Global Economic Crisis

As the major actors of the global economy gather in Davos for the World Economic Forum, they might shift their gaze from the landlocked enclave of Switzerland to another frigid enclave enveloped by the chilling waters of the Arctic Ocean and Denmark Strait; Iceland. For it is on this sparsely populated Island nation of 320,000 inhabitants that ground zero for what the Global Economic Crisis can unleash is being experienced. As a harbinger of the economic doom that the global financial disaster can inflict on human societies, Iceland should serve as a clinical laboratory for what much of the rest of the world is in store for, as the masters of the universe continue to feast on champagne and caviar at rarefied summits such as that occurring in Davos.

Iceland once had a reputation for hardworking fishermen, and financial thriftiness. Its budgets were usually balanced or in surplus, and its banking sector was responsibly regulated. Then came the ideology of the so-called “free market” in banking, bringing along a wave of financial deregulation. The financial engineers that populated Iceland’s banking sector dreamed up a new way to make money; have Iceland’s banks borrow heavily via short-term debt, while offering above-market interest rates to recruit bank depositors overseas. Iceland’s banks actually had more depositors outside of Iceland, especially the United Kingdom, when the global financial crisis exploded all the unstable banking models irrespective of national frontiers.

Iceland’s three largest banks became insolvent as the credit crunch pinched their access to short-term financing while simultaneously overseas depositors began a run on those banks. This resulted in a panicky Icelandic government being forced to place in receivership and thus nationalize Glitnir Bank, Landsbanki and Kaupthing, the latter being the nation’s largest bank. The potential liabilities of these banks exceeded the entire GDP of Iceland by a multiple of five, forcing the government to seek emergency financial aid from the International Monetary Fund (IMF) as the country’s currency, the krona, went into free-fall collapse.

The financial catastrophe that has engulfed Iceland has crippled her economy and brought about a political crisis fed by social unrest and collective fear that is unprecedented in her history. Prime Minister Geir Haarde has been forced to announce his resignation and the calling of early elections, as he and his senior ministers have been virtually besieged by non-stop demonstrations representing the anger of a large proportion of the population. As the internal situation in Iceland deteriorates, her external image has been forever tarnished by the irrational behavior of the nation’s bankers. With numerous foreign depositors demanding access to their accounts from these now insolvent banks, the British government went so far as to publicly declare that Iceland was a terrorist state. Such is the level of discord that is being aroused by the Global Economic Crisis.

Undoubtedly, Iceland is about to enter an economic apocalypse. It is absolutely impossible for this small nation to cover a potential liability that is five times as large as its entire annual GDP without the largesse of the IMF, among other benefactors. Even with this assistance, Iceland will be economically crippled far into the future, creating a pall of gloom that is enveloping this small country.

Some will say that Iceland is an exceptional case, because even projections of severer financial carnage in the United States do not come near to five times the GDP of the world’s largest economy. Those comforting themselves with such logic miss the point. Even if all the potential losses from the insolvent banking sector in the United States, added to insolvent households, public and corporate debtors, amounts to “only” half the American GDP, the scenario that occurred in Iceland remains highly relevant. In both situations, be it with a small economy or the world’s largest, the systemic financial meltdown is beyond each country’s capacity to “repair” the damage utilizing its own economic resources. There is, however, one important distinction. Unlike Iceland, the United States does not have the option of running to the IMF for a bailout.

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We must remember that not even Barack Obama walks on water, though a miracle worker is perhaps the only human being that can terminate the Global Economic Crisis with rapidity and no further pain. The approach adopted by Obama so far in confronting the economic crisis, though manifesting a clear realization of its seriousness, is also impeded by a conventionality that may be his biggest obstacle.

As with the other boilerplate responses from political leaders across the globe, the Obama administration is proposing a massive stimulus package, dubbed the “American Economic Recovery Plan,” financed with borrowed money. This follows a previous injection of borrowed money, $700 billion for TARP, supposedly essential for rescuing the banks. It is now clear that the $700 billion TARP spending frenzy was a fiasco. As has since been admitted by top Treasury Department officials, Hank Paulson, former Treasury Secretary, pulled the $700 billion out of thin air, because he wanted a “big number” to impress the markets. Such a cavalier attitude towards stampeding Congress into borrowing a staggering amount of money, equivalent to roughly $2,500 from every American man, woman and child, without any strings attached on the part of the banks receiving the money, explains its total failure to resuscitate the clogged arteries of the U.S. credit system. This example is not an encouraging harbinger for another dose of heavy deficit spending in a hurry by Washington.

The Obama Plan envisions $825 billion in borrowed money for a variety of projects and tax cuts. Though Obama promises a much higher level of accountability with his stimulus package than with TARP, that is not even the most crucial issue. It is the whole premise of Obama’s economic plan. What are the parameters and assumptions that led to a figure of $825 billion? On top of the already ballooning federal budget deficit, can the U.S. government raise another $825 billion from largely foreign credit markets (e.g. China), and at what interest rates? What if the Obama Plan has no significant impact on rapidly eroding macroeconomic indicators, while the exploding national debt and structural deficits remove any other fiscal options from consideration?

The proper context for President Barack Obama to view the Global Economic Crisis is not just as a catastrophe for the U.S. and world economy, but also as the gravest danger to American national security. If the Obama administration had a broad enough intellectual horizon to comprehend that the erosion in American geopolitical power that would inevitably result from the implosion of its economy is a far greater threat than what emanates from a non-state actor with a few thousand adherents, namely Al-Qaeda, it would review the irrationally excessive U.S. military budget.

The question Barack Obama should be reflecting on is if the U.S. should continue to spend a trillion dollars a year on its military establishment, and hope that the global credit markets will finance unfunded government liabilities in other categories in perpetuity. Ultimately, the global economic and financial tsunami cannot be combated by bloated military budgets. It is critical that there is a radical restructuring of U.S. budgetary priorities, or else Imperial overreach will finish what is left of U.S. economic power, after the meltdowns on Wall Street and Main Street have added their unique contributions to the deconstruction of the U.S. economy

 

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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While politicians have ceased denying what cannot be denied, that the world is enduring a crippling global financial and economic crisis, they still largely inhabit the land of make believe. What is more, they beckon their fellow citizens to enter blindly into their Alice in Wonderland construct for global economic salvation. Never mind that loose monetary policies enacted by central banks and massive deficit spending sustained by political actors lubricated the skids of this global economic disaster, we must accept on faith the prescription of the political establishment; even more public debt, compounded by near-zero interest central bank rates.

The latest macroeconomic data that has emerged from China and the UK should pour a bucket of cold water over even those most tolerant of political smoke-and-mirrors disguising itself as economic salvation. To say that the numbers were dismal would be an extreme understatement. Perhaps more poignantly, they are further markers on the highway to acute global economic meltdown.

China has for a decade been the primary engine of global economic growth. By becoming the factory for much of the consuming world, it accumulated huge savings, this cash pool being used to loan money to the United States, its major customer by a wide margin. As long as Americans bought Chinese products and kept the factory floors from Shanghai to Canton buzzing with full employment, the bosses in Beijing were quite content buying U.S. Treasury bills by the hundreds of billions of dollars. Now that consumer demand in the U.S. is contracting, however, along with other major markets, China will likely need to shift its accumulated savings towards financing its own deficit spending, as opposed to Washington’s stimulus credit needs. The official results for the 4^th quarter GDP show a drastic reduction in growth, pointing to a sharp downturn in the Chinese economy.

A 4^th quarter result of 6.8 % growth would seem like manna from heaven in comparison with other major economies. However, in the context of China’s massive labor pool this number is problematic, as double-digit growth has been essential for maintaining a level of employment satisfactory for sustaining social cohesion. Economist Nouriel Roubini points out, however, that this number is misleading. He believes that the Q4 in China brought no growth, perhaps even the beginnings of negative growth. Signs point to a recession in China during 2009, with disastrous consequences for the global economy.

The boom in the past decade in the Chinese economy also fueled economic expansion in much of Southeast Asia. Enterprises in South Korea, Taiwan, Thailand and Singapore, as well as other Southeast Asian nations, provided raw materials, products and services that were incorporated into the output of China’s vast economy. Contraction in China will be devastating to the economies on her periphery, while also diminishing her appetite to lend increasingly scarce savings to finance the profligacy of the U.S. federal budget.

In the UK, the 4th quarter GDP numbers, revealing a decline of 1.5%, magnified the apocalyptic news that has emerged from the carcass of its banking sector. As this is the second consecutive quarter of negative GDP growth in the UK, that country is now technically in a recession, hardly a startling revelation for the beleaguered British taxpayers. As with America, the political establishment offers only more tax-funded bailouts, even more massive deficit spending, garnished with historically low Bank of England fund rates.

In addition to the appalling quantitative data emerging from China and the UK, there is one other barometer of the cascading Global Economic Crisis, the obscure Baltic Dry Exchange Rate. In simple terms this is a measure of the cost of shipping raw materials to China by freighter. When the Chinese economy was humming, the demand for shipping dictated a high rate. That is now history; as the Baltic rate is sinking like a broken old rusty ship, reflecting collapsing demand by China for raw materials, as its factories shutter their doors. In essence, the current anemic Baltic rate attests to a process of virtual de-industrialization occurring on the planet on a titanic scale.

Though China and the UK have different economic characteristics and dynamics, they are both significant actors, along with the United States, in the global drama that is now unfolding. The examples I have sited are just another dose of empirical data pointing to the year 2009 as being one of economic extremis.

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According to Roubini, his latest calculations indicate that U.S. banks face potential losses from the credit crisis in the region of $3.6 trillion, a figure that is both stratospheric and apocalyptic, reaching a level previously beyond the worst nightmares of major financial analysts. Professor Roubini points out that with only $1.4 trillion in total capitalization, this means if his projection is accurate, the entire U.S. banking sector is insolvent. This is the equivalent of economic and financial Armageddon.

Last October, Treasury Secretary Paulson warned Congress that without an immediate injection of $700 billion into the financial system (all of it borrowed money) the entire global credit system faced imminent collapse. It appears that this money, designated TARP, has been used almost entirely by banks and financial institutions to shore up their rapidly eroding balance sheets. What Roubini’s numbers suggest is that the TARP is nowhere near enough money to recapitalize a banking sector that appears to be collectively insolvent.

Is the solution more TARPs? Putting aside the issue of moral hazard, we must comprehend that this is an economic and financial crisis that is global, not national. That means if the United States decides to bail out its banks through the largess of the taxpayers, it will either have to borrow the money, print it, or raise taxes to a level that will be draconian.

As the U.S. is reliant on foreigners to finance its fiscal and current account deficits, it will have to compete with many other countries also seeking deficit financing to salvage their own insolvent banks, the UK being a conspicuous example. Even with higher interest rates, it is unlikely that there is enough credit available to cover the total cost of bailing out the U.S. banking industry (it must also be factored in that the Obama administration plans on borrowing one trillion dollars for an economic stimulus program, not directly related to salvaging the banks). Printing the money and monetizing debt will lead to crippling inflation and the inevitable destruction in the value of the U.S. dollar. Finally, the level of increased taxation required to pay for full recapitalization of the American banks without resort to credit markets would be so severe, it is probably both politically and fiscally unsustainable.

With the numerical analysis of Nouriel Roubini adding a quantitative reality to the impending meltdown of the global banking sector in general and U.S. banks in particular, it appears that a bankers hell is in store for us all. In a perverse paradox, instead of banks lending to people, it will be the people called upon to save what can be salvaged from an insolvent banking system, even at the cost of economic ruin that may endure for generations.

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When the European Commission released its forecast for 2009 and 2010 on economic “growth” in the eurozone, the dismal projections were no surprise. According to the Commission, eurozone economies collectively will contract by 1.9 % in 2009 and grow by an anemic 0.4 % in 2010. Even these seemingly pathetic figures are almost certainly highly optimistic. A senior economist at Bank of America, Gilles Moec, for example, projects that the 16 nations that use the euro currency will see their economies shrink by 2.6 %. during 2009. As for 2010, I think the European Commission was inhaling some potent weed to see any growth potential for 2010.

The negative growth in the eurozone affirms that that this pivotal region in the global economy is deep in recession, with already high rates of unemployment about to surge to a level that will threaten the social and political cohesion of western and central Europe. Quite clearly, the eurozone, along with the rest of the planet, will not be immune from the man-made catastrophe that is the Global Economic Crisis.

What about the rest of Europe? Here the news is at least as bad, and in many instances worse than the eurozone. The economy of the UK is imploding, its banks technically insolvent, according to a recent and authoritative report. Russia is being shattered economically by the collapse in commodity prices, especially petroleum, its primary generator of hard currency. The Ukraine and Baltic nations are possibly in even deeper trouble, while even little Iceland has not been spared, as it risks being the first victim of the Global Economic Crisis to fall into national bankruptcy.

The global economic disaster ripping apart the world began in the United States, where it continues to accelerate in its destructive impact. However, now that Europe is being ripped apart by the global financial and economic tsunami, we are now entering what economists refer to as a negative feedback loop. As the U.S. and Europe feed upon each other’s economic decline, the tentacles of this destructive recessionary octopus will increasingly strangle the other major economic engines on the planet, namely China, Japan and Southeast Asia. The sobering conclusion is that the worst is yet to come, but almost certainly will.

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When the banks fail, the remainder of the economy is in cardiac arrest. It appears that the disarray in America’s banking sector is growing, its vastly over-compensated management left only with the last resort of “restructuring” and cashing in their political connections for massive bailouts from Washington. The latest public revelations demonstrate how the Global Economic Crisis will take no prisoners, including America’s banks, both large and small.Citigroup, whose management once waxed at its acquisitions fueling excessive growth in the firm’s size along with their salaries and bonuses, has just announced a fourth quarter loss in excess of 8 billion dollars. The total losses incurred by Citigroup for 2008 amount to more than eighteen billion dollars. Now a panicky management is trying to “prove” it has a strategy for survival, based on splitting the banking conglomerate into two components: Citicorp, supposedly the “healthy” component, and Citi Holdings, with the “unhealthy” remnants that will be sold or liquidated. In the meantime, Citigroup took in another $20 billion infusion of TARP money from the U.S. Treasury, along with Bank of America. Another financial institution that grew to the point of indigestion, Bank of America will also receive a government guarantee of $118 billion to “backstop” the bank’s vulnerable assets.

What is actually going on with America’s banks? The dark secret that the government will not discuss publicly is that this vital sector of the U.S. economy is largely insolvent. The reason the Treasury provided $350 billion in TARP funding to the banks with no accountability or strings attached (and no improvement in bank lending to desperate businesses and consumers) is because the balance sheets of U.S. banks are so abominable, any taxpayer funds sent to them are being used solely to improve their dismal balance sheets.

The desperate borrow and spend tactics of the Fed and Treasury Department are akin to bailing out water on the Titanic after she struck the iceberg, hoping in defiance of logic that they can miraculously impede the inevitable sinking of the ship. The calamitous disaster-management techniques in the United States are being replicated throughout the world, as clueless central bankers and politicians add their own permutation on flawed reactions to the Global Economic Crisis.

The banking ship of the United States is going down, and with the connivance of Treasury, the Fed and Congress it will take the American taxpayers on its death ride to foggy bottom

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The American consumer has been the driver of the global economic expansion that impacted the Eurozone, the BRIC countries (Brazil, Russia, India and China), Southeast Asia and Japan and emerging markets. The capacity of Americans to consume was not based on intrinsic productivity but rather on debt from overseas creditors, further lubricated by irrationally loose monetary policies enacted by the U.S. Federal Reserve. The American consumer has been leveraged to a level that is unsustainable, and that bubble has burst.

The first symptoms were manifested in the sub-prime mortgage meltdown. A complex architecture of financial engineering exported toxic securitized paper investments based on these non-performing sub-prime loans. The result has been the virtual destruction of the financial world as we knew it, with the extinction of many of the largest American investment houses, some of which had been in existence for more than a century, having weathered the Great Depression.

While the financial world and now sovereign governments are currently inundated with the consequences inflicted by the sub-prime meltdown, which have cost trillions of dollars, much worse is about to be set loose on the global house of financial cards. There are other asset bubbles that will be popping with lethal force.

While sub-prime mortgages continue to devastate the American housing market, near-prime and prime mortgages are about to get hammered, as the over-leveraged American consumer becomes financially debilitated by rapidly rising unemployment rates, restricted access to credit and collapsing value of their retirement funds and household equity. Car loan delinquencies and credit card defaults will also accelerate, while consumer spending in the United States plummets, leading to the next asset bubble: commercial real estate. Retail trade declines will bring about a horde of commercial bankruptcies and foreclosures, creating vast square footage of vacant offices and storefronts. Shopping malls will become deserted, leading to unpaid commercial mortgages that will rival the sub-prime disaster in intensity.

An American Government that is already consumed with mountains of debt may promise to bail out every American consumer and business, however this is just not possible in the real world. Yet, this is the course the incoming Obama administration seems determined to follow. And leading the charge will be Tim Geithner, Barack Obama’s nominee to succeed Hank Paulson as Treasury Secretary.

Paulson of the $700 billion TARP debacle, preceded by his numerous wrong assumptions about the direction of the U.S. and global economy, was clearly a disastrous Treasury Secretary for coping with the onset of the Global Economic Crisis. However, will Geithner be an improvement? A revelation just released raises disturbing doubts. It has now been disclosed that the man President-elect Obama wants to entrust the Treasury Department to, at a time of the gravest economic crisis, failed to pay $34,000 in back taxes. Failure to pay $34,000 in back taxes? This is the genius supposed to run the Treasury Department, which supervises the IRS, and strategize our way out the current global economic disaster? This leads to another signpost on the road to global economic catastrophe. When excellence in leadership is essential for coping with the Global Economic Crisis, throughout the world the political establishment is represented by mediocrities. Mister Thirty-Four-Thousand in back taxes is a metaphor for this failure by the global political elites to identify and select the most competent professionals to confront the world’s most chronic economic disaster.

When one aggregates the cumulative affects of the asset bubbles about to burst with incendiary destructiveness, factoring in mediocre decision makers, the case for a crisis as bad as the Great Depression is solidified. There remains another element that will make it much worse.

In the 1930s the world was not as financially interconnected as it is today. Globalization has massively increased the vulnerability of the world’s financial and economic system. To take one example, a corrupt stock or bond trader in Singapore or Paris can, by manipulating his computer, gamble away billions of dollars of his company’s assets, undiscovered until calamity has struck. Every day trillions of dollars is transacted at the speed of light, much of it unregulated, particularly with those mysterious entities known as hedge funds. The derivative products they have engineered have accrued to the stratospheric level of hundreds of trillions of dollars, unmonitored by any governmental authority. In essence, a vast global financial superstructure has been erected on a foundation of quicksand as fragile as the worst of the sub-prime securities. As the global economy sinks, hedge funds will begin to deleverage and liquidate, in effect multiplying the already catastrophic global economic downturn. The result: global economic Armageddon.

The Great Depression led to the most destructive war in the history of human civilization. Will the Global Economic Crisis so disrupt social stability and international relations that an even more terrible global conflict erupts? It may be that however calamitous the financial impact of the Global Economic Crisis becomes, it will be the inevitable geopolitical consequences that will exceed our worst nightmares.

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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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A global panic by policy makers has been in overdrive since the initial financial crisis brought the world’s credit markets to the brink of total meltdown. Staggering sums of money that boggle the human imagination are being heaved at the global crisis. With a fully-fledged global economic crisis now underway, the spigot of debt-driven cash is flowing out of governments like Niagara Falls. The most conspicuous example is the Obama stimulus package, now in preparation for rapid passage once the 44^th U.S. President is sworn in. The planned American stimulus package alone may top one trillion dollars over two years. This comes on top of the $700 billion TARP program of Hank Paulson infamy, now conceded by many economists to have been a poorly conceived boondoggle.

The global public square is being told that this massive amount of money must be spent, or the world economy will fall into even worse distress. Conveniently being veiled is the inconvenient fact that these monstrously large expenditures must be made with borrowed money, as many nations, especially the United States, have treasuries that have long been laid bare by accumulated deficit spending.

Even economists who are convinced that huge amounts of deficit spending must be tolerated to salvage the global economy are aware that the “medicine” may be the harbinger of its own financial disease. Consider what Nouriel Roubini, the “prophet of doom,” told BusinessWeek in a recent interview about the U.S. stimulus spending:

“…the cost of issuing a huge amount of public debt will be trillion-dollar budget deficits this year and next, which eventually is going to have a crowding-out effect on private demand. So either we issue a huge amount of public debt to finance it, and that’s going to push up interest rates, or we print a lot of money that eventually is going to be inflationary and again damaging to the economy. We have no choice but to have an aggressive policy response, but it’s not a free lunch.”

Not a free lunch, states Roubini, a reality that policymakers are hiding from their publics. These, the very same mediocre political leaders who facilitated the global economic crisis, surrendering to the “logic” of the unregulated market place. What does “no free lunch” mean?

The United States is currently broke, from a fiscal standpoint. The trillions of dollars in excess expenditures being planned by the policy makers will inevitably require massive borrowing, at a time when foreign countries whose credit markets the American authorities depend on will be doing their own stimulus deficit spending. The only way the U.S. will be able to attract foreign credit in this context is through much higher interest rates. This will kill private borrowing, stifling investment and ultimately defeating the purpose of the stimulus spending. The other alternative is to simply print the money, and produce the hyper-inflationary hell that now exists in Zimbabwe.

Virtually every serious economist agrees that massive deficit spending in the United States by both the public and private sector was the driver of the global economic crisis. Strange that the identical prescription that led to this disaster is now being advertised as the cure.

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