Attempts of understanding the sheer scale and interconnected nature of the world economy have
produced some of the world’s greatest thinkers, its most radical philosophers and scores of conflicting
tribes. From Thatcherites to Marxists, classical liberals to socialists, globalists to localisers and
capitalists to anarchists, these tribes all attempt to explain their perspective and views regarding the
state or future of the world economy. However, for this ABM insight, the world economy can be
thought of as one great big tower of Jenga, with seemingly unrelated factors all depending on each
other for stability. In fact, ‘The Big Short’, the film on the lips of most economics teachers attempting
to explain the financial crisis, does well to illustrate the fragility of the housing market using Jenga.
One of the many systematic risks in the world economy is debt. It can defeat nations, cripple
economies, liquidate corporations, humble billionaires and squeeze households. Therefore, when
Evergrande, one of China’s largest property developers was on the brink of collapse, it is not
surprising that fears ripple across the world and shook global markets in the process. If there is one
thing in common with the South Sea bubble in 1720, Great Depression in 1929, Financial Crash in
2008 and Coronavirus in 2019, is that local events can have global ramifications.
Evergrande is the world’s most indebted property company, with liabilities of $300 bn (The
Economist 2021). Therefore, it is not all surprising when a company as big as Evergrande is at risk of
collapsing, markets also tremble with it. Moreover, when the revelation of Evergrande’s troubles
became clear, global market indices dropped, the price of commodities like iron ore slumped and
other property developers had to rush to shore up confidence from their investors. This reasserts the
catalytic nature of a hyper-globalised world economy, in which Evergrande could set off a chain
reaction of economic destruction that transcends national boundaries, geography and institutions. In
this instance, Evergrande has yet to collapse (as of writing) but it does reveal the fragility of our
financial markets and reinforces the growing shadow of debt has on hampering confidence in the
world economy. Following Evergrande’s failure to pay the $83.5 million interest payment on its
overseas bond, it is now scrambling to raise money by selling £1.1 billion worth of assets.
Additionally, with its share price taking a downturn, the company has lost 80% of its stock market
value over the last year. With this, Evergrande’s future is up in the air and has investors nervously
holding their breath. We are yet to foresee how this will all play out, but it certainly has got the tower
of Jenga swinging.
Evergrande has a cautionary tale for the perils of debt. The pandemic has reforged the role of
government, triggering the rapid advancement in scale and responsibility of the state. Across the
world, governments rolled out economic help to workers, extended cheap loans to companies, slashed
tax and injected financial markets with quantitative easing. The results were spectacular, despite real
economic activity being pressed into hibernation and populations sheltering under national
lockdowns, global indices and markets melted upwards to new heights in a blitz of cheap credit and
investor speculation. However, in the same way an open bar sparks a euphoric rush of consumption,
eventually, someone will have to foot the bill. Governments after almost two years of unprecedented
spending are now facing the realities of national debt and companies having been fed a lifeline of
cheap credit are now starting to feel the pinch. Additionally, with inflation bubbling over the surface,
the spectre of future interest rate hikes is not unimaginable, presenting highly indebted companies and
households with new risks in servicing their liabilities. In truth, companies have been encouraged to
absorb large levels of debt in an era defined by monetarism’s emphasis on low inflation and
historically low interest-rates. Therefore, when faced with an increasingly tumultuous economic
climate, it is no wonder that highly indebted companies across the world are starting to sweat. On the
other hand, governments are increasingly becoming aware of the burgeoning burden that national debt
will play on their budget books. Therefore, with the return of the almost forgotten enemy that is
inflation, triggering the risk of having to raise interest rates and supply side-constraints, the perils of
debt are being told once again.
To sum up, Evergrande reveals that even the biggest companies are not too big to fail. It also
highlights the fragility of the world economy and how the challenges of one company can spark a chain reaction of uncertainty and speculation across the world. Under the surface, it is also presents a
cautionary tale for governments, corporations and households to be aware of the perils of debt in an
unstable economic climate. Thomas Jefferson understood that ‘public debt’ was one of the ‘greatest of
the dangers to be feared’. Alas, it is no wonder that with a world economy, so dependent on diverse
factors vulnerable to the slightest movements, that it could be described as a game of Jenga.
By Henri Willmott