An Order Of Magnitude

There are those of us who believe that we can now see the way out of the financial crisis (see article). To be sure, there is a long way to go until the real economy fully digests the disturbances caused by the financial economy. However, the real economy could not begin to return to normality until the financial economy has returned to something like normality. As we move forward, the question arises of exactly how big the financial disturbance might be.

The recent stability report issued by the Bank of England (see report) suggests that the cost of the financial disturbance may add up to $2.8 trillion (see article in The Independent). Is this a big number?

The answer really depends upon what we are comparing it with. On the one hand, the cost of the crisis is about as big as the cost to the US of the war in Iraq. It represents about a quarter of the annual GDP of the US. On the other hand, the cost of the crisis is slightly larger thatn the annual GDP of China, which is not a small amount. Hamish McRae estimates that the cost of the crisis is about 7% of world GDP (see Blog), which is no small amount, but certainly looks manageable.

Once we start to compare like with like, the cost of the crisis is large enough to notice, but is also a long way from representing the beginnings of a new barter age. Perhaps we should all keep a sense of proportion to this?