Global Economic Crisis

The unfolding Global Economic Crisis has stricken most economies, large and small, with the bitter twins of high inflation and recession. This phenomenon of stagflation, amid the destabilizing war between Russia and Ukraine and broken supply chains resulting from both war and Covid restrictions, is spreading like wildfire. Record levels of inflation are occurring in virtually every developed economy, including the United States. However, it is in the United Kingdom that the most disastrous repercussions are unfolding.

After Boris Johnson was forced to resign as British prime minister, he was succeeded by Liz Truss. Her hand-picked Chancellor of the Exchequer, Kwasi Kwarteng, released a proposed budget that immediately sent the British pound plummeting, sovereign bond rates soaring and fear and loathing manifesting in all leading UK financial circles. This is amid annual inflation exceeding double digits and an ongoing retraction within the UK economy.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The key component of Kwarteng’s budget package was major tax cuts targeting high net-worth taxpayers, to be financed by substantial borrowing despite the British government already facing large budget deficits. The whole ill-conceived package was an example of political ideology triumphing over economic reality. The markets swiftly provided a painful response, making the proposed budget untenable.

Truss has now fired her financial minster, a desperate move to save her weeks-old prime minister tenure by making Kwarteng the scapegoat. Already there is talk of a palace coup to remove Truss by desperate members of her Conservative Party. All this is another example of incompetent politicians doing everything possible to make a very bad economic crisis into an unmitigated global catastrophe.

Official data just released reveals that the United Kingdom has experienced its worst recession since quarterly economic output reports were first tabulated in1955. In Q2 of 2020 the UK’s GDP contracted by negative 20.4%. This rate of economic contraction was driven by enforced lockdowns of much of the British economy in the wake of Covid-19, which has stricken the nation  more than other European economies.

The calamitous Q2 economic data means that the UK is experiencing the worst degree of economic  collapse of any major developed economy. As bad as the economic news is, there is reason to believe it will get worse. Even the UK government admits that unemployment, already at record levels, will significantly increase in the months ahead. The government has warned of hundreds of thousands of additional jobs that will cease to exists as the coronavirus pandemic continues to paralyze the economy, leading to an unprecedented level of demand destruction.

The dire economic news from  the UK is reflective of what is transpiring throughout the world. Despite continued talk by many pundits and government officials in leading economies about the likely V-shaped recovery  of economic growth, based on  optimistic forecasts of early vaccine development and improved Covid-19 therapeutics, the hard data offers  increasing evidence of a Global Economic Crisis, in effect the Great Depression of the 21st century.

As expected, George Osborne, Chancellor of the Exchequer in the new British coalition government, unveiled an emergency budget aimed at tacking the UK’s massive structural fiscal deficit. It is being described as the toughest UK budget since the age of austerity that followed in the immediate postwar period after the Second World War. It features a rise in the VAT to 20%, increased income and capital gains taxes, public service wage freezes and across the board programmatic budget cuts. The question that stands is this: will it work?

In my view, as explained in my book (Global Economic Forecast 2010-2015: Recession Into Depression) the United Kingdom, as with many other advanced economies, is in a fiscal and demographic trap. It’s national debt has skyrocketed to almost 70% of GDP; even with the Osborne budget cuts, continuing deficits will send this ratio towards 100% of GDP in the near future. With an aging population, meagre real economic growth at best and an economy that, like a heroin addict, has become dependent on its fiscal deficit fix, the UK economy is in such a trap.

Cut public spending dramatically, warn the critics, and the British economy will enter a double dip recession, and they are right. A renewed economic contraction will diminish tax revenue, largely defeating the purpose  of budget cuts and increased levels of taxation. However, continuing the neo-Keynesian debt folly is even more calamitous, for it will inevitably lead to a total fiscal collapse of the UK.

The real lesson is that the wild spending spree engaged in by policymakers in response to the global economic and financial crisis was flawed, and should have been curtailed before public debt to GDP ratios exploded to unsustainable levels. It is now too late to avoid severe economic pain. The only option left is determining which path will incur the least suffering on society.

Complicating the economic problems in the UK is its disastrous banking crisis, which rivals that of the United States. Much of Britain’s banking sector is insolvent, prompting a costly bailout by Gordon Brown’s government. With plunging tax revenues due to the nation’s economic contraction, the UK has been forced to borrow vast amounts of money to cover the cost of subsidizing the nation’s zombie banks. The combination of bank bailouts and stimulus spending has created staggering budgetary deficits, prompting the governor of the Bank of England, Mervyn King, to warn that further government indebtedness threatens the long-term stability of the UK’s finances.

The IMF actually challenged the official UK government estimate on the cost of taxpayer funded bank bailouts, presented in Darling’s budget at 60 billion pounds. When the IMF issued its own cost estimate of 200 billion pounds, Gordon Brown and his team went ballistic, forcing the International Monetary Fund to lower is projection to an earlier figure of “only” 130 billion pounds, still more than double the official UK estimate. However, strong-arming the IMF cannot alter the fact that the national debt of the UK is climbing at an astronomical rate. Alistair Darling is projecting that the UK will need to borrow more than $500 billion during the next two years, a sum that exceeds the cumulative borrowing of all previous British governments since the creation of the Bank of England more than three centuries ago, according to the leader of the official opposition, David Cameron.

The UK economy has been transformed, in effect, into a candle burning at both ends. Insolvent banks are consuming taxpayer funds at a rate that is intergenerational while the domestic economy tanks and unemployment soars .In the meantime, the national debt is exploding. Deflation is raging now, while the specter of hyperinflation hovers around the corner, as eroding financial fundamentals cripple the value of Britain’s currency. Amid the acute economic and financial crisis afflicting the UK, the nation’s political establishment offers only rosy projections. Tony Blair may have been called George W. Bush’s lap dog, but Gordon Brown is proving to be his economic disciple.

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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.