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Obama Speech Warns of Economic Armageddon

January 9th, 2009 Comments off

Less than two weeks before his inauguration as America’s 44th President, Barack Obama delivered a major speech on the U.S. economy. The essence of his message is that Congress must quickly pass an economic stimulus package with a vast price tag, possibly in the range of a trillion dollars, or face economic Armageddon. With an apocalyptic tone, President-elect Obama delivered a sobering message. Undoubtedly, the economic crisis is even more dire than described in Obama’s speech.

Joseph Stiglitz, a Nobel Prize winning economist who was chairman of the White House Council of Economic Advisors during the Clinton administration, has joined the chorus of economic specialists warning that the global economy is going down the proverbial sink-hole, with the U.S. economy serving as the financial locomotive of this global train wreck. Among the destructive economic and financial forces he has recently written and commented on is the whole phenomena of de-leveraging.

According to Stiglitz, “America’s economy had been supercharged by excessive leveraging; now comes the painful process of de-leveraging. Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze. After all, when banks don’t know their own balance sheets, they aren’t about to trust others.”

Despite massive efforts by the Fed in the U.S. and central banks across the globe to unfreeze credit markets, the financial arteries of the world remain clogged. Though some shrinkage in the Libor rates and Ted Spread has occurred, the overwhelming degree of counter-party risk has eroded the element of trust to such an extent, monetary policy by central bankers cannot overrule human sentiment. The recent Madoff Ponzi scheme that may have bilked investors out of $50 billion has had far greater impact in defining the state of trust in the marketplace than near-zero interest rates being offered by central bankers.

The credit crunch may impact the massive economic stimulus package being proffered by Obama as the one great hope of salvaging the U.S. and global economy. To finance the massive amount of spending being planned by the incoming Obama administration, upwards of a trillion dollars of additional deficit funding will have to be borrowed, primarily from foreign creditors such as China. However, with China now requiring massive funding for its own economic stimulus spending, that nation and other foreign creditors may not be as readily available for financing U.S. government debt spending. Counter-party risk exists not only among private investors and institutions; foreign countries and sovereign wealth funds may prove as tight with their willingness to loan money, especially to an American government that is projecting trillion dollar plus deficits for years to come.

If the U.S. is unable to finance its massive deficit spending plans, what then? Perhaps economic Armageddon does loom in out future, as the Global Economic Crisis widens its vortex of destruction and doom.

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