The global economy is getting back to normal. That does not mean a rapid return to full employment nor to a low-risk world for investors. It means that the underlying realities of globalisation are becoming clearer: ours is a multipolar world, where the technological convergence between rich nations and capable poor ones is rapid. Middle classes are expanding quickly in emerging markets – a group that politicians focus on everywhere, while ignoring recurrent protests from others, particularly low-skilled labour. The world has and will have high real economic volatility despite relative price stability. This state of affairs is, in fact, a return to the Old Normal of the late 19th century. It is a world that we can understand, even if we do not like it.
In international politics, as has long been foretold, the “American century” of 1945-2000 has given way to a world where the US remains the leader but is losing dominance. So the global system is somewhere between outright conflict and smooth international governance. Reflecting this diffusion of economic and military dominance, a few major currencies – not just one – are increasingly being used for invoicing and reserve management, and that trend will only continue.
The link between currency usage and geopolitical ties is strong, and so the dollar will not be suddenly displaced, but regional alternatives will continue to rise. This has a feel of the 19th century: as Barry Eichengreen, a professor at the University of California, Berkeley has argued, there have been long periods of history where multiple reserve currencies coexisted, like at the end of the 1800s, and we are now in one of those periods – which contributes to economic volatility and uncertainty for national economies and investors.