Global Economic Crisis

A highly tangible outcome of the global economic crisis and its first stage, the so-called Great Recession, has been the deleveraging underway by households and businesses throughout major advanced economies. In the United States and United Kingdom, consumers who boosted consumption on the basis of easy credit as opposed to higher disposable incomes are now tightening their belts and battening down the hatches. The predictable result has been a decline in aggregate demand. This is where the neo-Keynesians enter the fray, preaching the gospel of mega-deficit spending by governments.

The classical economic theory as developed by John Maynard Keynes holds that in times of severe economic contraction in the private economy, it is permissible for the sovereign to go into debt and increase spending to compensate for the falloff in consumer and other private sector expenditures. The rationale is that this short-term increase in the public debt will retard the rise in unemployment, limit the impact and duration of the economic recession and in the long run lead to overall better economic performance, with limited effect on the ratio of public debt to GDP. Though advocates and opponents can offer differing views on the historical validity of Keynes and his counter-cyclical concepts of sovereign  intervention in the economy, there is no doubt that his theory is intellectually cogent and based on a serious analysis of economic problems, particularly in regards to the Great Depression of the 1930s. However, is the current wave of unprecedented sovereign indebtedness equally cogent? If John Maynard Keynes were still alive, he would likely take issue with the massive tidal wave of red ink being unleashed by politicians as their antidote to the global economic crisis.

Though John Maynard Keynes is portrayed as a deficit-loving interventionist, in reality he was not. What is left out of the description of his theory in regards to counter-cyclical fiscal policy is that Keynes also believed that in times of relative prosperity sovereigns should create budget surpluses. He belief was that booms and busts were an integral characteristic of modern capitalism, and that  the accumulation of reserves during times of plenty would enable governments to engage in temporary deficit spending to combat a severe recession, without creating the long-term danger of exploding national debt to GDP ratios. This is an aspect of Keynes’s views on fiscal policy that has been conveniently forgotten by the modern interpreters of Keynesian economics.

Since World War II, the U.S. has seldom run balanced budgets. If generally accepted accounting principles were applied to official U.S. federal government budget reports, which require taking into account future liabilities for Social Security and Medicare, then during this period the United States has always run large fiscal deficits, even during times of relative economic prosperity. What this means in reality is that the conditions laid out by John Maynard Keynes for allowing a sovereign to engage in deficit spending during a recession, namely building budget surpluses during periods of economic expansion, have never been adhered to.

During the Great Depression,  the U.S. government did engage in substantial deficit spending within the framework of the New Deal, but with a ratio to GDP far lower than what is currently occurring on President Obama’s watch. This fiscal policy was engaged in with a cumulative national debt to GDP ratio nowhere near the current level, and with a large base of domestic savers prepared to buy U.S. government debt, in contrast with the present day reliance on foreign buyers of U.S. Treasury Bills.

If John Maynard Keynes were alive today, I suspect he would be horrified at the manner in which his economic theories have been distorted, and the likely outcome of such fiscal profligacy.

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The economic metrics are truly surreal. The Dow Jones and other equity indices are soaring to the skies, while Wall Street boasts about its executive bonuses, which are at record levels. Amid the obvious creation of a new asset bubble, courtesy of the U.S. Federal Reserve and other central banks, coinciding with a return to megalomaniacal arrogance by the titans of finance, the real economy continues to plummet, despite claims that many economies have retuned to positive GDP growth. But with unemployment at record levels and continuing to grow, it is clear to many that the so-called economic recovery is based on a facade of fragility. It may take only one major international crisis to collapse the global financial house of cards.

In case you have not noticed, Iran is going full steam ahead with its opaque and ambitious nuclear program. Israel has continued to hint that time is running our for a peaceful resolution  of the controversy over the Iranian nuclear program, which it suspects is a covert atomic weapons program, aimed ultimately at them. However, the rhetoric from Israel has been toned down somewhat of late. That, in my opinion, is not a good sign. While the Israelis were loudly engaging in military manoeuvres suggestive of preparations for an attack on Iran, it was clear that this was a psychological game, aimed at putting pressure on Tehran and the international community. It is when the Israelis become quiet over what their military is preparing for that the world may be about to experience a surprise Israeli attack on the Iranian nuclear facilities. This would clearly spark a regional conflict, which will likely involve the United States, which now has military forces deployed on two different frontiers with Iran.

A regional conflict in the Middle East, beginning with a military exchange between Iran and Israel, could be the kiss of death for the global economy. Imagine another interminable conflict in that volatile region, with the major chokepoint for oil exports from the Persian Gulf to the primary industrial economies, the Strait of Hormuz, being interdicted by Iranian missiles. Oil prices would soar beyond their historic highs, sending the current false economic recovery into an authentic global depression.

The world may be just a single regional war short of a full-throated economic meltdown, and that fearsome war may be coming to a theatre near you, sooner than anyone can imagine.

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In confronting a  crisis of epic proportions, one can do the heavy work of crafting a well conceived, comprehensive strategy. But why bother, when short-term gimmicky is politically more feasible. Thus we have this absurd counter-cyclical gimmick, the so-called “cash for clunkers” boondoggle, being offered by the Washington establishment as their “answer” to the  massive problems confronting the automobile industry, not only in America but globally as well.

Throughout the world, a vast car manufacturing infrastructure has been constructed at great expense and high leverage, designed for global demand of almost one hundred million cars per year. However, the Global Economic Crisis has unleashed massive demand destruction in many key categories of consumer durables. In the case of autos, worldwide demand is currently just above fifty million units per annum, rendering it almost impossible for most automobile manufacturers to generate a profit, whether they are located in Detroit, Tokyo or Stuttgart. The challenge is massive, global and complex. Yet, the geniuses in Washington have come up with a solution that is small, local and simplistic beyond all measure.

The concept of the “cash for clunkers” program is very simple and superficially enticing, as are most gimmicks. Trade in the old jalopy that was on the verge of being junked anyways, since it had no trade-in value on the open market. The federal government will fund  a $4,500 credit that will go towards the purchase of a shiny new automobile, thus stimulating the economy. As to be expected, the response from those with dilapidated vehicles on the verge of being dropped off at the local scrap yard has been  substantial, in the process depleting the original one billion dollar appropriation for the program. Also not a surprise, the politicians rushed to provide another  $2 billion for the program, to the delight of car dealerships across the land.

While on the surface  the program may be seen as an economic stimulus initiative at work, no one should be fooled into believing that this is a carefully designed, long-term strategic answer to the worst economic contraction to occur in the United States since the Great Depression. And most notably, the supposedly strong response to the program actually betrays its supercilious essence. For one thing, four of the the five most popular cars being purchased under “cash for clunkers” are foreign brands, meaning the impact on the domestic auto industry is minor at best.

Beyond the fact that  domestic car manufacturers are only partially benefiting from the program, it must  also be remembered that every dollar of credit being distributed under the program’s auspices is from U.S. taxpayers, at a time of massive, multi-trillion dollar deficits. Using borrowed money to subsidize the purchase of foreign made automobiles, along with domestic models, does not make much economic sense. However, there is another aspect to this program that has thus far escaped scrutiny.

A major driver of the Global Economic Crisis was the stampede of consumers who were enticed into buying new homes they could not afford, due to the Federal Reserve lowering interest rates beyond prudent levels. This created a real estate bubble, and we all know the consequences of that. Now, with “cash for clunkers,” it just may be possible that many of the consumers taking advantage of the credit largesse from Washington are those with incomes that were inadequate for  a new car purchase, but have been persuaded by their own government to take the plunge on a new automobile loan, courtesy of this deficit-financed program. What happens if many of these new car owners end up defaulting on their auto loans, as the recession deepens?  This is by no means a small possibility, given the current dynamics of the nation’s most severe economic contraction since the 1930s. In effect, the American taxpayer may be financing a new wave of consumer loan defaults down the line, further exacerbating what some are now calling the Great Recession.

“Cash for Clunkers” is really a showroom lemon, masquerading as brilliant economic policy. The politicians may think it is ingenious; my own view is that it is symptomatic of the intellectual bankruptcy that has come to dominate Washington’s response to the nation’s descent into financial and economic doom.

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In Q2, Denninger points out, the government’s spending grew by 10.9%, contributing to a positive movement of 3.3% in the second quarter’s reported GDP. Remove that 3.3% from the equation, and the actual Q2 data for the consumer economy witnessed an overall contraction of -5.2%, a figure substantially worse that the official government Q2 report.

The statistical argument raised by Karl Denninger warrants careful consideration by all those who are seeking an accurate gauge of what is actually transpiring in the real economy. Furthermore, the track record of both the Commerce Department and Labor Department has not been exactly stellar with regard to its statistical accuracy in measuring the impact of the Global Economic Crisis on the American economy. Simultaneously with the release of reassuring Q2 numbers, the Commerce Department also admitted it had gotten its evaluation of the recession’s affect on the U.S. economy’s GDP from its onset in Q4 of 2007 through the latter part of 2008 stupendously wrong, now conceding that the actual contraction was -1.9 percent instead of -0.8%, as previously reported.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

　

　

　

　

　

　

 

 

 

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When media reports surfaced last week claiming that the prophet of doom of the Global Economic Crisis, NYU economics professor Nouriel Roubini, had  “improved” upon his previously gloomy economic forecast and predicted the recession would end by the close of 2009, a stock market rally was ignited. It seems it does not take much to facilitate a bear market sucker’s rally on Wall Street at this time of global economic distress, including false rumours. To his credit, Roubini swiftly set the record straight with the following comment on his blog:

“It has been widely reported today that I have stated that the recession will be over ‘this year’ and that I have ‘improved’ my economic outlook. Despite those reports - however - my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.”

Nouriel Roubini has consistently stated that he expected the current recession-by far the worst America has experienced since World War II- to terminate by the close of the year. This has been his longstanding forecast. Thus, when he repeated this consistent prediction of his, the media went wild with excitement, discarding the continuity of his forecast and presenting his belief that by the close of 2009 the recession would end as a surprise revelation. With business journalism like this, no wonder the Dow Jones is searching new highs even as employment numbers continue to plummet.

What is noteworthy about Roubini’s most recent insights on the economic situation are their increasingly gloomy tone related to the mid-term and long-term prospects for the American economy. This is largely predicated on the growing fiscal imbalance in connection with the public indebtedness of the United States. Though a supporter of the vast deficit-driven stimulus programs and expensive bailouts of the financial sector owing to his belief that to negate these policy responses would have resulted in the collapse of the global financial system and the free fall contraction of the U.S. economy, Roubini is not unmindful of the their consequences. In that sense, he parts company from other advocates of deficit-creating economic stimulus packages, including Paul Krugman, who prefer to discard the danger of the vastly-expanding debt of the federal government.

In addition to his concern about the ramifications of unprecedented levels of budget deficits, Roubini is also worried that the end of the recession he has long forecasted will now be only temporary, to be followed by a double dip recession during the latter half of 2010, interrupted by anaemic growth of less than 1%.

The forces contributing to what, at best, will be a weak recovery in 2010 are linked to the uniformly negative statistics on employment which, according to Professor Roubini, have a direct impact on an economy as highly dependent on consumer spending as America’s. According to Roubini, commenting on the latest employment numbers,  “these raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5 per cent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income — the product of jobs times hours worked times average hourly wages — has fallen dramatically.”

In his recent observations on declining labor income and its relationship to the continuing financial and economic crisis, Roubini identifies how this factor will exacerbate several interlocking indices. Consumer loan defaults across the board-mortgages, students loans, credit card debt-will continue to increase, adding to the level of toxicity of assets on the balance sheets of banks, and extending the credit crunch. Government revenues will decline while the need to fund unemployment benefits and other social expenditures will grow, further increasing budgetary deficits. Professor Roubini summarizes the growing contradictions in utilizing fiscal and monetary policy responses as the primary sovereign means of countering the worst global economic disaster since the Great Depression as follows:
“The higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilisers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable U.S. fiscal path, with budget deficits above 10 per cent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse. This leads to a policy dilemma: rising unemployment rates are forcing politicians in the U.S. and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetisation of deficits, and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation — and thus to higher interest rates, which would stifle the recovery of private demand.”
This leads to what economists refer to as a “W” or double dip recession. In other words, the very policy responses politicians and their advocates claim are vital to restoring the economy may, by the end of 2010, become the principal enabler of forces that will unleash round two of the Global Economic Crisis.

Nouriel Roubini had warned for years that the subprime mortgage sector would bring about financial and economic calamity, and take down much of the investment banking industry. Today we would all be wise to listen carefully to Professor Roubini’s warnings on the growing danger of a double dip recession and the long-term implications of a fiscal roadmap being pursued by our politicians that, in Roubini’s prescient words, is “unsustainable.” Given his track record, we can only discard the truth of which Roubini speaks at our peril.

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In his latest blog posting, Roubini offered the following dire pronouncement: “The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign…at some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system-including deposit guarantees-could come unglued.”

If what Nouriel Roubini has prophesized is in fact about to occur, the inevitable consequence will be global financial and economic Armageddon, a danger that I have also warned about on this blog. However, let’s put Roubini’s gloomy warning in context.

Last fall, the world’s financial system did indeed come to the brink of total systemic meltdown. The Libor rates and Ted Spreads were at sky-high levels, reflecting a global financial architecture that had just entered the Ice Age. The arteries of global finance simply froze solid, leading to U.S. Treasury Secretary Hank Paulson demanding that Congress grant him $700 billion virtually within hours, no strings attached, or witness the global economy implode. Even after the TARP Wall Street bailout was approved, Roubini warned that it was not nearly enough to stave off disaster. Apparently, only the intervention of the treasuries and central banks of the U.K., Eurozone, China and Japan, combined with the American TARP, prevented the world financial order from falling off a cliff. This was done through a variety of extraordinary means, including direct taxpayer injections of cash into virtually insolvent banks, quantitative easing, monetary policies that brought central bank prime rates to historic lows and raising the level of sovereign guarantees for depositor’s insurance. In effect, governments in the major economies acted as a backstop, putting their sovereign credit potential on the line to preserve a measure of confidence necessary to prevent a total run on the banks and unsustainable levels of deleveraging.

All the steps outlined above have the appearance of panic-driven improvisation. As this crisis has already proven, improvisation in never a substitute for thoughtful and strategic policy response. It appears, based on what Roubini is now suggesting, that in the year 2009 we will witness the futility of the debt-driven mania to socialize the losses incurred by private risk-takers. If a sovereign bank does indeed crack wide open, Nouriel Roubini seems to be suggesting that this may be the final nail in the coffin of a mindless policy whereby governments offer virtually unlimited financial backstops to cover the losses of banks that accumulated massive quantities of toxic assets on their balance sheets.

Which sovereign bank may crack? At this point, Roubini is not saying, however it seems clear that it must be a significant institution to have the potential of generating the apocalyptic ramifications being suggested. There are undoubtedly many candidates. To take just one example, Royal Bank of Scotland has already accumulated $40 billion in losses in just the past year, and has only been kept alive through a 70% equity stake being funded by the British taxpayer. Yet, the worst is still to come in the U.K. economy, which must certainly bring further massive losses to RBS as well as other British banks. It may be that the losses to come will be of such a stratospheric character, not even the deficit-crazed politicians will be able to cobble together the promissory notes required to avoid bankruptcy.

As the Global Economic Crisis worsens, comparisons with the Great Depression of the 1930s are being made more frequently. What must be remembered about our last great global economic disaster is that while the stock market crash of 1929 precipitated the Great Depression, it was the collapse of a single bank, the Kreditanstalt of Austria in 1931,that began a chain reaction that crippled the global financial world. It was that bank collapse which made the depression of the 1930s the Great Depression, leading to systemic economic collapse, massive GDP contraction and previously inconceivable levels of unemployment.

As with his previous warnings, Professor Roubini again provides us with a glimpse into the future, and it is indeed filled with gloom and doom.

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In retrospect, this so-called “economic stimulus” was sheer political gimmickry. As we now know, it did nothing to enhance the American economy, while almost doubling the projected deficit. Yet, we were all assured by President Bush’s press secretary that we absolutely had to borrow this money from our descendants, so as to ensure we left them a “strong economy.” No wonder our memories are so short, as we pass the one-year anniversary of this $152 billion boondoggle without a microsecond’s worth of notice.

Since that first stimulus, we have been through the implosion of the U.S. economy, the onset of the Global Economic Crisis, followed by the near collapse of the world’s financial system. This was followed by another deficit-driven expenditure, supposedly necessary to rescue the American economy; the $700 billion TARP program to prop up the nation’s insolvent, ineptly managed banks and financial institutions. Not to be outdone, TARP is now eclipsed by the $787 billion “American Economic Recovery Plan,” the gargantuan stimulus package enacted by the new Obama administration. Yet, this is not the end. It may only be the beginning of stimulus madness.

President Obama has already indicated he may be back for another stimulus program. Some economists have suggested that in a year’s time we may see a $2 trillion stimulus plan. In addition, TARP has been proven to be ineffective in facilitating a rescue of the largely insolvent banking sector of the United States.

President Obama and his team have paid lip service to the need to return to “fiscal discipline” once the economic crisis is in the past. Several optimists in the political establishment have even suggested that the U.S. budget will be balanced by 2012. Don’t believe it; we have all been down this economic make-believe road before.

Beginning with The Economic Stimulus Act of 2008, the U.S. political and financial elites have embarked on the most catastrophic addiction with debt in the entire history of human civilization. Despite the pompous rationalizations that are offered for the leveraging of America’s finances to an extent that is unsustainable, there is no rational elaboration that can be offered for this insane and inane fiscal policy. Rather than cure the U.S. and global economic crisis, these stimulus fantasies are only assured of one outcome: we will leave for our children and their children the inheritance of insolvency.

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Illustrating the quantitative and qualitative thinking that went into the annual threat review, Blair told the senators that, “statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period.” In other words, many countries will be vulnerable to the fracturing of their social cohesion, some obviously more prone than others. The implications are clear; internal instability will induce external behaviors that are geopolitical destabilizing. Among the examples of such behavior cited by the Director of National Intelligence is the scourge of economic nationalism and protectionism that is likely to result from the prolongation of the Global Economic Crisis. Protectionism will exacerbate the economic and financial crisis while creating rivalries and tensions involving the United States and her allies.

Not specifically spelled out, but a clear menace understood by the U.S. intelligence community, is that major worldwide economic turmoil will multiply the danger of armed conflict between nation states. The Great Depression of the 1930s provided the context that led to the most destructive war in human history. In the first decade of the twenty-first century, with the scourge of nuclear proliferation a dire reality, the dangers pointed out by Dennis Blair are sobering in the extreme.

The Global Economic Crisis already poses, according to leading economic analyst Nassim Taleb, possibly the greatest challenge to the United States since the American Revolution. The essence of Blair’s threat assessment is that the Global Economic Crisis may represent the most threatening challenge to the preservation of world peace since the end of the Cold War. “Time is not on our side,” warns Blair. The Global Economic Crisis is now a strategic crisis, with dangers that go beyond the economic and financial meltdown of the planet.

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For over a year, while the U.S. economy was mired in recession and exporting its economic disasters globally, the senior political and business leaders of the American establishment proclaimed to the American people that all was well, that the fundamentals of the economy were “strong,” while they threw taxpayers money at corporations and financial institutions “too big to fail” in a vain and desperate attempt to keep the floodtide of financial failure from inundating the whole economy. The collapse of Lehman Brothers exposed the fragility and rot for all to see and now the entire world is mired in a Global Economic Crisis that more and more economists are labeling as a second Great Depression.

While no one can predict with exactitude what the ultimate outcome will be after the world’s economies have completed their march through Calvary, it is likely that the denouement of this economic and financial apocalypse will see the end of American power as the hegemony-driven master of the planet.

America’s superiority was based on its military infrastructure, and the capability to project power thousands of miles from its shores, inflicting “shock and awe” on any foreign entity that inspired its ire. However, that military industrial complex required a massively productive and successful economy to maintain itself. During the last eight years, while America replaced its ability to create goods that the world needed with complex financial instruments and securitized mortgages as its primary export product, it relied on foreign creditors to subsidize the American military establishment and the cost of the foreign wars it was engaged in. That bubble is now in the process of bursting with tectonic force.

The U.S. government managed to double its national debt during the last 8 years, even before the onset of the Global Economic Crisis. Since then, the government has borrowed $700 billion for the TARP Wall Street Bailout, and is projecting a budget deficit of over one trillion dollars in 2009. That is before the Obama administration passes its own stimulus package after it takes office, possibly boosting the deficit to the stratospheric level of over two trillion dollars! With foreign countries America relies on to finance its deficit now about to embark on their own massive stimulus spending based on deficits, that source of credit will either dry up or become costly beyond tolerance. A few years more of multi-trillion dollar deficits and the single largest item in the federal budget will be the servicing of the national debt. When that happens, it will be fiscally impossible for the United States to maintain its current military outlay, which equals if not exceeds the rest of the world combined.

At present the U.S. pours roughly a trillion dollars into its military industrial complex. What must be understood about the U.S. defense budget is the depth of its deceptive architecture. While the official Pentagon budget is in the range of $600 billion, it excludes other expenditures scattered throughout the line items of the federal budget that properly belong under the category of military allocations. For example, the official defense budget excludes nearly two hundred billion dollars of unfunded (meaning borrowed) spending on the wars in Iraq and Afghanistan. It excludes military benefits for veterans, intelligence gathering and other national security activity. Most deceptively excluded is most spending on nuclear weapons, measured in the tens of billions of dollars, which is clearly a military allocation, but is budgeted under the Department of Energy.

The smoke and mirrors is about to be shattered, as the Global Economic Crisis gathers momentum. The U.S. will lose its capacity to finance its military establishment, unless it replicates the example of the once-mighty Soviet Union, which placed its military first and civilian economy last, ultimately leading to the implosion of both.

We are truly witnessing a global economic trauma that will also radically reorder the geopolitical configuration of our planet. What is uncertain is if America will emerge as a constitutional, democratic republic at peace with the world, or as a desperate actor that will grasp at retaining its once invincible economic and military power no matter the cost to its future generations.

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In a sign that the mortgage crisis in the United States is getting worse, it is being reported that defaults on privately insured mortgages rose by a staggering 35 percent in October, topping 80,000 for the first time. This is a clear sign that more homeowners are falling behind on their house payments as the American economy continues to deteriorate.

The distressing statistics were released by the Mortgage Insurance Companies of America. The figures indicated that 80,071 insured borrowers were at least 60 days late on payments, up from 59,308 a year earlier, and surpassed the previous record of 76,776 set in September. The numbers present a stark picture as the initial troubles with U.S. mortgage payment precipitated what is now a severe global economic crisis.

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