Archive for January, 2009

GDP Falls 3.8% In U.S. As Economic Meltdown Worsens

January 31st, 2009 Comments off
The U.S. Commerce Department has released preliminary figures for the 4th quarter of 2008, heralding a decline of 3.8% in GDP. As many analysts had forecast a Q4 contraction of at least 5%, on the surface the official figures could be perhaps spun by those taken to wishful thinking as “not as bad as feared.” Several headlines in the financial press actually conveyed this myopic fantasy. However, for once, even the usual Wall Street cheerleaders were not fooled by the “not as bad as we thought” mantra. In the first place, they know the government’s figures are preliminary and, like the unemployment numbers, are likely to be adjusted upwards once complete data for the last quarter is fully tabulated. Secondly, even the Commerce Department’s numbers indicate that the economic contraction in the world’s largest economy is much worse than negative 3.8 %.
The gap between what analysts predicted and what the government reported is explained by a statistical anomaly whereby expanding inventories of unsold goods are counted as “growth.” The growth of inventories “added” 1.3% to the GDP. This book-keeping exercise in imagined growth is due to the simple fact that consumer demand in the United States declined at a faster rate than businesses could cut back production and delivery. However, the lag between production and demand will not persist much longer, evidenced by the tsunami of employee layoffs that are now sweeping the United States. What this suggests is that the negative downturn for the first quarter of 2009 will be even more severe than otherwise.

Had the expansion of unsold or unwanted inventory not been factored in as GDP growth, than the Commerce Department would have reported a GDP decline of 5.1% for Q4 of 2008. It is likely that Q1 of 2009 will reveal an acceleration of GDP contraction of the American economy. is projecting that complete tabulation for the first quarter of 2009 will reveal a GDP contraction in the range of 6-7%.

What do these economic statistics mean in real terms? The answer is clear; the U.S. economy is in terminal free-fall. Even with the passage of the Obama stimulus plan, at best the U.S. can temporarily arrest 1-2% off the rate of annual GDP contraction. However, further erosion of the U.S. fiscal posture resulting from exploding structural deficits and the cumulative national debt will rapidly negate the very temporary boost from the stimulus package, while facilitating further catastrophic macroeconomic destruction.

The implosion of the world’s largest economy will ensure that the Global Economic Crisis is acute and of long duration. Policy responses thus far from political leaders and the financial elites that influence them are about as encouraging or realistic as inflating the U.S. GDP figures by counting the accumulation of unsold goods as evidence of economic growth and expansion. It appears that those in power have not learned much from the recent experience of counting subprime mortgage-backed securities as solid and secure assets.




Global Economic Crisis And The Meltdown Of Iceland

January 30th, 2009 Comments off

As the major actors of the global economy gather in Davos for the World Economic Forum, they might shift their gaze from the landlocked enclave of Switzerland to another frigid enclave enveloped by the chilling waters of the Arctic Ocean and Denmark Strait; Iceland. For it is on this sparsely populated Island nation of 320,000 inhabitants that ground zero for what the Global Economic Crisis can unleash is being experienced. As a harbinger of the economic doom that the global financial disaster can inflict on human societies, Iceland should serve as a clinical laboratory for what much of the rest of the world is in store for, as the masters of the universe continue to feast on champagne and caviar at rarefied summits such as that occurring in Davos.

Iceland once had a reputation for hardworking fishermen, and financial thriftiness. Its budgets were usually balanced or in surplus, and its banking sector was responsibly regulated. Then came the ideology of the so-called “free market” in banking, bringing along a wave of financial deregulation. The financial engineers that populated Iceland’s banking sector dreamed up a new way to make money; have Iceland’s banks borrow heavily via short-term debt, while offering above-market interest rates to recruit bank depositors overseas. Iceland’s banks actually had more depositors outside of Iceland, especially the United Kingdom, when the global financial crisis exploded all the unstable banking models irrespective of national frontiers.

Iceland’s three largest banks became insolvent as the credit crunch pinched their access to short-term financing while simultaneously overseas depositors began a run on those banks. This resulted in a panicky Icelandic government being forced to place in receivership and thus nationalize Glitnir Bank, Landsbanki and Kaupthing, the latter being the nation’s largest bank. The potential liabilities of these banks exceeded the entire GDP of Iceland by a multiple of five, forcing the government to seek emergency financial aid from the International Monetary Fund (IMF) as the country’s currency, the krona, went into free-fall collapse.

The financial catastrophe that has engulfed Iceland has crippled her economy and brought about a political crisis fed by social unrest and collective fear that is unprecedented in her history. Prime Minister Geir Haarde has been forced to announce his resignation and the calling of early elections, as he and his senior ministers have been virtually besieged by non-stop demonstrations representing the anger of a large proportion of the population. As the internal situation in Iceland deteriorates, her external image has been forever tarnished by the irrational behavior of the nation’s bankers. With numerous foreign depositors demanding access to their accounts from these now insolvent banks, the British government went so far as to publicly declare that Iceland was a terrorist state. Such is the level of discord that is being aroused by the Global Economic Crisis.

Undoubtedly, Iceland is about to enter an economic apocalypse. It is absolutely impossible for this small nation to cover a potential liability that is five times as large as its entire annual GDP without the largesse of the IMF, among other benefactors. Even with this assistance, Iceland will be economically crippled far into the future, creating a pall of gloom that is enveloping this small country.

Some will say that Iceland is an exceptional case, because even projections of severer financial carnage in the United States do not come near to five times the GDP of the world’s largest economy. Those comforting themselves with such logic miss the point. Even if all the potential losses from the insolvent banking sector in the United States, added to insolvent households, public and corporate debtors, amounts to “only” half the American GDP, the scenario that occurred in Iceland remains highly relevant. In both situations, be it with a small economy or the world’s largest, the systemic financial meltdown is beyond each country’s capacity to “repair” the damage utilizing its own economic resources. There is, however, one important distinction. Unlike Iceland, the United States does not have the option of running to the IMF for a bailout.


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President Barack Obama Confronts The Global Economic Crisis

January 27th, 2009 Comments off
As the global economy implodes, there remains the “audacity of hope,” or rather the author of the best selling book with that title, now 44th President of the United States, Barack Obama. If anything, the whole world, not just the U.S., is placing its hopes-and bets-on President Obama to provide the change in leadership believed necessary to bring the raging Global Economic Crisis under control. Will these global hopes in Barack Obama be realized?No doubt, President Barack Obama is an exceptionally intelligent man. He has a flexible mind and superb communications skills, essential for inspiring confidence in times of crisis. However, it must be recognized that the global financial and economic catastrophe that began in America and is now consuming the globe may be of such virulence and persistence, it is beyond the powers of any single mortal man, no matter how gifted, to vanquish.

We must remember that not even Barack Obama walks on water, though a miracle worker is perhaps the only human being that can terminate the Global Economic Crisis with rapidity and no further pain. The approach adopted by Obama so far in confronting the economic crisis, though manifesting a clear realization of its seriousness, is also impeded by a conventionality that may be his biggest obstacle.

As with the other boilerplate responses from political leaders across the globe, the Obama administration is proposing a massive stimulus package, dubbed the “American Economic Recovery Plan,” financed with borrowed money. This follows a previous injection of borrowed money, $700 billion for TARP, supposedly essential for rescuing the banks. It is now clear that the $700 billion TARP spending frenzy was a fiasco. As has since been admitted by top Treasury Department officials, Hank Paulson, former Treasury Secretary, pulled the $700 billion out of thin air, because he wanted a “big number” to impress the markets. Such a cavalier attitude towards stampeding Congress into borrowing a staggering amount of money, equivalent to roughly $2,500 from every American man, woman and child, without any strings attached on the part of the banks receiving the money, explains its total failure to resuscitate the clogged arteries of the U.S. credit system. This example is not an encouraging harbinger for another dose of heavy deficit spending in a hurry by Washington.

The Obama Plan envisions $825 billion in borrowed money for a variety of projects and tax cuts. Though Obama promises a much higher level of accountability with his stimulus package than with TARP, that is not even the most crucial issue. It is the whole premise of Obama’s economic plan. What are the parameters and assumptions that led to a figure of $825 billion? On top of the already ballooning federal budget deficit, can the U.S. government raise another $825 billion from largely foreign credit markets (e.g. China), and at what interest rates? What if the Obama Plan has no significant impact on rapidly eroding macroeconomic indicators, while the exploding national debt and structural deficits remove any other fiscal options from consideration?

The proper context for President Barack Obama to view the Global Economic Crisis is not just as a catastrophe for the U.S. and world economy, but also as the gravest danger to American national security. If the Obama administration had a broad enough intellectual horizon to comprehend that the erosion in American geopolitical power that would inevitably result from the implosion of its economy is a far greater threat than what emanates from a non-state actor with a few thousand adherents, namely Al-Qaeda, it would review the irrationally excessive U.S. military budget.

The question Barack Obama should be reflecting on is if the U.S. should continue to spend a trillion dollars a year on its military establishment, and hope that the global credit markets will finance unfunded government liabilities in other categories in perpetuity. Ultimately, the global economic and financial tsunami cannot be combated by bloated military budgets. It is critical that there is a radical restructuring of U.S. budgetary priorities, or else Imperial overreach will finish what is left of U.S. economic power, after the meltdowns on Wall Street and Main Street have added their unique contributions to the deconstruction of the U.S. economy


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Scary Data From China And The UK As Global Economic Crisis Worsens

January 24th, 2009 Comments off

While politicians have ceased denying what cannot be denied, that the world is enduring a crippling global financial and economic crisis, they still largely inhabit the land of make believe. What is more, they beckon their fellow citizens to enter blindly into their Alice in Wonderland construct for global economic salvation. Never mind that loose monetary policies enacted by central banks and massive deficit spending sustained by political actors lubricated the skids of this global economic disaster, we must accept on faith the prescription of the political establishment; even more public debt, compounded by near-zero interest central bank rates.

The latest macroeconomic data that has emerged from China and the UK should pour a bucket of cold water over even those most tolerant of political smoke-and-mirrors disguising itself as economic salvation. To say that the numbers were dismal would be an extreme understatement. Perhaps more poignantly, they are further markers on the highway to acute global economic meltdown.

China has for a decade been the primary engine of global economic growth. By becoming the factory for much of the consuming world, it accumulated huge savings, this cash pool being used to loan money to the United States, its major customer by a wide margin. As long as Americans bought Chinese products and kept the factory floors from Shanghai to Canton buzzing with full employment, the bosses in Beijing were quite content buying U.S. Treasury bills by the hundreds of billions of dollars. Now that consumer demand in the U.S. is contracting, however, along with other major markets, China will likely need to shift its accumulated savings towards financing its own deficit spending, as opposed to Washington’s stimulus credit needs. The official results for the 4th quarter GDP show a drastic reduction in growth, pointing to a sharp downturn in the Chinese economy.

A 4th quarter result of 6.8 % growth would seem like manna from heaven in comparison with other major economies. However, in the context of China’s massive labor pool this number is problematic, as double-digit growth has been essential for maintaining a level of employment satisfactory for sustaining social cohesion. Economist Nouriel Roubini points out, however, that this number is misleading. He believes that the Q4 in China brought no growth, perhaps even the beginnings of negative growth. Signs point to a recession in China during 2009, with disastrous consequences for the global economy.

The boom in the past decade in the Chinese economy also fueled economic expansion in much of Southeast Asia. Enterprises in South Korea, Taiwan, Thailand and Singapore, as well as other Southeast Asian nations, provided raw materials, products and services that were incorporated into the output of China’s vast economy. Contraction in China will be devastating to the economies on her periphery, while also diminishing her appetite to lend increasingly scarce savings to finance the profligacy of the U.S. federal budget.

In the UK, the 4th quarter GDP numbers, revealing a decline of 1.5%, magnified the apocalyptic news that has emerged from the carcass of its banking sector. As this is the second consecutive quarter of negative GDP growth in the UK, that country is now technically in a recession, hardly a startling revelation for the beleaguered British taxpayers. As with America, the political establishment offers only more tax-funded bailouts, even more massive deficit spending, garnished with historically low Bank of England fund rates.

In addition to the appalling quantitative data emerging from China and the UK, there is one other barometer of the cascading Global Economic Crisis, the obscure Baltic Dry Exchange Rate. In simple terms this is a measure of the cost of shipping raw materials to China by freighter. When the Chinese economy was humming, the demand for shipping dictated a high rate. That is now history; as the Baltic rate is sinking like a broken old rusty ship, reflecting collapsing demand by China for raw materials, as its factories shutter their doors. In essence, the current anemic Baltic rate attests to a process of virtual de-industrialization occurring on the planet on a titanic scale.

Though China and the UK have different economic characteristics and dynamics, they are both significant actors, along with the United States, in the global drama that is now unfolding. The examples I have sited are just another dose of empirical data pointing to the year 2009 as being one of economic extremis.




Global Economic Crisis Leading Banks To Financial Armageddon

January 22nd, 2009 Comments off
President Barack Obama was greeted on his first day in office by a 21-gun inauguration salute and a volley of synchronized demolitions on Wall Street. The Dow Jones tanked, not so much as a repudiation of the 44th President, whose election victory actually sparked a rally on Wall Street, but rather due to news emerging about the state of the banking industry. It is bad, very bad. However, new data on the full impact of the global financial and economic crisis makes it clear that the banking industry worldwide will sink to even lower depths, entering an abyss so dark that not even the most adroit spin-masters on Wall Street can create a rosy scenario to justify a fool’s rally on the Dow Jones.
The 4th quarter posting of an eight billion-dollar loss at Citigroup, taking the year’s negative figure to $18 billion in losses, was sobering and depressing news. Bank of America posted a 4th quarter loss in excess of $2 billion. The news out of the largest American banks was appalling in itself, however, this melancholy manifestation of the American banking industry was compounded in its misery by the revelations emerging across the pond, namely in the United Kingdom.
As described in a recent posting on, the British banking system is in morbid distress. A recent report on the state of British banking described the UK’s banks as “technically insolvent.” This dismal overview was followed by the realization that the Royal Bank of Scotland had incurred a loss for the year in excess of $40 billion, a sum of red ink that dwarfed Citigroup’s atrocious results. However, while the destructive contagion of the Global Economic Crisis is devastating the banks of the UK and elsewhere, it is in America that the next nails in the coffin of the financial industry are about to be hammered.
Nouriel Roubini is acknowledged as the leading economist on the global financial crisis, based on his repeated warnings about an impending credit crunch that earned him the moniker of “Dr. Doom.” His predictions turned out to be prophetic, yet even he acknowledged that the crisis evolved at a pace more rapid than he anticipated. That is why his latest forecast, issued during a conference held in Dubai, warrants urgent attention.

According to Roubini, his latest calculations indicate that U.S. banks face potential losses from the credit crisis in the region of $3.6 trillion, a figure that is both stratospheric and apocalyptic, reaching a level previously beyond the worst nightmares of major financial analysts. Professor Roubini points out that with only $1.4 trillion in total capitalization, this means if his projection is accurate, the entire U.S. banking sector is insolvent. This is the equivalent of economic and financial Armageddon.

Last October, Treasury Secretary Paulson warned Congress that without an immediate injection of $700 billion into the financial system (all of it borrowed money) the entire global credit system faced imminent collapse. It appears that this money, designated TARP, has been used almost entirely by banks and financial institutions to shore up their rapidly eroding balance sheets. What Roubini’s numbers suggest is that the TARP is nowhere near enough money to recapitalize a banking sector that appears to be collectively insolvent.

Is the solution more TARPs? Putting aside the issue of moral hazard, we must comprehend that this is an economic and financial crisis that is global, not national. That means if the United States decides to bail out its banks through the largess of the taxpayers, it will either have to borrow the money, print it, or raise taxes to a level that will be draconian.

As the U.S. is reliant on foreigners to finance its fiscal and current account deficits, it will have to compete with many other countries also seeking deficit financing to salvage their own insolvent banks, the UK being a conspicuous example. Even with higher interest rates, it is unlikely that there is enough credit available to cover the total cost of bailing out the U.S. banking industry (it must also be factored in that the Obama administration plans on borrowing one trillion dollars for an economic stimulus program, not directly related to salvaging the banks). Printing the money and monetizing debt will lead to crippling inflation and the inevitable destruction in the value of the U.S. dollar. Finally, the level of increased taxation required to pay for full recapitalization of the American banks without resort to credit markets would be so severe, it is probably both politically and fiscally unsustainable.

With the numerical analysis of Nouriel Roubini adding a quantitative reality to the impending meltdown of the global banking sector in general and U.S. banks in particular, it appears that a bankers hell is in store for us all. In a perverse paradox, instead of banks lending to people, it will be the people called upon to save what can be salvaged from an insolvent banking system, even at the cost of economic ruin that may endure for generations.






Welcome To The Global Economic Crisis, Europe

January 20th, 2009 Comments off

When the European Commission released its forecast for 2009 and 2010 on economic “growth” in the eurozone, the dismal projections were no surprise. According to the Commission, eurozone economies collectively will contract by 1.9 % in 2009 and grow by an anemic 0.4 % in 2010. Even these seemingly pathetic figures are almost certainly highly optimistic. A senior economist at Bank of America, Gilles Moec, for example, projects that the 16 nations that use the euro currency will see their economies shrink by 2.6 %. during 2009. As for 2010, I think the European Commission was inhaling some potent weed to see any growth potential for 2010.

The negative growth in the eurozone affirms that that this pivotal region in the global economy is deep in recession, with already high rates of unemployment about to surge to a level that will threaten the social and political cohesion of western and central Europe. Quite clearly, the eurozone, along with the rest of the planet, will not be immune from the man-made catastrophe that is the Global Economic Crisis.

What about the rest of Europe? Here the news is at least as bad, and in many instances worse than the eurozone. The economy of the UK is imploding, its banks technically insolvent, according to a recent and authoritative report. Russia is being shattered economically by the collapse in commodity prices, especially petroleum, its primary generator of hard currency. The Ukraine and Baltic nations are possibly in even deeper trouble, while even little Iceland has not been spared, as it risks being the first victim of the Global Economic Crisis to fall into national bankruptcy.

The global economic disaster ripping apart the world began in the United States, where it continues to accelerate in its destructive impact. However, now that Europe is being ripped apart by the global financial and economic tsunami, we are now entering what economists refer to as a negative feedback loop. As the U.S. and Europe feed upon each other’s economic decline, the tentacles of this destructive recessionary octopus will increasingly strangle the other major economic engines on the planet, namely China, Japan and Southeast Asia. The sobering conclusion is that the worst is yet to come, but almost certainly will.













Credit Crunch Nightmare: Report Claims British Banks Are Technically Insolvent!

January 18th, 2009 Comments off
British banks were not far behind their American cousins in being hammered by the onset of the global financial crisis, inflicting a cruel credit crunch on businesses and consumers in the United Kingdom. The unpopular British Prime Minister, Gordon Brown, initiated his own version of borrowing staggering amounts of money to prop of the tottering British banks, as fabled names like Northern Rock and HBOS became symbols of chronic institutional failure.
Early in his deficit spending spree, Gordon Brown boasted to Parliament, in a fiscal version of the Freudian slip, that he had “saved” the world. Well, it appears that boast from the right honorable gentleman was a tad premature. A report just released by financial analysts at the Royal Bank of Scotland will make limp the stiffest of British upper lips.

Entitled appropriately “Living on a Prayer,” the report concludes that UK banks are “technically insolvent.” The Brown government’s expenditure of nearly $400 billion to prop up British banks impacted by the Global Economic Crisis has almost entirely failed to curtail the affects of the credit crunch.

In a stealthy meeting at 10 Downing Street involving Prime Minister Brown, Financial Services Authority chairman Lord Turner and Bank of England governor Mervyn King, the implications of the “Living on a Prayer” report were digested. The purpose of this panicky pow-wow was apparently to conjure up some desperate last-ditch solution. According to media reports in the UK, Brown will probably throw another $150 billion in taxpayers money at the UK’s insolvent banks, desperately hoping that more deficit spending and mortgaging of the future will somehow repair the mistakes made by the “masters of the universe” whose casino capitalism is responsible for  incinerating the balance sheets of British banks.

The problem with Gordon Brown’s characteristic response, as with the TARP and Fed money gusher in the United States, is that we are dealing with a Global Economic Crisis, which means that there is not enough real money on the planet to plug up the collective insolvency of all the world’s major banks and credit institutions. Living on a prayer, indeed!




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Global Economic Crisis Sending U.S. Banks To The Bottom Of The Sea

January 17th, 2009 Comments off

When the banks fail, the remainder of the economy is in cardiac arrest. It appears that the disarray in America’s banking sector is growing, its vastly over-compensated management left only with the last resort of “restructuring” and cashing in their political connections for massive bailouts from Washington. The latest public revelations demonstrate how the Global Economic Crisis will take no prisoners, including America’s banks, both large and small.Citigroup, whose management once waxed at its acquisitions fueling excessive growth in the firm’s size along with their salaries and bonuses, has just announced a fourth quarter loss in excess of 8 billion dollars. The total losses incurred by Citigroup for 2008 amount to more than eighteen billion dollars. Now a panicky management is trying to “prove” it has a strategy for survival, based on splitting the banking conglomerate into two components: Citicorp, supposedly the “healthy” component, and Citi Holdings, with the “unhealthy” remnants that will be sold or liquidated. In the meantime, Citigroup took in another $20 billion infusion of TARP money from the U.S. Treasury, along with Bank of America. Another financial institution that grew to the point of indigestion, Bank of America will also receive a government guarantee of $118 billion to “backstop” the bank’s vulnerable assets.

What is actually going on with America’s banks? The dark secret that the government will not discuss publicly is that this vital sector of the U.S. economy is largely insolvent. The reason the Treasury provided $350 billion in TARP funding to the banks with no accountability or strings attached (and no improvement in bank lending to desperate businesses and consumers) is because the balance sheets of U.S. banks are so abominable, any taxpayer funds sent to them are being used solely to improve their dismal balance sheets.

The desperate borrow and spend tactics of the Fed and Treasury Department are akin to bailing out water on the Titanic after she struck the iceberg, hoping in defiance of logic that they can miraculously impede the inevitable sinking of the ship. The calamitous disaster-management techniques in the United States are being replicated throughout the world, as clueless central bankers and politicians add their own permutation on flawed reactions to the Global Economic Crisis.

The banking ship of the United States is going down, and with the connivance of Treasury, the Fed and Congress it will take the American taxpayers on its death ride to foggy bottom





U.S. Budget Deficit Will Likely Exceed 2 Trillion Dollars

January 15th, 2009 Comments off
The U.S. congressional budget office has recently forecast that the current federal budget deficit will exceed $ 1.2 trillion dollars, more than double the previous year’s near-record government overdraft. However, the CBO estimate does not even include the Obama stimulus package in its estimates, likely to be in the range of a trillion dollars over two years. Perhaps most problematic, the estimates conveniently set aside the catastrophic diminution in tax receipts that are inevitable, as the impact of the Global Economic Crisis on the American economy contracts payrolls and bankrupts businesses large and small. Just as dead men tell no tales, dead companies and unemployed workers pay no taxes. projects that for 2009, the U.S. government will have a deficit in excess of two trillion dollars and possibly even in excess of $2.5 trillion. However, government taxing and spending does not only occur at the federal level. All over America during the course of 2009, state, municipal and county governments will be drowning in red ink, and beg the federal government to bail them out. That is the logic of borrowing from Peter to pay Paul. There is a limit to how much money even the United States Treasury can borrow. However, an even greater danger lurks in both the short and long term.
The massive deficit spending that Washington initiated as the global financial and economic crisis accelerated was supposed to free up the credit markets and allow normal flows of business lending to proceed. In a fiscal paradox, the very solution implemented by the U.S. Treasury and Congress, massive debt spending by government, will inevitably suck up credit from the private sector like a vacuum cleaner, diverting this economic necessity into the public deficit purse, further aggravating the credit crunch.
The out-of-control multi-trillion dollar deficits being offered by Washington politicians and their coteries of corporate socialists desperate for a government bailout will bankrupt both the public and private sector, and ensure that the Global Economic Crisis brings about a worldwide depression of catastrophic proportions.

Why The Global Economic Crisis Will Be Worse Than The Great Depression

January 15th, 2009 Comments off
Eight decades ago the stock market crash of 1929 sparked the Great Depression, an economic crisis without parallel-until now. The 1930s were dark times of economic contraction, only alleviated to a modest degree in the United States by the New Deal of President Franklin D. Roosevelt. It would take the massive public works project known as World War II to bring the Great Depression to a close in the United States. The postwar economic boom in the U.S. ultimately revived the economies of Western Europe and Japan.
Now that the world is engulfed in a global economic crisis of staggering ferocity, does it mean another Great Depression is underway, and will it match the 1930s in its incessant demand destruction? The very bad news is that the Global Economic Crisis will ultimately prove far more devastating that the Great Depression. That is my projection, and I base it on a number of assumptions that appear to be supported by rapidly emerging macroeconomic data.

The American consumer has been the driver of the global economic expansion that impacted the Eurozone, the BRIC countries (Brazil, Russia, India and China), Southeast Asia and Japan and emerging markets. The capacity of Americans to consume was not based on intrinsic productivity but rather on debt from overseas creditors, further lubricated by irrationally loose monetary policies enacted by the U.S. Federal Reserve. The American consumer has been leveraged to a level that is unsustainable, and that bubble has burst.

The first symptoms were manifested in the sub-prime mortgage meltdown. A complex architecture of financial engineering exported toxic securitized paper investments based on these non-performing sub-prime loans. The result has been the virtual destruction of the financial world as we knew it, with the extinction of many of the largest American investment houses, some of which had been in existence for more than a century, having weathered the Great Depression.

While the financial world and now sovereign governments are currently inundated with the consequences inflicted by the sub-prime meltdown, which have cost trillions of dollars, much worse is about to be set loose on the global house of financial cards. There are other asset bubbles that will be popping with lethal force.

While sub-prime mortgages continue to devastate the American housing market, near-prime and prime mortgages are about to get hammered, as the over-leveraged American consumer becomes financially debilitated by rapidly rising unemployment rates, restricted access to credit and collapsing value of their retirement funds and household equity. Car loan delinquencies and credit card defaults will also accelerate, while consumer spending in the United States plummets, leading to the next asset bubble: commercial real estate. Retail trade declines will bring about a horde of commercial bankruptcies and foreclosures, creating vast square footage of vacant offices and storefronts. Shopping malls will become deserted, leading to unpaid commercial mortgages that will rival the sub-prime disaster in intensity.

An American Government that is already consumed with mountains of debt may promise to bail out every American consumer and business, however this is just not possible in the real world. Yet, this is the course the incoming Obama administration seems determined to follow. And leading the charge will be Tim Geithner, Barack Obama’s nominee to succeed Hank Paulson as Treasury Secretary.

Paulson of the $700 billion TARP debacle, preceded by his numerous wrong assumptions about the direction of the U.S. and global economy, was clearly a disastrous Treasury Secretary for coping with the onset of the Global Economic Crisis. However, will Geithner be an improvement? A revelation just released raises disturbing doubts. It has now been disclosed that the man President-elect Obama wants to entrust the Treasury Department to, at a time of the gravest economic crisis, failed to pay $34,000 in back taxes. Failure to pay $34,000 in back taxes? This is the genius supposed to run the Treasury Department, which supervises the IRS, and strategize our way out the current global economic disaster? This leads to another signpost on the road to global economic catastrophe. When excellence in leadership is essential for coping with the Global Economic Crisis, throughout the world the political establishment is represented by mediocrities. Mister Thirty-Four-Thousand in back taxes is a metaphor for this failure by the global political elites to identify and select the most competent professionals to confront the world’s most chronic economic disaster.

When one aggregates the cumulative affects of the asset bubbles about to burst with incendiary destructiveness, factoring in mediocre decision makers, the case for a crisis as bad as the Great Depression is solidified. There remains another element that will make it much worse.

In the 1930s the world was not as financially interconnected as it is today. Globalization has massively increased the vulnerability of the world’s financial and economic system. To take one example, a corrupt stock or bond trader in Singapore or Paris can, by manipulating his computer, gamble away billions of dollars of his company’s assets, undiscovered until calamity has struck. Every day trillions of dollars is transacted at the speed of light, much of it unregulated, particularly with those mysterious entities known as hedge funds. The derivative products they have engineered have accrued to the stratospheric level of hundreds of trillions of dollars, unmonitored by any governmental authority. In essence, a vast global financial superstructure has been erected on a foundation of quicksand as fragile as the worst of the sub-prime securities. As the global economy sinks, hedge funds will begin to deleverage and liquidate, in effect multiplying the already catastrophic global economic downturn. The result: global economic Armageddon.

The Great Depression led to the most destructive war in the history of human civilization. Will the Global Economic Crisis so disrupt social stability and international relations that an even more terrible global conflict erupts? It may be that however calamitous the financial impact of the Global Economic Crisis becomes, it will be the inevitable geopolitical consequences that will exceed our worst nightmares.



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