Global Economic Crisis

There is an imponderable dichotomy between the economic forecasters on Wall Street and the ugly reality on Main Street. With the Dow Jones having surged more than 60% since the lows that followed the collapse of Lehman Brothers and the onset of the global financial and economic crisis in the fall of 2008, there is increasing banter by Wall Street talking heads that the rally in equities reflects a logical analysis of the economic health of America and the conviction that the Great Recession is truly over and a return to robust economic growth is just around the corner. Call it the Street’s version of Fed Chairman Ben Bernanke’s proverbial “green shoots,” laced with steroids.

That is Wall Street’s prediction of where the U.S. and global economy is headed. As for myself, I will stick with my own look into the economic future, found in my book, “Global Economic Forecast 2010-2015: Recession Into Depression.” The essence of my forecast was that 2010 would give an illusory impression of an exit from the Great Recession, fueled by a massive explosion in public indebtedness, the so-called stimulus spending engaged in by most major advanced and developing economies. However, I also forecasted that unemployment would remain at historic highs; that and the rising level of public debt in many advanced economies would lead to a worsening sovereign debt crisis in 2011, culminating in a catastrophic collapse in public finances in major economies, especially the United States. This, I surmise, will transform a recession into a global depression.

So we are left with two contradictory views of the economic future, with no room in between. According to Wall Street, 2011 will be a bumper year for the global economy, with impressive levels of quarterly growth in the United States. As for myself, I believe that 2011 will be an “Anus Horibilis,” as the Romans would say during the years of decline of their empire; a truly appalling bummer of a year in terms of global economic health.

Economics is a social science, not an exact science.  Theories on how a nation’s economy and financial system should function  proliferate the body politic, ranging from Reagonomics to Keynesian pump-priming. However, as the past year’s global economic crisis has demonstrated, dogmas and theories, such as market fundamentalism, are largely impotent in the face of brutal economic realities. It was not out of conformity with a particular economic dogma, but rather sheer panic, which drove  key policymakers in major advanced and developing economies throughout the world to plunge their nations into unprecedented levels of public debt, all in a frantic effort aimed at halting the free fall collapse of the global financial system that had erupted after the downfall of the investment bank Lehman Brothers.

One year later, throughout the world and especially in the United States, political decision makers are proclaiming to their constituents that the worst of the economic crisis is behind us, “green shoots,” in the words of Fed Chairman Ben Bernanke, are starting to emerge, and the stock market has regained much of its losses. Yet, as Wall Street awards record bonuses to many of its stakeholders, unemployment in the U.S. and other developed countries continues to rise, while the credit crunch constricts small and medium size businesses. Amid the contradictory images regarding the Great Recession, I have written “Global Economic Forecast 2010-2015:Recession Into Depression,” http://www.createspace.com/3403422 , in which I look at the likely economic trends over the next 5 years. As the title suggests, my projection is not an optimistic one.

While the trillions of dollars poured into the global financial system by the United States and other sovereigns did prevent a total financial collapse in late 2008, this achievement has not come without a high cost, and growing danger.  The level of public debt being accumulated by governments across the globe in response to the global economic crisis, and especially in the U.S., will reach a point of unsustainability, likely by 2012. This will occur simultaneously with continuing high rates of unemployment, which equates with weak consumer demand. The United States is dependent on the American consumer for at least 70% of GDP output. Overleveraged and underemployed consumers dampen growth prospects and  retard government tax revenues. While public finances remain weak, policymakers will likely maintain stimulus spending programs, which translates into structural mega-deficits. The Congressional Budget Office is currently projecting a $9 trillion deficit over the next decade; based on the CBO’s past record, this is likely a lowball estimate.

In my look at the probable economic trajectory for the U.S. and other major economies over the next five years, I had to confront the strong possibility that amid America’s growing fiscal imbalance, there exists a serious danger of future shocks to the global financial system, which may possibly rival the implosion of the investment banks which occurred in 2008. During the next two years, $2 trillion in commercial real estate loans will come due. These were loans initiated when commercial properties were at their peak valuation, and largely securitized, as was the case with subprime loans that triggered the financial crisis in 2008. Should a commercial real estate implosion replicate the carnage that the banking system experienced in 2008, how will sovereign governments, the United States in particular, find the money to finance another financial system bailout? My conclusion is that it will not be mathematically possible for the U.S. and other governments to sustain a future rescue of the banking system. In essence, sovereign  governments will become overwhelmed with public debt, reaching a point of fiscal collapse. The result will be sovereign insolvency, leading to a synchronized global depression.

In his farewell address to the nation in January 1961, President Dwight D. Eisenhower warned his countrymen about the long-term consequences of soaring public debt. Mortgaging the assets of future generations, Eisenhower believed, could transform today’s democracy into tomorrow’s “insolvent phantom.” In the midst of our current economic crisis, it would be wise to pay heed to the sage advice that President Eisenhower offered nearly half a century ago.

History is littered with flawed forecasts on economic trends. And where some have proven to have been surprisingly accurate in their glimpse into the financial and economic future, these projections have usually been scorned, until too late. Our current global economic crisis is a case in point.

In  my view, the most accurate long-term economic forecast of all time was provided by the legendary Renaissance French seer, Nostradamus, usually more renowned for his prophecies on the end of the world. In 1548, Nostradamus predicted, “From Albion’s shore shall come a marvellous contrivance: a carriage of silence bearing the arms of Rolles de Roi.”  Apparently, Nostradamus saw the creation of the Rolls Royce motor car in England, and its reputation for silent and prestigious personal transportation, more than three centuries before the invention of the internal combustion engine.

In contrast, one of the most inaccurate and inept economic forecasts of all time was delivered relatively recently, by the Chairman of the U.S. Federal Reserve, Ben Bernanke. In October 2005 Bernanke, who had recently succeeded Alan Greenspan as chairman of the Fed, issued a confident prediction that the unprecedented rise in U.S. home prices did not constitute an asset bubble, and was based on sound economic fundamentals. Oh well.

Forecasting economic trends is both highly difficult yet absolutely essential. Operating complex economies and businesses without accurate trend analyses is like flying blind without instruments. A major difficulty with many recent economic forecasts is that they are mired in ideology.

In the near future, I will be offering my own long-term economic forecast. It should be finalized within a few weeks. Readers of my blog should stay tuned for further information.