Global Economic 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.

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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.

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The political masters of the Eurozone delivered their promised “shock and awe” just before Monday’s Asian financial markets opened. If the intention was to create a 24 hour surge in equity prices across the globe, the politicians’ desperate bid to “defend the euro at any price” achieved their transitory objective, at the cost of nearly $1 trillion. However, it is already becoming clear to  investors and analysts globally that this trillion dollar joint Eurozone-IMF boondoggle will utterly fail. Already, the euro has given up almost all of its 24 hour euphoric gains, and is resuming its downward descent.

It is also increasingly clear that key decision makers within the Eurozone played fast and loose with the EMU constitution,  by invoking the “exceptional circumstances” clause of Article 122 of the Lisbon Treaty governing the European Monetary Union. More problematic, it is becoming undeniably obvious that the supposedly independent European Central Bank took orders from the politicians, especially President Sarkozy of France. The ECB president, Jean-Claude Trichet, protests that there was no political interference in the ECB’s decision to start purchasing worthless government bonds from Greece, Portugal and the other insolvent nations that make up the so-called PIIGS. No one believes Jean-Claude Trichet, and Germany in particular will become increasingly alienated from the Eurozone as the ECB engages in the once forbidden monetary sin of quantitative easing.

At the price of one trillion dollars, the Eurozone has just paid the first instalment in what may prove to be the most costly funeral for a currency in modern financial history.

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This is a disaster-laden forecast, which essentially describes a developed global economy mired in staggering contraction, while the developing world is experiencing a collective growth rate of just above 1%, which undoubtedly would have slipped into negative territory without the inclusion of China’s GDP, which received the only positive projection from the World Bank, which has upped its China GDP forecast to a growth level of just above 7%. However, China’s economic growth is almost entirely based on borrowed money; a massive stimulus program comprising nearly $600 billion to subsidize domestic demand as a counterweight to the sharp decline in Chinese exports.

In 2010, the global economy is projected to return to growth, though on a lackadaisical scale. Even in projecting growth for next year, the World Bank reduced its already weak forecast. What the data seems to reflect, on the macroeconomic level, is that global trade is in free fall, and with the severe contraction of export-driven economic growth, massive borrowing by the sovereign to fund domestic stimulus activity is about the only major economic expansion still occurring. Unfortunately, fiscal policy is only a short-term driver of growth. Even sovereign states eventually exhaust their capacity to borrow and engage in vast levels of deficit spending.

With the World Bank pointing towards more bad news for the global economy, the European Central Bank has come out with a wet blanket of its own. The ECB is warning that pump priming by governments as their primary policy response to the Global Economic Crisis must soon come to an end, or create unacceptable levels of risk to sustained economic development. In particular, the ECB is concerned about the danger of rampant inflation and uncontrolled fiscal imbalances, as national debts of major developed economies, especially within the Eurozone, comprise a growing proportion of their GDP. More alarmingly, the ECB is not alone; other central bankers and economists are also warning that economic policymakers must soon find what they refer to as an “exit strategy” from the massive fiscal deficits that are currently being accumulated with such reckless abandon.

The World Bank’s June forecast data presents economic decision-makers with a conundrum. With 2009 shaping up to be the single worst year for global economic performance since World War II, and 2010 being projected as a year of anemic growth at best, there will be immense pressure on policymakers to enact follow-up stimulus programs, with even greater levels of public borrowing. For example, Nobel Prize wining economist Paul Krugman has consistently called for a much larger stimulus package than the nearly $800 billion Obama package. The argument will be that without more deficits, the globalized recession will be prolonged, and create higher levels of unemployment. However, the fact that in this fragile economic environment some voices within the policymaking establishment are beginning to question the continuation of debt-driven public financing is a sign that there is no clear consensus on how to resolve the Global Economic Crisis.

To add to all the other bad news, economist Nouriel Roubini, the most astute observer of the global financial and economic contraction, is now warning that while a slight economic upturn is possible in early 2010, there is now a growing risk of a “double dip” recession towards the end of 2010, facilitated in large part by the fractured finances of sovereigns that have accumulated staggering levels of public debt.

Finally, even the most optimistic projections concur that global unemployment will continue to accelerate, well into 2010. With fewer wage earners and a continuing credit contraction, it is hard to see any tangible basis for a sustained economic recovery. Remove deficit spending from the equation, and we could see a second Great Depression. Maintain high levels of public borrowing, and the global credit and bond markets will impose their own will, leading to equally cataclysmic economic consequences.

The World Bank’s updated economic forecast does not present a clear roadmap for the future of the global economy. What it does provides is more evidence that the Global Economic Crisis is far from over, and that there is no clear answer to the question of how to bring this globalized disaster to an end, and restore healthy, sustained growth to a battered world economy.

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