Global Economic Crisis

In his historic contribution to America’s fiscal imbalance, current Federal Reserve chairman Ben Bernanke has even surpassed the corrosive reputation of his predecessor, Alan Greenspan. It has been on Bernanke’s watch that the previous structural deficits of the U.S. federal government have been transformed into even more alarming structural mega-deficits. Bernanke knows that a fiscal firestorm is brewing. So how do you continue with policies that encourage annual deficits measured in trillions of dollars while looking responsible on the deficit issue? Why, just testify before Congress and speak eloquently of your serious concern about the deficit.

This is what the most powerful man in America, an individual who can make fiscal and monetary decisions that will bankrupt your children and grandchildren without interference from legislative or executive or judicial branches of government, had to say to the august members of Congress:

“Although sizable deficits are unavoidable in the near term, maintaining the confidence of the public and financial markets requires that policymakers move decisively to set the federal budget on a trajectory toward sustainable fiscal balance.”

Trajectory toward sustainable fiscal balance? The only clear trajectory I see is an irreversible rendezvous with national insolvency, sparking a catastrophic global economic depression.

global economic crisis ben bernanke, Fed Chairman Ben Bernanke, federal reserve, u.s. budget deficit

According to the U.S. Treasury Department, America’s federal government set a record for red ink in February 2010, accumulating a deficit in just that one month of  $221 billion. In comparison, the deficit for February 2009 was $194 billion.  Year on year, the February deficit grew by 14%. No doubt, the Obama administration is spending and borrowing at a record pace, in order to put as much of a dent as possible in America’s staggering unemployment number before the midterm election in November. Thus, short term political expediency is given a higher priority than the long term fiscal health of the nation.

The massive U.S. government deficits are not only a function of rapacious federal spending, but also a reflection of plummeting revenues. In the year to date corporate tax receipts were $45.4 billion, compared to $52.8 billion during  the same period in FY 2009, while individual income tax receipts declined by 14%. Where does this end? Bar an economic miracle leading to instant double-digit real growth, fiscal doomsday lies before us, as policymakers in the United States and other advanced economies sail on at flank speed towards the mother of all sovereign debt crises.

global economic crisis sovereign debt crisis, u.s. budget deficit, u.s. treasury department

Ten years ago, the Clinton administration submitted to Congress a proposed federal government budget of $1.9 trillion. Now, the Obama administration has released  a proposed budget for the upcoming fiscal year. It is a whopper: more than $3.8 trillion. As inflation has been low over the past decade, if official U.S. government statistics are to be believed, the great majority of this doubling  in federal spending over the past decade has been actual increases in real terms.

More disturbing than this explosion in federal outlays has been the record deficit that is being projected, following on the heels of previous record deficits. The red ink being forecast for FY 2011 is an eye-popping  $1.56 trillion. Yet, President Barack Obama claims that this is a first step towards deficit reduction.
 
I beg to differ with the president. Far from being a move towards fiscal responsibility, this massive spending fest, with a projected deficit that is the equivalent of more than three quarters of total federal government spending a mere ten years ago, is the clearest indication yet that U.S. government spending is out of control, and has entered the fiscal twilight zone. As I project in my new book, “Global Economic Forecast 2010-2015: Recession Into Depression,” this dangerous path is unsustainable. The ultimate consequences will be frightful.

global economic crisis $3.83 trillion u.s. budget, obama budget deficit, u.s. budget 2011, u.s. budget deficit, u.s. budget record deficit

As a synchronized global recession hammers the economies of Europe, Japan and North America, the last refuge of those who still believe in a short-lived economic downturn, with no danger of a worldwide depression, has been China. Everyone and their cousin, it seems, are banking on China to lift the entire planet out of the clutches of the Global Economic Crisis. The latest export figures issued by the Chinese authorities, however, demolish any rational expectation that the world’s third largest economy will reverse the ferocity of the synchronized global recession.

Exports from China in February declined 25.7 % from one year ago, a staggering rate of contraction that is far worse than the expectations of analysts. The clear message is that the Chinese economy is being fully impacted by the Global Economic Crisis, despite the forlorn hopes of some that Beijing would successfully decouple its economy from the global recession.

The entire center of gravity of the Chinese economic machine is export trade. No matter how one may try to formulate some new theory of Chinese economic development based on the mythology of “domestic demand,” it is China’s transition into the factory of the world that transformed the formally stagnant economy of Mao’s Cultural Revolution into a 21^st century behemoth. It is for that reason that a decline of one quarter in China’s exports must be seen for the economic catastrophe that it is, both for China and the world.

Along with the plunging in exports has been the narrowing of China’s once vast trade surplus. Until recently, China typically experienced a monthly current account surplus of $40 billion. In February, this figure shrank to less than $5 billion. This diminution in the current account surplus is significant, for it was through large trade surpluses that China was able to accumulate large foreign exchange reserves, currently in the range of $2 trillion dollars. This reserve enabled the Chinese government to purchase nearly a trillion dollars in U.S. Treasuries, a critical factor in providing credit to cover the staggering budgetary deficits incurred by the United States. A continuing trend downward in both overall Chinese exports and her current account surplus, combined with the need to now fund Chinese deficit spending for that nation’s own economic stimulus program, translates into less capacity for Beijing to loan the U.S. Treasury money. This dismal convergence occurs precisely when the projected U.S. government deficits are expected to increase exponentially.

China’s export contraction is bad news for many reasons. Domestically, the Chinese authorities worry, with good reason, that social stability and cohesion will be at risk due to increasing levels of unemployment. Fewer Chinese exports also means that Beijing imports less from the rest of the planet, further exacerbating the Global Economic Crisis. Most vexatious of all, however, is the diminished ability of China to be the banker of last resort to the debt-ridden U.S. Treasury. Not enough attention has been devoted to the contradiction of America planning multi-trillion dollar deficits annually for years to come at exactly the time when China’s now sputtering export machine likely means that the number one source of credit for the United States will no longer be able to satisfy the credit needs of the American government.

The latest export data from China, when placed in the context of the factors listed above, points to a perfect fiscal storm brewing that will prove shattering to the U.S. economy and a volatile accelerant in the mad rush towards a global economic depression.

global economic crisis china trade surplus, chinese exports decline, chinese purchase u.s. treasuries, u.s. budget deficit