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Global Financial Crisis Agonistes

February 15th, 2009 Comments off
At the G7 meeting of finance ministers in Rome, representing most of the world’s major economies (but excluding China), there was an outpouring of Keynesian conformity. Already engaging in fiscal policies in most G7 countries that represent major structural deficits, the finance ministers in unison pledged even more massive deficit spending as a panacea for demand destruction and rising unemployment. However, even if massive stimulus spending were the correct policy response in a normal recession, in this economic crisis such a course is doomed to failure. The current Global Economic Crisis began with a global financial crisis that is still very much with us. The banking and financial system in the major economies is struck with paralysis, resulting in a credit crunch that has debilitated a growing proportion of the world’s primary economic activities. Without a solution to the global banking and credit crisis, all the debt spending in the world will accomplish nothing save international insolvency.

Right now, frightening proportions of the banks of the major economies are either insolvent, close to insolvent or in otherwise poor condition. Though the major economies have already poured trillions of dollars of largely borrowed money into shoring up the balance sheets of failing banks, it has been a case of good money after bad. There may simply not be enough money available in the world to “fix” all the banks, which are rotting with the disease of toxic assets. Yet, without some form of effective, coordinated policy response on a strategic level to the financial component of this global crisis, all the other conversations ongoing in Rome with these illustrious finance ministers represents nothing more than side-talk on the decks of the Titanic.

U.S. Treasury Secretary Timothy Geithner and his G7 colleagues are pontificating about their robust stimulus deficit spending and pledges to avoid protectionism, while paying lip service to the catastrophic disintegration of much of the global financial architecture. As outlined on this blog in prior posts, almost the entire United States banking sector is insolvent; ditto for the United Kingdom. I have also drawn reference in another post to a leaked secret document from the European Commission, which seems to suggest that a large proportion of the Eurozone Banks are also infected with toxic assets to such a degree, they are also threatened with insolvency.

The financial cancer is spreading through the enfeebled limbs and arteries of the global credit and banking system. Time is running out for an effective and comprehensive solution. Yet, in imitation of Emperor Nero, the G7 finance ministers prefer to exercise their fiddles, accompanied by the lyrical singing of meaningless rhetoric, as the financial and economic world around them burns with agonizing ferocity.

 

Spanish Economy Facing Systemic Economic Meltdown

February 6th, 2009 Comments off
Spain may be following Iceland as the next country facing systemic economic collapse due to the global financial and economic crisis. Recently released macroeconomic data is illustrative of a national economy in free fall. Not even the United Kingdom, with its insolvent banks and a collapsing currency, is in as decrepit economic shape as is Spain.
Among the eurozone economies, it clearly has the worst performance. Not that the other eurozone countries should gloat, for the Spanish economic contraction is a roadmap for the destination in store for the European Union as a whole. Official tabulations reveal that in the month of December, Spain’s industrial output declined by 19.6%. In just one month, nearly a fifth of Spanish output eliminated! This is not merely a recession, but wholesale economic collapse. Other figures elaborate on the depths of the disaster. Spain’s National Statistics Institute disclosed that in the last quarter of 2008, 1,082 companies filed for bankruptcy. To put this number in perspective, the last quarter of 2007 had a bankruptcy rate barely more than a quarter of that grim statistic.
Without question, the Spanish economy is grinding to a halt, significantly increasing the unemployment rate, which currently stands at 14.4%. The European Commission is forecasting that Spain’s unemployment rate may reach close to 19% by 2010, reflective of an economy that has not reached bottom, despite wishful thinking by some financial analysts.
As with the United States, the perception of prosperity in Spain was largely fabricated on the basis of a housing boom and highly leveraged real estate speculation. Again matching the American experience, the housing asset bubble in Spain was punctured, in the process crippling financial institutions and curtailing access to credit by Spanish enterprises. The ripple effect brought on by the collapse in housing and the banking crisis has crippled the broader economy to such an extent, cascading business and personal bankruptcy rates and massively rising levels of unemployment seem irreversible.
There exists another parallel with the United States. As the Global Economic Crisis evolved, the Socialist government in Madrid led by Prime Minister Zapatero, as with the Bush administration in the U.S., at first denied the nation was in the throes of a virulent economic recession. Only when the dire facts overwhelmed political spin did both governments begin to face reality. By then, in both Washington and Madrid, it was too late. As with many other panic-stricken leaders across the globe, Zapatero will seek massive deficit spending as a means to stimulate the failing economy. Being a member of the eurozone with its own central bank, monetary policy falls outside the immediate purview of options available to the Spanish government. So fiscal stimulus, inevitably hampered by an inability for a left-leaning government to talk soberly to labor unions, will be the feeble response to the worsening disaster.
Spain will likely experience a level of economic decline unprecedented in the last half-century of her history. However, in this journey of gloom and doom, she will be far from alone. 
For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com

 

 

Global Economic Crisis Brings World To The Eve Of Demand Destruction

February 1st, 2009 Comments off
A new center of gravity is driving the vortex of global economic destruction that is ravaging the planet. It was the financial sector that originated this cosmic disaster, leading to the earlier definition of what was unfolding as the Global Financial Crisis. The systemic failures in the global financial system will not only continue to inflict fiscal carnage; their impact will worsen as the realization grows that the banking systems in many of the world’s economies, in particular the United States and the U.K., are effectively insolvent. However, out of the inferno of a worldwide credit crunch and systemic banking failure has emerged an even more potent instrument of economic disintegration, the phenomenon referred to by economists as “demand destruction.”
While the banking and credit systems of national economies represent the bloodstream of commerce, it is the production of goods and services that define sustained economic activity. The totality of human life is captured in the statistics that gauge an economy’s productivity, in areas as diverse as agriculture, manufacturing, transportation and services in a vast multitude of human endeavors. Over a given span of time, it is anticipated that economic activities will peak and flow through businesses cycles. A recession brings a diminution in the output of goods and services for a limited period of time, followed by recovery and the restoration of growth. An economic depression, however, manifests a far different and much more radical character with respect to quantitative measurements of production and distribution of goods and services. The numbers increasingly evident from emerging macroeconomic data makes clear that what we are now witnessing is not the typical short-term recession in economic output but rather the far more dangerous and virulent evidence of global demand destruction.

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 4th 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.

 

 

Global Economic Crisis Leading Banks To Financial Armageddon

January 22nd, 2009 Comments off
President Barack Obama was greeted on his first day in office by a 21-gun inauguration salute and a volley of synchronized demolitions on Wall Street. The Dow Jones tanked, not so much as a repudiation of the 44th President, whose election victory actually sparked a rally on Wall Street, but rather due to news emerging about the state of the banking industry. It is bad, very bad. However, new data on the full impact of the global financial and economic crisis makes it clear that the banking industry worldwide will sink to even lower depths, entering an abyss so dark that not even the most adroit spin-masters on Wall Street can create a rosy scenario to justify a fool’s rally on the Dow Jones.
The 4th quarter posting of an eight billion-dollar loss at Citigroup, taking the year’s negative figure to $18 billion in losses, was sobering and depressing news. Bank of America posted a 4th quarter loss in excess of $2 billion. The news out of the largest American banks was appalling in itself, however, this melancholy manifestation of the American banking industry was compounded in its misery by the revelations emerging across the pond, namely in the United Kingdom.
As described in a recent posting on GlobalEconomicCrisis.com, the British banking system is in morbid distress. A recent report on the state of British banking described the UK’s banks as “technically insolvent.” This dismal overview was followed by the realization that the Royal Bank of Scotland had incurred a loss for the year in excess of $40 billion, a sum of red ink that dwarfed Citigroup’s atrocious results. However, while the destructive contagion of the Global Economic Crisis is devastating the banks of the UK and elsewhere, it is in America that the next nails in the coffin of the financial industry are about to be hammered.
Nouriel Roubini is acknowledged as the leading economist on the global financial crisis, based on his repeated warnings about an impending credit crunch that earned him the moniker of “Dr. Doom.” His predictions turned out to be prophetic, yet even he acknowledged that the crisis evolved at a pace more rapid than he anticipated. That is why his latest forecast, issued during a conference held in Dubai, warrants urgent attention.

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.

 

 

 

 

 

Credit Crunch Nightmare: Report Claims British Banks Are Technically Insolvent!

January 18th, 2009 Comments off
British banks were not far behind their American cousins in being hammered by the onset of the global financial crisis, inflicting a cruel credit crunch on businesses and consumers in the United Kingdom. The unpopular British Prime Minister, Gordon Brown, initiated his own version of borrowing staggering amounts of money to prop of the tottering British banks, as fabled names like Northern Rock and HBOS became symbols of chronic institutional failure.
Early in his deficit spending spree, Gordon Brown boasted to Parliament, in a fiscal version of the Freudian slip, that he had “saved” the world. Well, it appears that boast from the right honorable gentleman was a tad premature. A report just released by financial analysts at the Royal Bank of Scotland will make limp the stiffest of British upper lips.

Entitled appropriately “Living on a Prayer,” the report concludes that UK banks are “technically insolvent.” The Brown government’s expenditure of nearly $400 billion to prop up British banks impacted by the Global Economic Crisis has almost entirely failed to curtail the affects of the credit crunch.

In a stealthy meeting at 10 Downing Street involving Prime Minister Brown, Financial Services Authority chairman Lord Turner and Bank of England governor Mervyn King, the implications of the “Living on a Prayer” report were digested. The purpose of this panicky pow-wow was apparently to conjure up some desperate last-ditch solution. According to media reports in the UK, Brown will probably throw another $150 billion in taxpayers money at the UK’s insolvent banks, desperately hoping that more deficit spending and mortgaging of the future will somehow repair the mistakes made by the “masters of the universe” whose casino capitalism is responsible for  incinerating the balance sheets of British banks.

The problem with Gordon Brown’s characteristic response, as with the TARP and Fed money gusher in the United States, is that we are dealing with a Global Economic Crisis, which means that there is not enough real money on the planet to plug up the collective insolvency of all the world’s major banks and credit institutions. Living on a prayer, indeed!

 

 

 

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

 

 

 

 

 

 

 

U.S. Budget Deficit Will Likely Exceed 2 Trillion Dollars

January 15th, 2009 Comments off
The U.S. congressional budget office has recently forecast that the current federal budget deficit will exceed $ 1.2 trillion dollars, more than double the previous year’s near-record government overdraft. However, the CBO estimate does not even include the Obama stimulus package in its estimates, likely to be in the range of a trillion dollars over two years. Perhaps most problematic, the estimates conveniently set aside the catastrophic diminution in tax receipts that are inevitable, as the impact of the Global Economic Crisis on the American economy contracts payrolls and bankrupts businesses large and small. Just as dead men tell no tales, dead companies and unemployed workers pay no taxes.
WWW.GlobalEconomicCrisis.com projects that for 2009, the U.S. government will have a deficit in excess of two trillion dollars and possibly even in excess of $2.5 trillion. However, government taxing and spending does not only occur at the federal level. All over America during the course of 2009, state, municipal and county governments will be drowning in red ink, and beg the federal government to bail them out. That is the logic of borrowing from Peter to pay Paul. There is a limit to how much money even the United States Treasury can borrow. However, an even greater danger lurks in both the short and long term.
The massive deficit spending that Washington initiated as the global financial and economic crisis accelerated was supposed to free up the credit markets and allow normal flows of business lending to proceed. In a fiscal paradox, the very solution implemented by the U.S. Treasury and Congress, massive debt spending by government, will inevitably suck up credit from the private sector like a vacuum cleaner, diverting this economic necessity into the public deficit purse, further aggravating the credit crunch.
The out-of-control multi-trillion dollar deficits being offered by Washington politicians and their coteries of corporate socialists desperate for a government bailout will bankrupt both the public and private sector, and ensure that the Global Economic Crisis brings about a worldwide depression of catastrophic proportions.
  

National Insolvency As Policy Response To Economic Crisis?

January 11th, 2009 Comments off

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 44th 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.

Global Financial Crisis Claims 535,000 Jobs In U.S.

December 7th, 2008 Comments off

The November unemployment numbers released by the U.S. Labor Department show a record 535,000 jobs were lost during the month. This is the worst monthly total of lost jobs ever tabulated, and shows that the full wrath of the global economic crisis is wreaking havoc on the United States economy. With only weeks left in the lifespan of the Bush administration, America appears rudderless at a time when its economy is in dangerous free-fall.

Many economists believe the worst is yet to come. The official unemployment rate, which excludes long-term jobless, now stands at 6.7%. Some experts are forecasting that the number will rise to 8 or 9 percent, or even higher. With fear rife among families about losing their livelihoods, consumer spending in the U.S. will continue to erode, leading to further demand destruction. This is likely to continue the trend of house price deflation, the facilitator of the current credit crisis. A vicious circle of economic implosion is now fully underway, with policy makers in the United States and throughout the world desperately throwing money in vast sums at the problem, hoping something will work. So far, however, nothing seems to be impacting the acceleration of the global economic crisis. It is likely that vast numbers of workers across the globe will be joining the ranks of the unemployed, leading to further recessionary pressures on the global economy and dangerous levels of deflation.

$8.5 Trillion And Counting; Cost Of U.S. Economic Crisis Soars

December 1st, 2008 Comments off

The impact of the global economic and financial crisis on the United States has already cost potentially $8.5 trillion. Perhaps even more frightening, many more trillions of dollars could be added to the economic rescue bill, without certainty of success. Indeed, some economists are saying the U.S. is doomed to a horrific economic depression, no matter how much money the government borrows or prints.

In the past week the government allocated up to $300 billion to save Citigroup from certain implosion claiming that it was “too big to fail.”. This allocation, added to $150 billion and counting for AIG, more for Fannie Mae and Freddie Mac and other expenditures and loan guarantees currently add up to a staggering $8.5 trillion. This is more than half the entire U.S. gross domestic product in the past year.

President-elect Barack Obama and Democrats in Congress are planning an additional stimulus package of $500 billion to $700 billion. It is expected that the stimulus package will be one of the first bills passed by Congress after Barack Obama is inaugurated as the nation’s 44th president.

The United States federal budget deficit soared to $455 billion in the past fiscal year. With the bailout packages already enacted and additional spending being planned, economists are forecasting that the next fiscal year’s budget deficit could exceed one trillion dollars, a figure which would have defied belief only a year ago.

 

Global Economic Crisis

November 28th, 2008 Comments off

What began as a global financial crisis has truly become a virulent global economic crisis. The credit crunch that has clogged the arteries of the world financial system has now caused an economic meltdown of global proportions. No economy, big or small, developed or undeveloped is being spread.

The danger confronting policy makers and citizens as the international community and individual sovereign nations are passing through uncharted but stormy waters. Parallels are already being drawn to the Great Depression of the 1930s. More dire, several very learned financial experts and economists have warned that what the world confronts is a mega-economic crisis that may even dwarf the Great Depression.

Recently, even China’s high growth rate has receded. It was hoped at one time that the Chinese economy could rescue the planet from a worldwide recession. scenario is no longer operative. The Eurozone, the U.K. and the U.S. are now experiencing negative growth in their GDP. A terrifying global economic crisis is about to inflict staggering pain throughout the globalized, interconnected planet.