Global Economic Crisis

How significant is the exposure to the coming implosion in the commercial real estate market? I have seen some estimates in the range of $7 trillion, however, the ultimate number may be significantly higher. Commercial properties encompass a vast array of buildings in developed and developing economies, from small, medium and large sized office buildings to shopping malls of all dimensions. Strip malls and mega-shopping complexes are losing tenants, with no one lining up to replace them as the Global Economic Crisis curtails demand by consumers. With fewer tenants and constricted income, property owners unable to service their outstanding loans are deleveraging, as mentioned above. Keep in mind that this is not just a New York City phenomenon; London and Budapest, Los Angeles and Berlin, Seattle and Tokyo are already seeing this torrent of economic destruction at work. As the implosion in commercial real estate accelerates, the already fragile global banking and credit system will be hammered again. In a worst case scenario, the blow about to be delivered by this next bursting asset bubble may prove to be mortal for the global economy.

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There is another inference to draw from Premier Wen’s presentation on the economic problems confronting Beijing. While not belittling the acute and dangerous challenges that the Global Economic Crisis poses for China, the nation’s leadership seems to have taken a long view that suggests the following: by playing her cards carefully, China may be able to exploit the Global Economic Crisis in such a manner that she will emerge as the dominant economic power in the world.

With the United States reduced to literally begging China to buy her Treasuries, a vital imperative necessary to finance Washington’s stratospheric deficits, it may be that China is already positioned for global economic dominance, so long as she succeeds in maintaining her social cohesion during the difficult years that lie ahead.

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There are apparent to me several signposts that clearly point to a downward spiral of accelerating velocity. One of these signposts involves the worsening statistics chronicling the effects of the Global Economic Crisis. Japan’s Q4 of 2008 growth figures show GDP contraction of 12.7%, with every indication that this measure of economic deconstruction will grow even more dire in Q1 of 2009. We already have figures indicating that in January, Japan’s exports declined by almost half from a year ago.

America’s tottering economy is receding so severely, the statisticians cannot keep track of the staggering rates of decline. The Commerce Department had to revise the Q4 of 2008 GDP figures from negative 3.8% to more than 6% GDP contraction. Unemployment numbers are swelling at an alarming rate, while the public and private debt ratios are entering into astrophysical red shift territory, so rapid is their spread from any realistic possibility of fully servicing them.

Beyond the fiscal doomsday being portrayed by the macroeconomic data, there is the looming banking apocalypse that is now gripping almost every economy on the globe, major and minor. In both the U.S. and U.K., almost the entire banking sector is insolvent, being kept on life support by massive infusions of government IOUs that are being backed by what amounts to an intergenerational commitment from the taxpayers. The banks of the European Union have on their balance sheets, according to a leaked secret European Commission document, $24 trillion of toxic assets. Iceland is already bankrupt, with Eastern Europe about to follow down the path of national insolvency.

All the dire news I just chronicled cannot be viewed in isolation, but must be seen as a devastating continuum, in which the negative news emerging from one economy impacts another, creating a destructive chain reaction that is close to achieving the point of irreversible criticality. And with the global economic order about to undergo nuclear fission, the policy makers are reacting in thoughtless panic and hysteria, stampeding into a rush of Keynesian irrational excess. Despite the fact that unsustainable debt was a principal driver of the Global Economic Crisis, the sovereigns of the world are replicating the worst habits of the consumer and private sector. Staggering levels of deficit spending are being enacted into policies, unmindful of the inability of the global financial world to absorb and sustain such stratospheric levels of unfunded spending. Neither are the policy makers cognizant of the inconvenient fact that with so many economic actors swamping the global credit markets to fund levels of deficit spending that defy the human imagination, it is inevitable that interest rates will rise to crippling levels, choking off private capital. In their frantic efforts to rescue the global economy and bailout irresponsible financial institutions and ineptly run conglomerates at any price, the politicians are planting the seeds of a bitter harvest for all.

The world is facing the equivalent of a world war, with the Global Economic Crisis playing the role of the Axis. It is humanity’s misfortune that instead of Winston Churchill or Franklin Roosevelt to lead and inspire us, we are left with the likes of Timothy Geithner and Nicholas Sarkozy. It may be our fate to be led down the path of economic perdition, with the highway to hell being paved with mediocrity and ineptitude.

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Not only did the statisticians of the U.S. government miss the true rate of economic descent in Q4 by a country mile; they were completely dislocated from the true rate of economic disintegration afflicting all strata of U.S. econometrics. Take for example exports, which supposedly showed some growth in the preliminary estimate, but are now shown in actuality to have been in decline. Ditto for inventory expansion. If anything, the corrected Q4 numbers tell us that the American economy is in free fall, and neither the public nor private sector analysts can give us a reliable appreciation of how severe the economic decline is in the United States in anything approaching a timely manner. In contrast, the Japanese government at least has been able to track its own economic implosion with much more accurate and timely numbers.

I point out the wide gap in the preliminary Q4 number and the corrected results because it is a reminder to be weary of the likely attempts by both government and Wall Street to downplay the American economic contraction while hyping the projected upside. The Obama administration has just unveiled a budget that projects a stratospheric deficit of $1.75 trillion dollars, a number equivalent to roughly 12% of the GDP. In their budget projections, Obama’s economic advisors are projecting a total GDP contraction in all of 2009 of just a little over one percent. Based on the revised Q4 contraction of negative 6.2%, how can the Obama administration believe the American economy will rebound in the middle of 2009 and sustain a modest decline in annual GDP? The answer is that President Obama’s economic team needs a GDP decline limited to just above 1% to keep the administration’s promise of cutting the gargantuan deficit in half by the end of its first term in office, at least on paper.

Political expediency may dictate how those in Washington deal with economic projections, however the Global Economic Crisis is not a respecter of political requirements. The U.S. is in a severe recession, and likely entering an economic depression. Any belief that the United States will halve its deficit while continuing with its accelerated public spending is pure fantasy.

As with the revised Q4 number on GDP, the unvarnished data that is yet to emerge throughout the course of 2009 will end up being far worse than is being currently forecast.

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President Barack Obama may have the worst job in the world. He has inherited the mantles of power in what is still the world’s largest economy, at least on paper. Yet, that status has become largely irrelevant in the context of the raging Global Economic Crisis, which has crippled the economies of virtually every nation on the planet. The supposed “sole superpower” is mired in a severe recession that has all the characteristics of an emerging economic depression. In addition, the United States that Barack Obama now leads is fiscally insolvent, both in the public and private spheres. For that reason, perhaps the world expected too much when Obama addressed a joint session of Congress on the sole topic of the nation’s economic crisis on the evening of February 24.

To Obama’s credit, the speech he delivered at his presidential nomination on January 20 was sober and solemn, reflecting a touch of honesty that is atypical of American politicians. For that expression of intellectual integrity, President Obama was roundly criticized by the American media and political establishment for being too focussed on gloom and doom surrounding America’s economic predicament. What the establishment wanted was a message to the public that was more reassuring and expressive of hope for the future. For that reason, the Obama speech to Congress was designed for a strictly domestic audience, being a weave between recognition of the dire economic realities while offering enough Americana in the form of platitudes and expressions of optimism to satisfy the critics. For that reason, Obama’s speech was a disappointment, for it abdicated a unique opportunity to inform the American public that the emerging economic disaster is no longer an American crisis, but one that is truly global, requiring synchronized responses that are unprecedented.

A sign of how irrelevant the cheering in the halls of Congress was on the night of the Obama speech is reflected in the news that emerged almost simultaneously from Japan. The world’s second largest economy, which had recently reported that its GDP has contracted at an annual rate of 12.7 %, revealed that in January its exports had declined by 45.7 % from a year ago. As exports are the center of gravity in the multi-trillion dollar Japanese economy, the revelation that this most important indicator of Japanese economic activity had fallen by nearly half is further confirmation that this national economy is in free fall collapse. Yet, no mention was made by Obama of the catastrophic economic news emerging from Japan, or the U.K., or Eurozone, or China where in the last few months 20 million migrant workers have lost their jobs.

For better or worse, the United States bought into the globalization of the world’s economy. What this means in practical terms is that the U.S. is deprived of the option of a national answer to its grave economic crisis. It exported its financial crisis to the world through the engineering of securitized mortgages that were transformed into toxic assets on the balance sheets of banks and financial institutions across the globe. And the world is now subjecting the United States to blowback; the rampant demand destruction throughout the world is creating its own negative feedback loop that is buzz-sawing the American economy and its narrowing opportunities for recovery. Yet, President Obama and the Congressional Democrats are talking about this crisis as though it is exclusively American. The Republicans are even more insular and dichotomized from reality, advocating more deficit-driven tax cuts for those Americans still in the ranks of the wealthy, while ignoring all the evidence that proclaims this disaster as being a global financial and economic crisis that is inoculated against recovery attempts that are strictly national in character.

While Barack Obama talked about America’s love affair with the automobile to demonstrate his bonifides as the protector of U.S. jobs affiliated with the Detroit manufacturers, he ignored completely the fact that a growing proportion of automotive jobs in America are found in factories and assembly plants owned by Toyota, Honda, Nissan and Subaru. If Japanese exports, of which automobiles constitute a significant proportion, are cut almost in half, what incentive do the Japanese car producers have to retain their manufacturing presence in the United States, when they are under pressure to preserve jobs in Japan? It may be that Tokyo is a more important center than Detroit in determining if the car building business will survive in the U.S., but one would not realize that from Obama’s discourse on the automotive problem in America.

Amid all the positive polling data and glowing reviews that were celebrated in the American media after President Obama’s speech before Congress, more enlightened observers will recognize that this is just another demonstration that the political establishment in the United States is disconnected from the brutal reality of the Global Economic Crisis. As the rhetoric is made sweeter and the public debt grows exponentially, the race towards a synchronized global depression continues unimpeded.

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Treasury departments and central banks far and near assured their publics that this speedy borrowing spree by the decision-makers had rescued the world’s financial system, thus serving the interests of the now heavily-leveraged taxpayer. Now, only three months later, it is clear that at a terrible financial cost, at most a short respite was purchased. The temporary lull in the LIBOR rate cannot, however, camouflage the essential truth; the major banks and financial institutions in many major economies, particularly in the United States and United Kingdom, are for all practical purposes insolvent.

A banking system that is insolvent is dysfunctional in the extreme. That is the core of the credit crunch that has now precipitated a Global Economic Crisis so egregiously destructive, it will likely exceed the Great Depression of the 1930s in its impact. This is why all the costly deficit spending on economic stimulus packages being enacted in the G7, BRIC and eurozone countries are doomed to failure. The key decision makers are aware of this conundrum, which is why they are frantically searching for a solution to the banking disaster that has frozen normal credit flows throughout the global economy.

The new U.S. Treasury Secretary, Timothy Geithner, postponed his speech on how the Obama administration intended to resolve the banking and credit crisis by 24 hours. Whatever solution he ultimately proposes it will probably, like TARP before it, be insufficient and require further interventions by the Treasury Department and the U.S. taxpayer. Indeed, dark clouds are obscuring an horrific reality; the American banking sector is insolvent to such an immense degree, it would in all likelihood require recapitalization at a level counted not in hundreds of billions, but rather trillions of dollars.

The paradox is that the U.S. economy, as with any other, cannot function without a solvent banking sector. At the same time, it cannot afford the cost of salvaging its banks. Consider what Professor Nouriel Roubini said in a recent interview with the Financial Times: “In many countries the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.”

Thus, the United States created a banking system with large institutions that are too big to fail, due to the systemic risk such a collapse would impose on the national and even global economy. It compounded this roll of the dice by removing any coherent regulatory regimes, instead trusting in the “self-correcting” character of the unregulated marketplace, which encouraged risky behaviors, otherwise known as “innovation,” leading to the creation of unsustainable asset bubbles.

Geithner may try to sugar-coat what in effect will be a TARP II, knowing that the public and its congressional representatives will be reluctant to mortgage the financial future of their children for the sake of another bank bailout. However, no matter how the Obama administration packages its own TARP II bank rescue effort, it is increasingly likely that the foreign credit markets the United States relies on for financing its grandiose deficit spending will simply lack the capacity to loan all the money needed to recapitalize America’s banks.

In the event the credit markets are unable to finance the rescue of the U.S. banking sector, then the lender of last resort will undoubtedly be the Federal Reserve. By resorting to quantitative easing, the Fed may purchase Treasury bills with bank notes it simply generates off of its printing press. In essence this is legal counterfeiting, conjuring up fiat money out of thin air. It may lead to the recapitalization of the banks, on paper. But the net cost will be the destruction of the U.S. dollar as the world’s reserve currency, along with the displacement of the current trend of deflation with a virulent and potentially uncontrollable outbreak of hyperinflation.

The bank rescue mission the U.S. Treasury Department and the Fed are currently embarked upon reminds me of what a U.S. Army spokesman once told journalists during the Vietnam War: “We had to destroy the village in order to save it.”

I fear that this same reasoning may be at work among the policy-makers in Washington, through the enactment of decisions that will destroy what remains of the U.S. economy in order to bailout the “too big to fail banks.” In this instance, however, it is not a village, but the whole global economy that hangs precariously in the balance.

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It is not only those who were myopic a year ago that want to avoid talk of a depression, at all costs. Even the most prescient analysts and experts have held back on their vocabulary in defining the Global Economic Crisis. However, more and more credible economists and experts have begun describing our current economic catastrophe as a depression. The Economist magazine was one such authority, as was the most recent recipient for the Nobel Prize for economics, Paul Krugman.

Perhaps the most astute observer of the unfolding disaster resulting from the implosion of the U.S. housing bubble has been NYU economics professor Nouriel Roubini. A year ago, amid the happy talk being proffered by Hank Paulson and Ben Bernanke, he accurately warned of the systemic financial collapse that would ensue in short order, unless urgent, coordinated steps of global intervention were swiftly undertaken. History vindicated the judgement of Roubini, while also applying to him the moniker of “Dr. Doom.”

As clear-cut as Nouriel Roubini has been in assessing the Global Economic Crisis, even he has been reluctant to use the “D” word. Now, however, he is warning that the worldwide economic crisis will get much worse, and in the absence of effective global intervention that is coherent and synchronized, a “near depression” was a serious possibility. His most recent warning comes in conjunction with his current assessment of the losses he projects for the global financial system due to “toxic assets,” in the range of $3.6 trillion. His conclusion is chilling in the extreme: the banking system in the U.S. is effectively insolvent.

Added to the mounting evidence of banking insolvency, not only in the United States but other major economies, in particular the U.K., are the horrendous unemployment numbers. The U.S. Labor Department has released its statistics on job losses for January of this year, indicating that another 600,000 Americans joined the ranks of the unemployed. This translates into an official unemployment rate of 7.6%. However, in reality, the situation is far worse than those numbers indicate. In the first place, the Labor Department’s monthly reports are never complete, owing to lagging tabulations from small firms and businesses. This is reflected in that the current report revised substantially higher the unemployment numbers for November and December of 2008. In all probability, more than 700,000 Americans were terminated in January, with every indication that this trend will continue far into 2009. In addition, the official unemployment rate, since the 1960s, subtracts “discouraged” workers, meaning the permanently unemployed, as well as part-time workers unable to find full-time employment. If these numbers are added into the unemployment figure, it exceeds 14%.

At its worst level, the unemployment rate in the U.S. during the Great Depression stood at 25%. After the advent of the New Deal of President Franklin Roosevelt, it temporally declined to near 10%, but then rose to a much higher level, reaching the range of 16-17% prior World War II. Accordingly, a true current unemployment rate of 14% is within the levels experienced by the United States during the 1930s. Factor in the structural insolvency of the American banking sector, the rampant demand destruction infecting the global economy and other catastrophic asset bubbles set to burst during the next several months, and it becomes clear that the United States and the rest of the world have now entered a dark economic territory that can no longer be defined as merely a recession.

The Global Economic Crisis has now achieved levels of economic contraction in all major indices that can only be described as a depression of worldwide dimensions. The global depression train has left the station, and will bring a level of economic and financial carnage to every corner of our world on a scale so staggering, it would have been unimaginable to even the most sober pessimists-until recently.

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The inept policy-makers and their legions of technocrats, as with the alchemists of so long ago, are claiming that their own permutation of economics will somehow create gold out of thin air, thus terminating the Global Economic Crisis and restoring prosperity. They tried monetary policy, however with interest rates on central bank funds in many major economies at effectively a rate of zero, and the global economy only falling further into the abyss, a new bag of tricks must be offered to the pubic.

The massive debt-driven stimulus spending plans being unveiled with monotonous regularity by the political leaders of the major economies are nothing more than fiscal chemotherapy. With the Global Economic Crisis having metastasized beyond the point of containment, this disastrous flirtation with national insolvency by policy-makers will only accelerate the path to global economic disintegration.

The major proponent of fiscal chemotherapy is the United States, which will in the near future pass a so-called “economic recovery plan” that will initially cost one trillion dollars over two years. However, even without this stimulus plan, the U.S. federal budget is already projected to incur a deficit of $1.2 trillion. Add in the stimulus, plus hundreds of billions of more dollars required for bank bailouts beyond the $700 billion TARP fiasco, then factor in the sharp decline in revenue from taxation as businesses go bankrupt and millions more Americans lose their jobs, and it is clear that the U.S. Treasury will have to borrow far more than even the stratospheric projection of $1.2 trillion. But it gets worse.

Politicians close to the Obama administration, as well as some economists who stand by the Keynesian formula for combating economic recessions, have already strongly hinted that the $1 trillion stimulus package will not be nearly enough to resolve the economic crisis, and will have to be massively enlarged and repeated. What this in effect means is that the United States will be compelled to borrow untold trillions of dollars for years to come. Now, with domestic credit possibilities utterly exhausted, it is to foreign creditors that the U.S. Treasury must look to for financing the profligate budgetary deficits of the United States.

Unfortunately for the U.S. Treasury Department, virtually every major economic actor on the planet is also replicating grandiose deficit spending wrapped up as stimulus packages. This includes almost all the G7 and BRIC countries. More alarming for the U.S., one of those nations is China, looked upon as the major source of available credit by the Treasury Department. However, China currently has its own priorities, now that the Global Economic Crisis is beginning to batter the world’s third largest economy in severe ways. A normally reticent Chinese government has disclosed that the number of unemployed migrant workers in their country now tops 20 million. It is for that reason that the authorities in China have begun a stimulus-spending program currently budgeted at $600 billion, but almost certainly to grow substantially beyond that figure.

The economic contraction hitting China means far fewer surplus dollars generated by Chinese savers. The credit pool in China is now shrinking, and most of those funds will logically be used to finance the government’s operating deficit in China, as opposed to the United States.

If China dries up as a source of credit for the U.S. government, where is the alternative? The Gulf Arab states are also being lacerated by the Global Economic Crisis, as the implosion of oil commodity prices has created severe budgetary constraints in the previously abundant coffers of OPEC. As with China, whatever sovereign wealth or other surplus funds are still available will be directed in the first instance towards enhanced domestic spending deemed necessary to maintain social cohesion.

The essential point is that the fiscal chemotherapy that suggests that, as with a cancer patient, the toxicity of the medicine, in this case budgetary deficits, must be absorbed for the short-term to preserve the long-term health of the patient is nonsensical in the extreme. There simply will not be enough credit in the entire world to finance the budgetary deficits that are likely to arise in the United States as well as other major economies. Rather than pursue the only sane fiscal option available, namely radical budgetary surgery (as with massive trimming of bloated U.S. military spending), the mediocre elites dominating U.S. decision-making circles have chosen to go down the route of fiscal chemotherapy and economic alchemy, which can only result in terminal consequences for the American economy.

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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 4^th 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.

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Had the expansion of unsold or unwanted inventory not been factored in as GDP growth, than the Commerce Department would have reported a GDP decline of 5.1% for Q4 of 2008. It is likely that Q1 of 2009 will reveal an acceleration of GDP contraction of the American economy. GlobalEconomicCrisis.com is projecting that complete tabulation for the first quarter of 2009 will reveal a GDP contraction in the range of 6-7%.

What do these economic statistics mean in real terms? The answer is clear; the U.S. economy is in terminal free-fall. Even with the passage of the Obama stimulus plan, at best the U.S. can temporarily arrest 1-2% off the rate of annual GDP contraction. However, further erosion of the U.S. fiscal posture resulting from exploding structural deficits and the cumulative national debt will rapidly negate the very temporary boost from the stimulus package, while facilitating further catastrophic macroeconomic destruction.

The implosion of the world’s largest economy will ensure that the Global Economic Crisis is acute and of long duration. Policy responses thus far from political leaders and the financial elites that influence them are about as encouraging or realistic as inflating the U.S. GDP figures by counting the accumulation of unsold goods as evidence of economic growth and expansion. It appears that those in power have not learned much from the recent experience of counting subprime mortgage-backed securities as solid and secure assets.

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