Global Economic Crisis

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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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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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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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 

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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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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.

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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 44^th 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.

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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.

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