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Global Economic Crisis Brings World To The Eve Of Demand Destruction

February 1st, 2009 Comments off
A new center of gravity is driving the vortex of global economic destruction that is ravaging the planet. It was the financial sector that originated this cosmic disaster, leading to the earlier definition of what was unfolding as the Global Financial Crisis. The systemic failures in the global financial system will not only continue to inflict fiscal carnage; their impact will worsen as the realization grows that the banking systems in many of the world’s economies, in particular the United States and the U.K., are effectively insolvent. However, out of the inferno of a worldwide credit crunch and systemic banking failure has emerged an even more potent instrument of economic disintegration, the phenomenon referred to by economists as “demand destruction.”
While the banking and credit systems of national economies represent the bloodstream of commerce, it is the production of goods and services that define sustained economic activity. The totality of human life is captured in the statistics that gauge an economy’s productivity, in areas as diverse as agriculture, manufacturing, transportation and services in a vast multitude of human endeavors. Over a given span of time, it is anticipated that economic activities will peak and flow through businesses cycles. A recession brings a diminution in the output of goods and services for a limited period of time, followed by recovery and the restoration of growth. An economic depression, however, manifests a far different and much more radical character with respect to quantitative measurements of production and distribution of goods and services. The numbers increasingly evident from emerging macroeconomic data makes clear that what we are now witnessing is not the typical short-term recession in economic output but rather the far more dangerous and virulent evidence of global demand destruction.

The Global Economic Crisis is fully revealed by a combination of a systemic financial meltdown contributing to uncontrolled demand destruction in a continual negative feedback loop. This is not just demand destruction, but a global economic death spiral.

To take the example of the 4th quarter GDP figures released by the U.S. Commerce Department, they reflect a consumer base that has been stripped of its financial capacity to consume, thus displacing demand by staggering levels of contraction. In just one quarter we are seeing the American consumer, who represents 72% of the totality of all American economic activity, curtailing purchases in major categories at double-digit rates. The cutbacks by individual consumers are being replicated by the means of production, reflected by businesses in the manufacturing and distribution arenas. These enterprises are cutting back sharply on orders for durable goods, other products and services, be it machine tools, imported fabric, transportation services or inventory for supply to retailers. As Q4 GDP statistics from the U.S. indicate that the business sector is only in the initial phases of correlating its output with consumer demand contraction, these numbers will get much worse in the first and second quarters of 2009.

The American consumer, over-leveraged with debt but always beckoned to purchase more by easy access to credit, has now been denied his fiscal narcotics and is experiencing the writhing pain of withdrawal symptoms. Upon such a slender reed was the global economy constructed. With the collapse of consumer demand in the United States, factories in vast numbers throughout China, Japan, Taiwan and Southeast Asia are shuttering their doors, throwing multitudes of employees out of work. This in turn is collapsing internal consumer demand in those countries, further exacerbating the virulence of the Global Economic Crisis. The Asian contraction in comsumption is leading to global demand destruction in commodities, facilitating the deadly virus of global deflation.

It is now chillingly clear that this global economic disaster can no longer be contained. The cancer stimulated by banking and credit systems contaminated by toxic assets based on subprime mortgages in the United States, has now metastasized into the mainstream world economy and no variation of radical surgery or fiscal chemotherapy can bring this man-made catastrophe into remission.

Policy makers throughout the world are reacting in panic. Their prescriptions are the usual doses of debt-funded stimulus spending, while borrowing even more money to throw into the black hole created by the Wall Street magicians and banking sector. However, it is now the rampaging demand destruction throughout the world that is cementing the insolvency of the credit system. No amount of money that can conceivably be borrowed, begged or conjured out of thin air by central bankers and hysterical politicians has even a snowball’s chance in Dante’s inferno of reversing the tsunami of demand destruction that has now been unleashed by the Global Economic Crisis.