Global Economic Crisis

In my last post, I wrote:  “With 2012 a presidential election year in America, expect the Obama administration to spin economic data seven ways to Sunday in an effort to make things look more rosy. Thus, an unprecedented reduction in the total size of the American work force is twisted into a lowering of the unemployment rate.” Right on cue, the Bureau of Labor Statistics issued an rose-tinted jobs report, showing a decline in the U.S. unemployment rate while the private sector was creating 200,000 new jobs in the last month.

No doubt, President Barack Obama would like nothing more than to reverse the disastrous employment picture in the United States. But he is caught in a trap, one only partially of his making. The American economic  order he inherited, and which Obama is unable to transform beyond minor cosmetic alternations, is a de-industrialized, financialized monstrosity. No wonder his minions are reduced to creative bookkeeping to show that jobs are in fact being created and an economic recovery is truly underway. The reality is that the percentage of Americans of working age participating in the workforce is at a record low, overall labor wages are stagnant or declining and there are no indications that this is being changed.

And what about Barack Obama’s Republican would-be challengers? GOP frontrunner Mitt Romney may boast of his “business experience,” though in reality the man from Bain Capital is nothing more than a poster child for the domination of financialization over the manufacturing sector in the United States. Other Republicans seeking the GOP presidential nomination such as Newt Gingrich are offering the same old mantra of infinite tax cuts for the mega-wealthy of America and trickle-down economics for everyone else.

Between President Obama and his GOP rivals, I see no one with the transcending vision and leadership skills to undertake the massive economic changes required to restore America’s economic and fiscal health.

global economic crisis 2012 presidential election, mitt romney, Newt Gingrich, President Barack Obama, U.S. Economic Crisis

All signs point to 2012 witnessing an acceleration of the negative economic and fiscal metrics that plagued advanced and major emerging economies in 2011. In particular, the Eurozone debt crisis, which dramatically worsened in 2011, shows no sign of abating in 2012. A clear indication of this is that Eurozone cheerleaders President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany, in New Year’s messages, warned that things with respect to the Eurozone crisis will be even more dire in 2012.

A sign of how  bad things look in Europe is the latest PMI data on European manufacturing, which was continuing to contract towards the tail end of 2011. This all points to a recession. In fact, there is now a clear consensus among economists that the Eurozone will enter a double-dip recession in 2012, if it in fact has not already done so. Clearly, nations such as Greece, Ireland and Portugal are currently in a recession so deep, it meets the definition of a full-blown economic depression.

And what about the United States? With 2012 a presidential election year in America, expect the Obama administration to spin economic data seven ways to Sunday in an effort to make things look more rosy. Thus, an unprecedented reduction in the total size of the American work force is twisted into a lowering of the unemployment rate.  But such gimmicks will probably become totally inoperative, once the impact of the looming Eurozone recession and banking crisis migrates to American shores.

In 2009, in my book , “Global Economic Forecast 2010-2015: Recession Into Depression,” I forecasted that the massive transfer of private debt into public debt by sovereigns as a synchronized response to the global financial and economic crisis unleashed in 2008 by the collapse of Lehman Brothers would fail to resolve the crisis, and would lay the seeds for an even more virulent global economic crisis by 2012. With a global sovereign debt crisis now an established reality, and the Eurozone teetering while America has had its previous AAA credit rating downgraded by at least one major ratings agency, neither a continuation of failed policies  nor gimmickry by politicians and central banks will bring an end to the global economic crisis in 2012. Instead of a return to economic growth, the most optimistic forecast one could make is stagnation which, at a time of structural mega-deficits and ballooning national debts, is a guarantee  of further long-term economic misery for a great many of the planet’s inhabitants.

global economic crisis angela merkel, european debt crisis, global economic crisis, Nicolas Sarkozy, sovereign debt crisis

It appears that the ECB is abandoning its policy of monetary prudence, and imitating U.S. Fed Chairman Ben Bernanke in running its printing press wildly. Mario Draghi, ECB boss, has made available cheap loans to European banks experiencing liquidity problems. In response, more than 500 European banks stampeded to the ECB discount window, and have borrowed nearly 490 billion euros, equivalent to $643 billion USD at current exchange rates. Clearly, the European banks had desperate need for new capital, while the Eurozone politicos hope the banks will use the newly minted euros to buy European sovereign debt.

Nouriel Roubini I think described this rather nicely as in essence quantitative easing and stealth debt monetization. As with Ben Bernanke’s repeated bouts of money printing, I don’t think this new loose monetary policy by Mario Draghi will avail itself of any meaningful results. Since the global financial and economic crisis was unleashed in 2008, money printing by central banks has been a symptom of the problem, not its solution.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis ben bernanke, ecb, european central bank, eurozone banking crisis, Mario Draghi, nouriel roubini

The International Monetary Fund’s boss, Christine Lagarde, has issued another warning regarding the global economic crisis. This time, she spoke in Washington DC about  the danger of another Great Depression unless all countries work together to resolve the Eurozone sovereign debt crisis. If they don’t act in unison and effectively, Lagarde said the consequences would be, “Protectionism, isolation, and other elements reminiscent of the 1930s Depression.”

The grim outlook from the IMF is in sequence with cascading warnings from France and Germany that unless fiscal policy in the Eurozone becomes “harmonized” (e.g. more erosion of national sovereignty) and other countries outside the Eurozone (especially China) provide funding for the “big bazooka” to backstop the danger of sovereigns becoming insolvent, the global economy will implode. What the IMF and the politicians have not said is that it is politically impossible for them to obtain all the scenarios they claim are needed to prevent outright catastrophe.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis Christine Lagarde, eurozone debt crisis, IMF, international monetary fund

Nobel Prize winning economist Paul Krugman, in his recent column, has declared that the crisis in the global economy is now a depression.  Since the onset of the global economic crisis, policymakers and media pundits have resisted using the “D” word, instead preferring terms such as the “Great Recession.” However, this is what Paul Krugman wrote in his  December 11, 2011 New York Times column:

“ It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege. .. Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained.”

Krugman points out in his piece that the economic disaster now unfolding in Europe threatens a resurgence of anti-democratic, populist authoritarianism of the type that infected European civilization during the Great Depression of the 1930s.Of course, the same dangers also lurk in the United States.

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I predicted in 2009 that the policy responses following the collapse of Lehman Brothers in 2008 would not only fail to resolve the global financial and economic crisis; they would create a sovereign debt contagion that would transform the recession into a depression.  Paul Krugman has confirmed the validity of my forecast made in 2009.

In his closing observation, Paul Krugman offers an ominous warning. After describing how Hungary, one of the new democracies in Eastern Europe, is receding into authoritarian rule as its politics become more extremist, all due to the economic crisis in Europe, Krugman writes about the Eurozone political leaders,  “they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.”

It appears that the global economic crisis, and Eurozone debt crisis, are increasingly becoming a political crisis.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis eurozone debt crisis, Great Depression, Great Recession, paul krugman

After months of individual sovereign downgrades by the three leading ratings agencies, S & P has now entered a quantum leap by placing almost the entire Eurozone on a credit watch, including the behemoth economies of Germany and France. Furthermore,  Standard & Poor’s followed up by placing the European Financial Stability Facility, the vehicle for supposedly bailing out problematic Eurozone sovereigns and banks, on a negative credit watch. The fact that even the EFSF is on the verge of a downgrade, along with potentially almost all the sovereign states using the euro, is proof positive that the Eurozone debt crisis is irreversible, the politicians have lost control, and when the inevitable downgrades follow this devastating credit warning from S & P, all hell will break loose.

In the meantime, the clownish politicos of the Eurozone continue their interminable series of emergency meetings, continuing to promise a final and complete solution to the Eurozone debt crisis. However, in a rare moment of candor, German Chancellor Angela Merkel admitted that at best, a solution was years away.   Given all that, will China and the other BRIC nations, along with private investors, really want to invest in Euro bonds? 

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis angela merkel, eurozone credit warning, eurozone debt crisis, Standard & Poor’s

The figures for China’s purchasing managers’ index (PMI) for November registered a mere 49 points, according to the China Federation of Logistics and Purchasing. This figure represents a contraction in the crucial Chinese manufacturing sector. It has been due to its role as factory to the world that China’s GDP has been propelled to the second largest in the world. The latest PMI has been amplified by a similar index compiled by HSBC, which is also reporting a contraction in the industrial sector. This dismal news on the supposedly rapidly growing Chinese economy is being attributed to a decrease in exports to the Eurozone countries, now mired in an ever-worsening sovereign debt crisis. The data on China’s PMI is the worst since February 2009, at the tail-end of the free fall contraction in the global economy after the onset of the global economic crisis in the fall of 2008.

How worried should one be about the industrial contraction in China? Many observers have already pointed out that China’s rapid growth at a time of economic decline and stagnation among advanced economies was in large part artificially induced by massive government spending, in particular on uninhabited apartment complexes and unoccupied shopping malls. But more importantly, how worried is China about the economic health of its largest customers, in both the Euozone/UK region and the United States? This is what Chinese Vice Finance Minister Zhu Guangyao said about the current global economic crisis: “The current global crisis may be in some way more severe and challenging than that of 2008 after the collapse of Lehman Brothers.”

The Chinese political leadership is clearly worried about the spillover effects of the Eurozone debt crisis on China. This has led to some radical about-turns in economic policymaking. Concerns about inflation and banks with a significant portfolio of bad loans have been discarded. The authorities in Beijing are again focused on growth at all costs, involving the loosening of monetary policies and requirements on Chinese banks for minimal provision for reserves against bad loans. However, with a much smaller proportion of its economy driven by domestic consumption compared to the Eurozone, U.K. and U.S., there is only so much the government can do to induce growth at a time of stagnation or contraction of its exports to its largest customers. In the final analysis, China cannot go on indefinitely building uninhabited cities as a means of creating “growth” in its GDP. 

Despite all the talk in economic circles about the large economies in East Asia being “decoupled” from the advanced economies in Europe and North America, China is as much a prisoner of the impact of the Eurozone debt crisis as is America-just as Europe and China were prisoners of the subprime mortgage meltdown in the United States. In our integrated global economy, no one is immune to the effects of a legacy of bad economic and fiscal policymaking in Washington and Brussels, least of all Beijing.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis china economic crisis, China PMI index, chinese economy, Chinese Vice Finance Minister Zhu Guangyao, eurozone debt crisis

The Organisation for Economic Co-operation and Development has revised its economic forecast for the Eurozone and the UK. In both areas, the OECD is predicting negative growth in Q4 of 2011 and Q1 of 2012. Two consecutive quarters of negative GDP growth meets the technical definition of a recession. Other economists believe that the Eurozone, United Kingdom and the United States have already entered a double-dip recession.

As the global economic crisis worsens, the debt crisis metastasizes and more and more sovereigns are having their public debt downgraded by the ratings agencies, the equity markets are soaring again. Why is that happening, when global economic and financial fundamentals are so rotten? It appears that a false rumour that the IMF was going to bailout Italy from its suffocating public debt was the catalyst for the stock markets to rally strongly. Even when the report was officially denied, the equities maintained their climb. It must be that equities reside in a parallel universe, devoid from the inconvenience of fiscal, financial and economic reality.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis eurozone debt crisis, OECD, Organisation for Economic Co-operation and Development

As all but the most gullible no longer have faith in the European politicians to resolve the increasingly deadly sovereign debt crisis among the PIIGS nations in the Eurozone, the last ditch hope is now resting with the European Central Bank. The new president of the ECB, Mario Draghi, is under increasing pressure to abandon the bank’s defined mandate to maintain price stability, and to instead become the Eurozone’s lender of last resort. It can only do that by firing up its printing press, and conjuring new euros out of thin air.

Only Germany, with a long historic memory dating back to the massive monetary inflation of Weimar Germany in the early 1920s, remains in opposition to the ECB unleashing its printing press. Otherwise, politicians, hedge fund managers and investors are demanding that the ECB flood the world with euros. In their eyes, inflation is preferable to a deflationary recession, and the inevitable devaluation of the euro resulting from monetary creation would cheapen European exports. All a good thing, so they claim. No wonder Mario Draghi is being cajoled into becoming the savior of the European monetary union, and possibly the global economy.

My take on the ECB becoming the lender of last resort? I think we have the evidence of what would likely occur right in front of us. In the U.S., the Federal Reserve under the direction of its chairman, Ben Bernanke, has been in the money printing business since the onset of the current global financial and economic crisis in 2008. The Fed has been in many cases the lender of last resort in America, buying everything from U.S. Treasuries to toxic assets from banks and companies, while flooding the land with instantly manufactured liquidity and maintaining a zero interest policy at its discount window. We have all seen how effective such a policy measure has been in the United States. Bernanke’s record includes unprecedented fiscal deficits, many state and local authorities in the U.S. tottering on the brink of bankruptcy, unemployment levels not witnessed since the Great Depression of the 1930s and an economy functioning at stall speed and about to enter a double-dip recession, despite unprecedented levels of monetary, not to mention fiscal stimulus.

 If the European Central Bank follows in the footsteps of Bernanke, I don’t see how the results will be any different for the Europeans. Printing money may sound attractive to the desperate, but it is at best a short-term panacea, which solves nothing in the long run, and creates its own set of complications and economic distortions. Ultimately, a printing press cannot correct the flawed concept of a single currency for a multitude of different political cultures and economies.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis ben bernanke, ecb, european central bank, Mario Draghi

The debt crisis contagion in the Eurozone continues to metastasize. With Italy’s ten year government bonds above the red line of 7 percent yields despite a new government, Spain is now approaching that same zone of danger. Spanish government bonds with ten year maturities are very near the toxic level of 7 percent. With the two largest PIIGS nations in the Eurozone on the verge of insolvency, it is quite clear that the attempts to a avoid a contagion from the Greek debt crisis have been a monumental failure.

The politicians in Europe are so desperate that they have actually ditched democracy in a last ditch effort to avert a catastrophic implosion of the Eurozone.  Appointing  unelected governments and forbidding popular votes on economic and fiscal policy , not to mention eroding national sovereignty are the last refuge of the bumbling European politicians. The latest developments in the Spanish debt crisis show that these desperate measures are likely to be as dysfunctional as all other previous efforts to forestall an inevitable disaster from occurring.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis eurozone debt crisis, PIIGS, spain debt crisis, spanish debt crisis