Global Economic Crisis

In a piece for Al Jazeera entitled “black swan events and the global economy,” NYU economics professor Nouriel Roubini, the “doctor of doom,” has presented a new dark perspective on the current state of global economics. Roubini integrates a number of negative economic metrics and phenomena, including “black swan” events such as the Japanese earthquake and more mundane though far from rosy economic data that challenges the views of economists who are eternally optimistic. While the optimists believe the current negative economic factors are merely hiccups, and equity growth can resume in full force, Roubini warns that the dangers confronting the global economy are chronic, and may lead to a double-dip recession.

On the current Greek debt crisis, Roubini writes, “Global risk-aversion has also increased, as the option of further ‘extend and pretend’ or ‘delay and pray’ on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely.”

One of the points Nouriel Roubini makes in his article is that  new financial and economic disasters on the scale of 2008 and would leave policymakers empty-handed, as the massive growth in public debt since 2008 leaves them without ammunition in the event of a new series of catastrophes. As Roubini puts it:

“This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line. Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained. Another round of so-called ‘quantitative easing’ by monetary authorities may not occur as inflation is rising – albeit slowly – in most advanced economies.”

In essence, Roubini offers a portrayal of the current state of the global economy that is laden with doom and gloom.

I was not alone in being skeptical as the first European/IMF bailout package was cobbled together last year when the Greek sovereign debt crisis first exploded. At that time, the European politicians assured their constituents that the 110 billion euro bailout for Greece would absolutely stabilize the situation for Athens, and prevent a sovereign debt contagion metastasizing throughout the rest of Europe, especially to the so-called PIIGS nations on the southern periphery  of Europe (Italy, Spain Portugal as well as Greece) and Ireland. Now, after Portugal and Ireland have joined Greece in begging for a bailout from European taxpayers and the IMF, Greece is back with its cup in hand.

After a year of crippling austerity measures that have thrown the Greek economy into recession,  Prime Minister Papandreou has told the Greek parliament that even more severe stringent cutbacks and tax increases are required. The reason; last year’s bailout was insufficient to enable Greece to continue to pay creditors for her massive (and until the crisis surfaced, largely hidden) public debt. The news from Papandreou is dire; another massive injection of European and IMF loans are needed, equaling  the already staggering previous bailout package of 110 billion euros  (approximately $150 billion in U.S. currency), or else Athens will default on its sovereign debt. It must be pointed out that the second bailout  package, as with the first, will necessitate other European nations themselves going further into debt to provide Greece with the bailout, including countries such as Spain and Italy which are considered only slightly less vulnerable to a sovereign debt implosion than  Greece, Ireland and Portugal.

Anyone who though that the global economic and financial crisis that began in 2008 ended due to the “brilliant” expansion of public debt engineered by the policymakers is now getting their wakeup call. As I predicted in my book, “Global Economic Forecast 2010-2015:Recession Into Depression,” a global sovereign debt crisis will precipitate a worsening of the global economic crisis. Furthermore, solving a debt crisis with more debt, tied to fiscal policies that retard economic growth, is not a solution but rather an exhibition of economic and financial insanity.

 With policymaking of this “quality,” it bewilders the human intellect  that anyone still  thinks an economic recovery is just around the corner. There is in fact something just ahead for the global economy, but it won’t be pretty.

No matter how the EU and IMF policymakers try to spin truth, the reality is that Greece (and not only Greece) is functionally insolvent. The spread on Greek debt is a clear sign as any can be that markets have thumbed their noses at Greek sovereign debt. The European/IMF bailout, at the price of severe austerity by Athens, is life support for what is already a fiscal corpse. Now that Standard & Poor’s has cut its ratings on four of the largest Greek banks to CCC, the politicians in Athens and throughout the Eurozone are even more desperate.

How bad things are in Athens can be observed by the latest machinations by Greek politicians. George Papandreou, the current Prime Minister of Greece, is supposedly offering to step down as the price to pay for a broad-based coalition government. It is said only a coalition government can adopt the severe austerity measures the IMF is demanding for more of the loans that alone keep Greece afloat. In the meantime, there are riots on the streets of Greek cities, as the population rebels against paying the price for sins it did not commit.

I think the smart money is on Greece defaulting on its sovereign debt, either outright or stealthily through restructuring. Of course, Greece will not be the last casualty of the rapidly evolving global sovereign debt crisis. In looking at Greece today, perhaps followed soon by Ireland and Portugal, we are also catching a glimpse of what is in store for the greatest sovereign debtor of them all; the United States of America.

Just when things couldn’t get more bizarre for the International Monetary Fund, a leaked internal memo from the powerful global financial entity indicates it was the target of a highly sophisticated “spear-phishing” hacker attack. The BBC indicated that security expert Tom Kellerman told the Reuters news agency, “that it was ‘a targeted attack’ with code written specifically to give a nation state a ‘digital insider presence’ on the IMF network.”

Other views by computer security experts add to the picture that the IMF was targeted by a state actor wanting a presence inside the databases of the organization. While not enough information has been leaked to identify the likely nation-state or its objectives, I will inject my own speculation.

My view is that such an extreme measure targeting the IMF would likely be initiated by a large economy and global creditor that is vulnerable to massive write-downs of its overseas sovereign debt purchases, especially within the Eurozone, UK and USA. Such an actor might decide that the strategy it must implement to safeguard its investments and long-term fiscal equilibrium requires an extraordinary degree of access  to highly confidential IMF data and policy assessments. Furthermore, such an actor would have already established its interest in cyber-warfare, and has an advanced computer infrastructure of sufficient level to design the highly sophisticated software utilized in the IMF hacking operation.

When it comes to the culprit, I don’t think we are talking about Zimbabwe.

Alan Greenspan, former Fed Chairman and a prime facilitator of the U.S. housing bubble, appears in retrospect a scion of fiscal prudence in comparison with his successor, Ben Bernanke.  This disaster-prone Fed Chairman presided over the financial collapse of 2008, which came in the wake of his prediction that the housing bubble would not cause a recession, let alone a global financial meltdown. And this man is still the most powerful architect of U.S. monetary policy?

 In his recent speech delivered at the International Monetary Conference in Atlanta, Bernanke blamed everything but himself for what he concedes is anemic economic growth, which he knows all too well is being artificially propped up by the most expansive monetary and fiscal policies in human history. In the Fed Chairman’s world, the earthquake and tsunami in Japan, weather conditions and other unpredictable “acts of God” are to blame, not the Federal Reserve’s polices, for the utter disaster that the U.S. and many other advanced economies are coping with.

While in Atlanta, Ben Bernanke made passing reference to the sharp rise in commodity prices, though without admitting that this was due largely to the Fed’s policy of quantitative easing. He then added the illogical assessment that inflation is “not broad based” in the economy. Really?

As he has done before, Bernanke made perfunctory remarks about the need for the policymakers to eventually bring down the U.S. federal government’s budget deficit. As he and his colleagues continue to propel the United States towards a fiscal train wreck, he holds the politicians with no power to rein in Bernanke with responsibility for preventing the future shocks that the Fed’s policies have in store for everyone.

The disconnect this man has with the real world is mind-numbing. One thing, however, we can be thankful for. At least Bernanke has avoided the personal behavior issues that led to the recent resignation of the head of the IMF. With Fed Chairman Ben Bernanke, the question is all about his performance as Fed Chairman, and nothing else. On that score, history will probably judge President Barack Obama harshly for reappointing Ben Bernanke as Fed chairman.

It was less than three years ago when the global financial system suffered a nearly fatal heart attack, and the world economy has been lying in the intensive care ward ever since. Despite the claims by pundits and policymakers that the unprecedented levels of public debt incurred ever since has “saved” the global economy, there are abundant signs that the symptoms of 2008 are returning with a vengeance.

Housing prices in the U.S., the leading edge of the crack-up of the CDO and monetized poisoned mortgages that unhinged everything in 2008, are again descending. Despite government programs aimed at transferring private debt to the public sector and amending age-old accounting standards so that worthless junk can be camouflaged as valuable assets on bank balance sheets, credit markets remain weak.  Though history does not exactly repeat itself, if often rhythms, and what is occurring today has a painful yet rhythmic quality to it.

Now, here are two key differences from 2008. Unemployment rates in all the major advanced economies  are far higher than was the case  in 2008.In addition, the level of public debt has been expanded by leaps and bounds. Taken together, this means that the global economy has much less latitude available for absorbing future economic and global shocks such as a major spike in oil prices,  systemic bank collapse or, as is increasingly likely, sovereign debt default. If, for example, Greece were to default on its debts in the near future, that would precipitate a panic within the global financial system that not even the craftiest central banker with the largest printing press could prevent from steamrolling over what is left of global economic stability.