Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

There are two parallel economic universes that currently exist. There is that of the central bankers, who still largely maintain that the rapid inflation growth affecting the world’s commodities, finished goods and services is merely “transitory.” The monetary policymakers are joined by their counterparts in the fiscal and political realm, who are engineering massive deficit spending , justified by the need to “fight” Covid, while pretending that there is no economic or financial crisis, merely temporary bumps in the road.

Then there is the real economic arena, with red lights blaring and klaxons blasting away as the probability of a global economic implosion grows ever stronger.

When the 2007-09 Global Financial Crisis first arose, the chairman of the U.S. Federal Reserve, Ben Bernanke, boasted that there would be no recession. How wrong he was.

He and his counterparts within the Fed did not comprehend the complex interconnection between sub-prime mortgage backed securities and the global financial system, exacerbated by a then ill-understood financial instrument, derivatives. Thus when sub-prime mortgages in the U.S. went bust, their collapse took down much of the global financial system.

Now, in 2021, the global financial system has vastly greater complexity, interconnections and vulnerabilities than existed during the last major economic and financial crisis. For one thing, it is not just what happens one major economy. Now there are two.

China is on par with the United States as a critical global economic player. China today is experiencing major financial dangers, especially in the real estate sector. The present crisis afflicting Evergrande, China’s second largest developer of real estate, is a harbinger of the precarious state of debt-financed commercial and residential property activity in that country. Bad economic outcomes in China will be added to those in the United States, creating a financial tsunami affect far in excess of what occurred in 2007-09.

Then there are the economic ramifications of Covid and the reaction of monetary and fiscal policymakers. They shut down at various stages large segments of the global economy, back-filled the contraction that resulted with unprecedented levels of debt spending, which was augmented by central banks opening the spigots on massive liquidity infusions. The predictable result has been levels of inflation not experienced in major advanced economies since the 1970s. This has been further enabled by Covid-imposed disruptions in global supply chains.

Then there is an element that did not exist in 2007-09 as a significant financial factor; cryptocurrencies. They are opaque, in the case of Bitcoin the identity of its actual creator is unknown. They employ an archaic blockchain technology, and are a favorite currency vehicle for criminal enterprise, large and small. And yet, despite all that, cryptocurrencies have become a major force in global finance. Even In better times they displayed high levels of volatility. In the impending economic crisis. a severe collapse in cryptocurrency valuations will greatly add to  negative forces threatening all economies.

As the above makes clear, the current global economic order is characterized by an unprecedented level of complexity. Few economists, and virtually no sovereign fiscal or monetary policymakers, comprehend this complex economic reality that is about to come apart.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

He predicted the 2007-09 Global Financial Crisis with uncanny accuracy, even while experts including then Federal Reserve chairman Ben Bernanke were dismissive of him. He’s Nouriel Roubini, economics professor at NYU and a highly distinguished economist. Though his correct forecast of the 2007-09 financial implosion earned him the nickname of Dr. Doom, he prefers to think of himself as Dr. Realist. His latest exercise in realism makes chilling reading.

As the Covid pandemic erupted, Roubini was already warning that the world faced a global economic depression sometime during the course of the present decade. With unprecedented sovereign debt expansion during the past year  unleashed by governments under the guise of providing Covid relief, Professor Roubini has taken a fresh look at the data, and published his conclusions in a recent article that appeared in The Guardian.

“Conditions are ripe for repeat of 1970s stagflation and 2008 debt crisis,” reads the headline of Roubini’s article.  “Warning signs are there for global economy, and central banks will be left in impossible position,” he writes.

In essence, Roubini points out that current trends, which include not only the massive expansion  of sovereign debt but also contributing  factors such as the loss of independence by central banks coupled with the decoupling between the United States and China, leading to fragmentation of global supply chains, point to an unavoidable train wreck  for the global economy. It is a hellish forecast, which unfortunately has the ring of truth.  If Professor Roubini’s forecast is as accurate as was his previous warning of the impending Global Financial Crisis of 2007-09, the world stands on the verge of the Global Economic Crisis of the 21st century, a Great Depression 2.0 coupled with high inflation. And, as Roubini warns, central banks  will be powerless to stop it.

A resurgence, in effect the predicted second wave of the Covid-19 pandemic, is in full motion, striking at both advanced economies as well as large developed economies, such as India and Brazil. The confirmed worldwide death toll has now passed one million, a number both large and yet most probably a severe undercount of the actual number of fatalities generated by the coronavirus pandemic.

The toll in human misery is staggering. More than 35 million persons have been infected with Covid-19. It spares no one; the commoner and the elite are all at risk, as the recent news of President Trump contracting coronavirus  indicates. However, the damage inflicted on the world’s economy  is as severe as that incurred on public health.

The enforced lockdowns imposed by sovereigns as the only currently available means of halting the spread of coronavirus resulted in unprecedented demand destruction in Q2 of 2020. Optimists predicted a V-shaped recovery as a quick end to lockdowns would lead to a rapid “snap-back” in economic demand. That, and unprecedented deficit spending by governments and money-printing by central banks, temporarily reversed the massive fall in equity prices  and induced unwarranted optimism. Now that governments are again imposing draconian lockdowns throughout the world, the evidence mounts that the severe recession created by the pandemic will eventually morph into a full-blown economic depression.

Even once buoyant economists are grasping at straws, praying that quick development and production of an effective vaccine will save the global economy as well as preserve lives. However, even in a best case scenario, a safe and effective vaccine is unlikely to be widely available until the latter half of 2021. The likelihood is that the world will experience, along with the public health consequences, another 6-months of demand destruction and self-imposed economic suicide. Yet, governments, politicians and economists have yet to grasp the full measure of the Global Economic Crisis that is now upon us.

A global economy already  in fragile condition  due to  the contraction in  GDP and exploding sovereign debt levels due to the Covid-19 pandemic, is now in  danger of being further weakened by political strife in the United States. With about six-weeks to go before the 2020 presidential election, there are already numerous indicators of looming political and social chaos looming in the USA.

Even before the death of Supreme Court justice Ruth Bader Ginsburg, there were already claims by both the Democratic and Republican parties that their opponent was out to undermine presidential voting. The incumbent, President Donald Trump and his supporters allege that mail-in ballots, favored by Democratic-run states, will unleash massive voter fraud. Trump’s challenger, former vice-president Joe Biden, and his Democratic supporters, have allegations of their own; Russia is supposedly working in tandem with Trump to undermine the true results of the pending election. Either way, both sides have set up voting day, November 3, as not decision-day, but rather the beginning of a bitter fight by armies of lawyers for who will be the legitimate winner of the upcoming presidential election.

Added to the above, there is a ferocious fight looming over the prerogative of the current president to select a replacement for the now-vacant seat on the U.S. Supreme Court. The fact that Trump has the constitutional legality to do this is irrelevant; this all about massively polarizing fault lines within the American body politic, adding to severe social tension and propensity for violence linked to the upcoming election.

All the above factors, occurring in what is still the world’s largest economy (though China is on the verge of overtaking that position) are destabilizing; not only politically but perhaps even more in terms of the global economy. In the post-coronavirus world we all now inhabit, the political storm brewing in the U.S. may be the final element that brings about a total economic depression, thus ensuring that the Global Economic Crisis is deeper and of longer duration than the pundits and analysts are currently predicting.

Government leaders and financial pundits  continue to trumpet the myth of the V-shaped economic recovery, a leading factor in the ability of Wall Street and other exchanges to recoup virtually all their catastrophic losses inflicted in the early stages of theCovid-19 pandemic. Yet, despite the happy talk, the anemic recovery occurring in many economies during Q3  is already in danger of being premature. Growing headwinds  lie ahead  for the global economy.

The temporary alleviation of the worst affects of the economic lockdowns that occurred throughout the second quarter of the year were purchased with a  staggering and unprecedented level of sovereign debt. To give only one example, Canada is projecting a government deficit for 2020 of $343 billion (Canadian), in USD equaling to about $260 billion USD. In the United Sates, the 2020 fiscal deficit incurred by the federal government t (excluding state, county and local government expenditures) is projected currently at  3.3 trillion dollars; more than 15% of America’s GDP.

Never before in human history have sovereigns incurred such massive debt levels within a very short time interval. This rampant borrowing has not been unleashed to fund major infrastructure projects and other activity aimed at stimulating economic growth. In fact, this massive borrowing binge has been utilized by policymakers  for two purposes: providing a financial lifeline to the vast numbers of newly unemployed, and pump up the equity markets that were on the verge of implosion.

For the short-term, stock prices may have recovered and large numbers of unemployed workers have been rescued from instant insolvency. However, with new pockets of Covid-19 emerging and leading to renewed economic lockdowns, and the threat of a second-wave of the coronavirus looming, economic disaster stands right before us. The possibility of an effective vaccine is the remaining hope  for much of the world to escape a Great Depression of the 21st century. How realistic such a therapeutic creation is for the salvation of the global economy remains to be seen.

Ian Bremmer, the highly regarded political scientist, has predicted a global depression in his most recent column in TIME. “The Next Global Depression  Is Coming and Optimism Won’t Slow It Down,” read the morbidly-stated headline of his column. He bases his forecast on the global nature of the evolving economic crisis, and the severe impact of Covid-19 on economies that far surpasses what occurred during the Global Financial Crisis of 2007-09.

The column by Bremmer follows last week’s release of Q2 economic data in the United States, which revealed that quarterly GDP had contracted by a staggering 33%. Unemployment rates in not only the U.S. but in all major economies are at double digit rates, as Coronavirus induced lockdowns continue to destroy consumer and industrial demand.

Meanwhile, stock markets worldwide are soaring, including the Dow Jones, as delusional investors continue to believe in the phantom of a V-shaped recovery. However, a spike in Covid-19 infection rates following a temporary receding after the initial lockdowns, reveals that such optimistic thinking is totally illusory. The likelihood of a second wave of infection in the Fall, coinciding with a likely divisive presidential election in the United States, makes Ian Bremmer’s dire economic forecast  the most likely future trajectory for the global economy.

Official statistics just released indicated a worse than expected decline in Germany’s GDP. The Q2 of negative 10.1 % follows a less sharp contraction in Q1. This is the most severe quarterly decline in economic activity in Germany since then end of the Second World War and the establishment of the Federal Republic. Germany is Europe’s largest and most successful economy, and the decline reflects the widespread economic damage being inflicted by the Coronavirus pandemic.

Optimists will point to a likely strong rebound in Q3, as economic activity picks up with a reduction in Covid-19 lockdown measures. Such a rebound is likely to be temporary. The renewal of Covid-19 outbreaks in various hotspots throughout Europe, and forecasts of a second pandemic wave this Fall, are predictive of future bad economic news. In addition, the export-dependent German economy will likely be buffeted by Coronavirus infection rate  increases in many of its major export markets, in particular the United States.

The latest German economic data reinforces the growing consensus that the pandemic-driven global recession, already the worst since the Great Depression of the 1930s, will likely evolve into a full-blown economic depression lasting many years.

Coronavirus has already unleashed a severe worldwide recession that is far worse than the Global Financial Crisis of 2007-09. In the words of economist Nouriel Roubini, the emergence of the Covid-19 pandemic resembled an asteroid striking the global economy.

The response of governments was inconsistent, but basically followed the following pattern; shut down much of the economy, accumulate unprecedented levels of debt to subsidize investors, businesses and laid-off employees, while hoping for the miracle of a quickly-developed vaccine. Amid the sea of debt-induced liquidity, pundits and policymakers boasted of a quick V-shaped recovery.’

Now we are witnessing in many countries a second-wave of the pandemic, in many cases only weeks after government officials boasted that coronavirus had been contained and that the economy could begin reopening. This, despite warnings from those more knowledgeable about the dynamics of a great pandemic that premature reopening of economic activity would greatly worsen the impact of a second wave of Covid-19, leading to repeated false openings followed by swift shutdowns of normal economic activity. These false starts and rapid lockdowns will actually worsen the negative impacts of coronavirus on the overall economy.

Now we are witnessing evidence that the pandemics is close to being out-of-control and spreading like wildfire in a growing number of countries, while sovereign debt , only months into the pandemic, is already at unprecedented levels. These factors further exacerbate the Global Economic Crisis now underway in tandem with the health crisis,  with talk of a V-shaped recovery proving to be illusory, while a severe economic depression  on the scale of the 1930s looks increasingly likely.

There are two conflicting versions of reality emerging  regarding  long-term economic trends generated by the global health crisis. On the one hand, enforced lockdowns of key economic activity in response to the Covid-19 pandemic has already led to a worldwide recession that is by all measures far worse than the Global Financial Crisis of 2007-09. On the other hand, central banks, multinational economic forums and leading investment bankers are predicting  a V-shaped recovery; a sharp rise in economic activity following the steep decline due to the coronavirus.

A lesson from 2007-09 is that reality and data trump optimism. It must  be recalled that at the onset of the Global Financial Crisis, well into 2008, the U.S. Federal Reserve predicted that there would be no recession. Only months later, Lehman Brothers collapsed.

In the Global Economic Crisis created by the Covid-19  pandemic, the collapse of key industries such as tourism and airlines, the energy sector and manufacturing, the implosion of retail trade  and decline of exports and imports already rival the level of contraction that occurred during the Great Depression of the 1930s. This implosion in economic activity has occurred in 2020 in a matter of months, not years as with the Great Depression. Furthermore, the massive deficit spending by sovereigns, combined with the collapse in tax revenue, points to a staggering debt crisis globally in the near future.

Health experts warn of a second or even third wave of the coronavirus, thwarting attempts at restarting the global economy. A vaccine, in the most optimistic scenarios, is at least a year away. And even if a vaccine is developed and widely distributed,  the cumulative damage to the global economy will linger for years.

The most realistic scenario is that the 2020s will be a decade of unprecedented economic depression.

In a startling forecast published in Project Syndicate entitled, “The Coming Greater Depression of the 1920s,” NYU economics professor Nouriel Roubini outlines ten negative trends that ensure the inevitability of a full-fledge economic depression sometime during the current decade. Professor Roubini achieved notoriety for predicting with uncanny accuracy the Global Financial Crisis of 2007-09.

Roubini points out that even prior to the coronavirus pandemic there were downside trends involving structural issues left over from the financial crisis of 2007-09, coupled with deglobalization and the balkanization of supply chains, decoupling between China and the United States and other geopolitical rivalries, and environmental factors  such as climate change. What the COVID-19 pandemic has done is accelerate and magnify those negative trends, which already  have created a perfect storm, leading to a “greater depression” later on in the present decade.

The current economic crisis created by the coronavirus will bring about a severe, U shaped recession, which moist economists now believe will exceed the 2007-09 Global Financial Crisis in  severity. There will be no V shaped recovery, in Roubini’s view. The most chilling aspect of Professor Roubini’s forecast is that even if the COVID-19 enabled recession eventually has a U-shaped recovery, it will only be temporary, with a 21st century Great Depression to follow in its wake, making the 1920s  a time of Global Economic Crisis, with prospects of recovery being differed until the 1930s, all predicated on new technologies and the emergence of more competent political leadership.