Looked at from the point of view of unemployment, the US reflects a phase of near continuous buoyancy with declining employment rates (from 7.5 to 4.2 per cent) starting in 1992, but Japan has recorded a continuous increase in unemployment rates from 2.1 to 4.2 per cent between 1991 and 1999, Germany from around 6 to over 9 per cent and France from 9 to 11-12 per cent (Chart 3). Thus within the developed "triad", the good days seem to be large confined to the workers in the US, and to an extent in the UK.
Chart 3 >>
 
Further, there are signs of an increase in instability both in the financial and the real realms of the world economy. The instability in the financial sector, noted at the beginning of this article, has been widely reported by the media. But in the real realm too, besides the two phases of significant slowdown in economic growth (in 1991-93 and 1998-99) over the decade, and the crises in Mexico, East Asia, Russia and Brazil, the 1990s have closed with extreme weakness in Japan, despite repeated efforts to revive the economy with lower interest rates and large deficits. Figures reported in April this year suggest that restructuring efforts by Japanese firms have not merely kept unemployment at its post-War high of 4.9 per cent, but unemployment among males rose by 0.1 percentage point that month to touch 5.2 per cent and that unemployment among males aged 15-24 rose by 0.8 per cent year-on-year to touch a record 12.5 per cent.
 
This combination of slower growth, greater divergence in growth and increasing instability, stems precisely from the growing role of finance in the international system. There are a number of features of this rise to dominance of finance, which have been noted earlier in these columns. Despite talk of a new architecture, the global financial system remains highly centralised, with a few US financial institutions intermediating global capital flows. Decisions by a few agents determine the "exposure" of the system, which appeared to work well, till reports of the near collapse of Long Term Capital Management came in. The Soros development indicates that was not an isolated instance. The adverse role of individual decision-making is illustrated here as well. As Stanley Druckenmiller, a senior executive at Quantum Fund reportedly put it: "I screwed up. I should have got out in February … This business is a bit like a drug. When you are doing well its hard to quit.". Unfortunately, unregulated entities run by intoxicated individuals making highly speculative investments are at the core of the system.
 
Further, with financial firms betting on interest rate differentials and exchange rate changes at virtually the same time, the various asset markets relating to debt, securities and currency are increasingly integrated. Developments in any one of these markets affect the others as well. It is in this light that the trends in interest rates have to be assessed. As Chart 4, which provides the trends in short term interest rates suggest, since the early 1990s, interest rates in the US have risen, while those in Germany and Japan have fallen. This has meant that the interest rate parity between the US, Japan and Germany in 1990, has given way to a situation where US interest rates rule much higher than in the other two countries, the gap is in fact tending to widen. Since inflation rates (Chart 5) in the US have tended to converge, while those in Japan have fallen, the real interest rate differential has widened even further.
Chart 4 >> chart 5 >>