that, by the end of 2021, global public debt also represented 100 % of world GDP. Moreover, debt levels could worsen if the crisis deepens.
Since March 2021, prices have risen sharply and almost uninterruptedly. Inflation in Catalonia, which exceeded 10% year-on-year in the summer, was close to 7% in October. The situation beyond our borders is no better, as inflation in the euro area as a whole reached 10.7% in the same month. Successive interest rate hikes are expected to help control inflation levels not seen since the 1980s. The price to be paid will be further economic stagnation, leading to a recession in the major economies.
As we pointed out in an article in La Plaça, a new mutual model is emerging, more communitarian and based on the sharing of goods and services, as an alternative to the model of individual purchase and use. In subscription business models, each customer pays fees that allow prolonged access to a good or service instead of making a large upfront payment to own that good or service. This business model is increasingly common in the computer, entertainment or automotive industries.
We do not live in a virtual world, but we do live in a virtualised world, since “what happens in the digital world has a real impact on our lives”, as James Sène warned in a session on the current economic situation. In this sense, the president of 11Onze predicted that the metaverse, whose economy depends on the authentication of digital properties, will play a key role in digitising our identities.
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At its annual meeting in Davos, the World Economic Forum
Molt bon diccionari 👏👏👏👌
👏 👏 Ensanem preparant i mentalitzat en aquestes paraules i conceptes claus
Bones notícies! Seguim democratitzant el coneixement financer. 💪🏻
Una bona introducció a uns temes altament complexos. Bon article.
Gràcies, Francesc. Seguim! 💛