Mark Lamb | Wednesday, 08 April 2009

The third wave

Weekly international investment round up to 7 April 2009

• IMF given central role in protecting the most vulnerable economies

• The ripple effect of $1 trillion dollars

One of the best explanations I have ever read on trying to grasp the enormity of $1 trillion is by the author Bill Bryson. He once wrote, “Imagine that you were in a vault filled with dollar bills and that you were told you could keep each one you initialled. Say, too, for the sake of argument that you could initial one dollar bill per second and that you worked straight through without ever stopping. How long do you think it would take to count a trillion dollars? Go on, humour me and take a guess. Twelve weeks? Two years? Five? If you initialled one dollar per second, you would make $1,000 every seventeen minutes. After 12 days of non-stop effort you would acquire your first $1 million. Thus, it would take you 120 days to accumulate $10 million and 1,200 days - something over three years - to reach $100 million. After 31.7 years you would become a billionaire, and after almost a thousand years you would be as wealthy as Bill Gates. But not until after 31,709.8 years would you count your trillionth dollar. That is what $1 trillion is!”
The recent G20 pledge of $1 trillion dollars in loans and guarantees largely directed to projects orchestrated by the International Monetary Fund (IMF) is understandably big news, and is already causing a few ripples.
This colossal amount is set to counter what the IMF calls the ‘third wave’. The head of the IMF, Dominique Strauss-Kahn recently said, “after hitting first the advanced economies and then the emerging economies, a third wave from the global financial crisis is now hitting the world’s poorest and most vulnerable countries”. He went on to say: “This puts at risk the major achievements of higher growth, lower poverty, and greater political stability that many low-income countries have made over the past decade.”
Left unchecked, the richest nations realise that the financial crisis would pale into insignificance should global unrest be allowed to develop into something much worse. As highlighted in last week’s article, a large part of this pledged money will go to the IMF to help troubled economies secure short-term financing deals while also increasing the availability of more ‘easy money’ through special IMF schemes to poorer nations without the usual harsh conditions attached.
When the world economy was booming just a couple of years ago the IMF was being derided with many in the West calling it irrelevant and out-of-date. In fact, just like their banking counterparts today IMF staff were being laid-off in their hundreds as the organisation faced a diminishing role and severely cut budgets. Now it finds itself at the very centre of the global rescue plan.
Equally, much scorn has been poured upon stock market based investments as if the whole system has some how become obsolete, those that have kept the faith have seen things moving. The MSCI Emerging Markets Index has added 32 per cent in the last 25 days, while year-to-date China and Russia’s main index have increased by 33 per cent and 18 per cent respectively. Given time, a trillion ripples should make one huge wave.

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The third wave