Global Economic Crisis

The U.S. Commerce Department issued revised figures for the first quarter of 2011. It had earlier reported an annual rate of anemic GDP growth of 1.9 percent for Q1. Even if that number had been accurate, it was insufficient to reverse the catastrophic rate of unemployment and underemployment in the United States. The revised numbers are now in; the Commerce Department now says that actual GDP growth in the first quarter of 2011 was a virtually non-existent 0.4 percent. It also issued preliminary growth figures for Q2 of 1.3 percent, worse than expected. As with the Q1 data, it is likely that future revisions will show that Q2 did even worse.

What conclusions can one draw from this miserable economic data? Two things come to mind. In the first place, any preliminary numbers on the U.S. economy that derive from official government sources are highly suspect, and likely to be overly optimistic. Secondly, after an unprecedented level of public debt that is leading America towards fiscal ruin, the best that can be accomplished by the Washington policymakers is a Japanese-style “L” shaped recession. 

Now, what happens to the U.S. economy when the pump-priming stops, as will inevitably happen?  With revenue at historic lows and public expenditures at unprecedented highs as a proportion of the national economy, the frail American  economic edifice is floating on an ocean of unsustainable debt. While the current fiscal trajectory of the United States is headed towards a calamitous train wreck, a self-imposed and immediate elimination of the deficit, or even talk of such a possibility, will further exacerbate the economic crisis that never ended in America, despite official pronouncements.

 In the meantime, the U.S. political establishment cheerfully debates the debt ceiling. Both sides of the argument are in denial. The bottom line that both Republicans and Democrats refuse to confront is that the authorship of the present economic and fiscal crisis is bipartisan. The only hope of avoiding a full-fledged American sovereign debt crisis and its apocalyptic ramifications is creating a path towards much higher levels of growth that will reduce the ratio of debt to GDP to levels that can be sustained into the future. Instead of a serious policy debate, however, both parties are engaged in an ideological debate on cloud nine, divorced from the miserable reality of an American economy that is imploding.

If this is not an indication of dysfunction in Washington, I don’t know what is. Maybe the policymakers are not worried because they know that Fed Chairman Ben Bernanke will soon ramp up his printing press again. I am more inclined towards the vision of Dante than Bernanke, when it comes to the future of the U.S. economy.

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It is not the “Road To Morocco” ( for those who remember the classic film with Bing Crosby and Bob Hope) but he proverbial road to ruin that Fed Chairman Ben Bernanke is leading the U.S. economy towards, at flank speed. Under his leadership, the last meeting of the Federal Reserve’s FOMC of 2010 confirmed the zero interest rate policy being maintained, and the policy decision to purchase $600 billion in long-term U.S. Treasury debt. This, despite claims by many punch-drunk economists that the American economy is recovering, and at a heightened pace. Give Bernanke credit for one thing; he knows the supposed economic growth is not real, but rather marginal increments painfully extracted through massive public borrowing. But his solution, in effect creating even more public stimulus, this time through monetary policy, is totally antithetical.

Supposedly, Bernanke’s stratagem is to force down long-term interest rates through his $600 billion second round of quantitative easing. However, the bond market is reacting in a manner contrary to expectations. With Europe already mired in a deep sovereign debt crisis, the prospect of a surge in now record low interest rates on U.S. sovereign debt is becoming increasingly likely, due to the Fed’s policies. Should the U.S. encounter anything remotely like the spike on bond yields currently plaguing Europe, the game is up. Not even Bernanke could print enough money to cover the ruinous implosion an increasingly likely sovereign debt crisis will have on the already fragile American economy.

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The NBER has issued a consensus determination that America’s Great Recession, which it said began  in December 2007, came to a technical end in June 2009, after GDP growth resumed. It is the NBER that economists look to in making the call on the initiation and termination of economic recessions in the United States.

While declaring the Great Recession over, the NBER concedes that the recovery has been unusually weak, after enduring the sharpest and longest downturn since the Great Depression of the 1930s.

I will put my own spin on the NBER report. It may be technically correct, but the resumption of GDP growth was based entirely on a massive explosion in public debt, the consequences  of which are excluded from the NBER’s take on the American economy. However, by acknowledging the anemic character of the recovery, it is indirectly pointing to the unsustainability of the recovery. Declining consumer spending capacity, essential for sustained economic growth, will ensure that the massive public debts cannot be serviced in the long term. This will lead to a global sovereign debt crisis and likely long-lasting economic depression.

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NYU Economics Professor Nouriel Roubini believes that the risk of a double dip recession is growing in the United States. He assesses the  probability of a double dip at 40%, the other scenario being subpar economic growth (under one percent), which feels like a recession in terms of high unemployment, growing public deficits, declining home values and increased losses among banks and financial institutions.

“You don’t need negative economic growth to feel like a recession  when growth is well below trend growth,” Roubini said in a recent Financial Times interview. Even if a double dip is technically avoided in the last quarter of 2010, Nouriel Roubini’s forecast for 2011 is dire. He sees the risk of a double dip recession increasing, along with widening credit spreads and interbank lending rates. Compounding his gloomy projection, Roubini sees little left for policymakers to grapple with, either on the monetary or fiscal side. In particular, he sees another flurry of quantitative easing by the U.S. Federal Reserve as being “impotent.”

The downbeat perspective of Roubini on the U.S. economy extends to Europe, where he believes the recent impressive growth figures in Germany are merely temporary. Furthermore, he points out, Germany is the best performing economy in the Eurozone, where the remaining countries are facing disaster. Half of the Eurozone is already experiencing a double dip recession. In addition, Japan is courting a double dip, and even strong emerging economies such as China are showing signs of an economic slowdown.

Overall, I have not seen Professor Roubini so gloomy on the state of the global economy since his prescient warnings of  financial Armageddon approaching in the months leading up to the implosion of the investment banks in the summer and fall of 2008.

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If any further proof is needed that the U.S. economy is headed towards a double dip recession, the latest statistics from the Labor Department provide it. The most recent figures, just released, show that initial jobless claims have risen to 500,000. This is the third consecutive week of rising unemployment claims, and the worst numbers in nine months.

In March 2008, initial jobless claims rose to a peak of 651,000. By July 2010 they had dropped to 427,000. The green shoots corner over at the Federal Reserve and U.S. Treasury were celebrating the “success” of the Obama stimulus spending, and expected the figures on initial unemployment claims to soon drop below 400,000, a sign that the job market in America was recovering. Instead, however, this figure has soared to 500,000. The reason is simple. There has been no recovery or end to the economic crisis. All that has been accomplished is that Wall Street was bailed out, at the cost of transferring vast amounts of debt from the private to the public sector.

And what are the august politicians of Washington DC doing while the U.S. economy continues its implosion? Surely they must be working night and day trying to salvage the fast eroding American economy. Perhaps they would, if they had not found other fish to fry. For instead of addressing the nation’s profound economic crisis, they are obsessed over the proposed location of a new Islamic Center in Lower Manhattan  and whether or not it should be moved a few blocks, as well as the vital existential question of President Barack Obama’s religious identity (some on Capital Hill feel he is not really a Christian, and might actually be a secret Moslem).

It would appear that the American political establishment has gone deeply insane, and its collective madness will accomplish nothing constructive on behalf of the U.S. economy.

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In  the last 100 years, encountering a year in which the U.S. federal government has achieved a balanced  budget has been as rare as the chance that Vladimir and Estragon will actually meet Godot. As with most Western economies as well as Japan, fiscal deficits by sovereign governments have become so normative that a term has long been in vogue to describe this phenomenon, the co-called “structural deficit.” But all that was prior to the onset  of the global financial and economic crisis, which erupted in 2008 with the collapse of Lehman Brothers. We are all now in new territory, never before encountered  by sovereign governments on such a prolific scale. Welcome to the era of the structural mega-deficit.

In compiling data for my new book, “Global Economic Forecast 2010-2015: Recession Into Depression” (http://www.createspace.com/3403422), I recognized that the size of current and projected fiscal deficits for the United States and other advanced and major economies was so much greater than typical structural deficits, a new terminology was required. The term I have adopted  in my report, “structural mega-deficit,” implies a whole new and unprecedented reality for public financing. In essence, a deficit which approaches or exceeds 10% of a national economy’s GDP, and has an aspect of permanence similar to previously tolerated structural deficits, has entered the fiscally turbulent terrain of structural mega-deficits.

As with private consumers, sovereign economic policymakers have become addicted to debt, nowhere more so than in the United States, Western Europe and Japan. For example, when the Eurozone was established with a single currency, participants were expected to show “prudent” fiscal management of the public finances, by ensuring that their national deficits did not exceed 3% of national GDP. Heaven forbid a balanced budget had even been suggested as an ideal target. Now, however, even the Eurozone’s supposedly responsible 3% cap on annual deficit to GDP ratios is coming apart at the seams, witnessed most recently by the  fiscal crisis in Greece, where the current  budget deficit is expected to reach 12.7% of that nation’s GDP.

It is the United States, however, where the emergence of the structural mega-deficit reaps the most tangible dangers for the global economy. In the past, key economic policymakers throughout the world maintained that a structural deficit of around 3% of GDP could be easily sustained  as long as the national economy produced a modest level of growth. However, there exists no mathematical models that demonstrate how any nation’s economy, including that of the U.S., can sustain structural mega-deficits. With the official U.S. deficit for  the 2009 fiscal year having reached 10% of GDP and the 2010 federal budget likely to produce a deficit in the range of $1.5 trillion, America’s public finances are clearly in a debt trap that is unsustainable by any logical measure. The Congressional Budget Office projects a cumulative deficit of $9 trillion over the next decade; based on the CBO’s track record, the actual deficit is likely to be much worse.

One of the strange paradoxes for the U.S. economy is that in 2009, even with a tripling of the national deficit, the annual payment by the federal government for interest on the national debt was actually lower than the prior year. This was due to the unique and anomalous conjunction of much of America’s national debt being financed by short-term Treasuries with historically low interest rates established by the Federal Reserve. However, with growing doubts on the part of foreign lenders as to the long-term credit worthiness of the United States, it is inevitable that the days when much of America’s growing debt load could be financed at almost zero interest rates will soon end. With  the public debt of the United States  based on an average turnover for refinancing  of four years, the shortest timeframe of any large indebted economy, a spike in bond yields will add potentially hundreds of billions of dollars to the annual U.S. deficit. A time may not be far off when current taxes and other federal government revenue will cover less than half of the annual expenditures of the federal government. All this will be occurring as outlays for Social Security and Medicare begin to exceed revenues, adding further to the structural mega-deficit, and at a rate that will become increasingly voracious.

The ultimate tragedy about the present and future danger of structural mega-deficits in the United States and other major economies is that this is an impending train wreck that can be viewed  from a great distance before its catastrophic impact. Yet, in spite of the clear and obvious unsustainability of structural mega-deficits, with very few exceptions the political leadership in the United States, in both the Democratic and Republican parties, is conspicuously silent.

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As if on cue, the Dow Jones index soared to the skies in sequence with the Commerce Department’s triumphant announcement that the third quarter GDP growth in the United States was a robust  3.5 %. After 4 consecutive quarters of economic contraction, the pronouncement that the American economy was now growing, and at a stronger rate than many experts had forecasted, the cheerleaders on Wall Street are celebrating the end of the recession. Hallelujah, the Great Recession is over, the stimulus package has worked!

Not so fast.

Let us journey back into recent history of just over one year ago. It is August 28, 2008 and the Commerce Department has just released its revised growth figures for the second quarter of 2008. It turned out, according to the statisticians at  the Commerce Department, that the American economy grew at a much faster pace than originally reported. The revised Q2 GDP growth figure for 2008 was 3.3%, nearly identical with the Q3 figures now being reported in 2009. The pundits rejoiced at this magnificent economic news, proclaiming that these numbers reflected the success of the $150 billion deficit-driven  stimulus package approved by Congress at the beginning of the year. Analysts proclaimed that the impressive growth figures for  Q2 of 2008 meant that the U.S. economy had dodged a bullet, and thanks to loose fiscal and monetary measures, there would be no recession.

Two weeks after the release of the revised and supremely optimistic quarterly growth figures by the Commerce Department, Lehman Brothers went bankrupt, the global financial system went into cardiac arrest and a synchronized recession struck virtually every economy on the face of the earth.

Before celebrating the glorious Q3 numbers for the U.S. economy, I recommend that prudent observers reflect on the massive levels of public indebtedness required to create the accounting metrics that can demonstrate economic growth simultaneously with the devastation of the real economy  and continuing increases in an already staggeringly high level of unemployment. Furthermore, digest the reality that car sales generated by the recent “cash for clunkers” program contributed nearly  1.7% of the 3.5% growth in GDP in Q3. Then, looking at the recent history referred to above, ask the hard questions on how sustainable the trajectory suggested by the third quarter numbers really is.

In my view, the 3.5% Q3 numbers of 2009 are as reliable an indicator of future economic growth as were the 3.3% GDP growth figures in 2008. As George Santayana stated, those who forget the past are condemned to repeat it.

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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In Q2, Denninger points out, the government’s spending grew by 10.9%, contributing to a positive movement of 3.3% in the second quarter’s reported GDP. Remove that 3.3% from the equation, and the actual Q2 data for the consumer economy witnessed an overall contraction of -5.2%, a figure substantially worse that the official government Q2 report.

The statistical argument raised by Karl Denninger warrants careful consideration by all those who are seeking an accurate gauge of what is actually transpiring in the real economy. Furthermore, the track record of both the Commerce Department and Labor Department has not been exactly stellar with regard to its statistical accuracy in measuring the impact of the Global Economic Crisis on the American economy. Simultaneously with the release of reassuring Q2 numbers, the Commerce Department also admitted it had gotten its evaluation of the recession’s affect on the U.S. economy’s GDP from its onset in Q4 of 2007 through the latter part of 2008 stupendously wrong, now conceding that the actual contraction was -1.9 percent instead of -0.8%, as previously reported.

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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No one can accuse Obama of not recognizing that the U.S. faces a severe economic recession. Most of his administration’s initial activity has centered around crafting policy responses to the recession, primarily involving the unprecedented expenditure of borrowed money in an attempt to revive growth. However, the very character and essence of his administration’s economic policymaking reveals the lack of comprehension of how dire and unique the Global Economic Crisis is on the part of President Obama. At his core, Obama believes that the American economic system is basically sound, but slid into a severe recession because of irresponsible behavior on the part of some actors within the financial oligarchy. Hence, by restoring growth through deficit spending and enacting a new regulatory regime to restrict the destructive greed of some Wall Street tycoons and bankers, we can return to the happy economic days of yore. In effect, Obama is acting like a nostalgia buff, hoping that the correct policies will recapture the solid economic model of pre-George W. Bush America. Unfortunately, this view of America’s political economy is mythological. The U.S. economy was unhinged under the presidency of Bill Clinton as much as it has been under Bush, yet Obama has chosen Clintonites to serve in the most important economic policymaking positions in his administration. Cheerleaders for a failed model will not lead America to a new economic Jerusalem.

A major part of the problem Obama is facing is philosophical. He is following a conventional view of counter-cyclical economics; when a recession occurs, the sovereign can go into debt and use borrowed money to artificially increase demand and thus arrest the decline in growth. Once the recession is arrested, government fiscal policy can return to a more prudent policy of balanced budgets, as restored economic growth eliminates the need for the government to maintain demand. Sounds simple, as this has been enshrined as the recession-fighting bible created by economist Maynard Keynes. The only difference, the Obama administration would argue, is that this recession is much bigger than previous economic downturns, and therefore requires much more significant deficit spending. Otherwise, the Keynesian model remains unaltered.

This perspective by the Obama administration, in my view, is myopic. Like many contemporary politicians and economists, President Obama and his senior economic advisors have misread Maynard Keynes. Contrary to public perception, Keynes was no economic radical, but a centrist in dealing with the challenge of managing economic cycles within a capitalist system. Though Keynes did believe deficit spending was justified as a means to stimulate economies in deep recession, he also advocated budget surpluses during times of relative prosperity. In effect, Keynes believed in “rainy day” economics; in times of plenty you put away a little fiscal cushion that can then be spent during a recessionary period to enable the sovereign to maintain economic demand during a time of private sector contraction and declining tax revenues. This is actually a conservative philosophy that many farmers are familiar with.

In the United States, even during times of sustained economic growth, massive government deficits have been de rigeur during the past nine years, in the process doubling the national debt. There is no rainy day fund to speak of, so the staggering deficits that are now being enacted by the Obama administration are, in my judgement, fiscally unsustainable. Already, the projection for the current fiscal year’s deficit has risen by $200 billion to a stratospheric $1.8 trillion; my own estimate is that it will top $2 trillion. Looking into the future, the current Obama fiscal agenda foresees annual deficits of $1 trillion or more for several years into the future, gambling that the recession will be short-lived, with growth returning as early as the last quarter of 2009, leading to increased tax revenue and declining deficits.

But are we in a recession? The current downturn is already the most protracted and destructive since World War II. However, there is another ingredient that has been added into this toxic economic stew: globalization. We are in a Global Economic Crisis in which synchronized contractions across the world create multiple negative feedback loops that reinforce the underlying negative causation. The subprime collapse in the United States crippled banks in the U.K. and devastated Japan’s export machine; the Eurozone economic contraction is now impacting America’s export driven manufacturers. When China’s exports to America decline, commodity exporters and peripheral economies that supply value-added components to China’s export goods get whipsawed. This phenomenon is occurring at an accelerating pace, despite attempts by the Obama administration to portray minor statistical anomalies to the prevailing trend as “rays of hope” and “green shoots.” Reading tealeaves is no substitute for critical analysis.

The ongoing Global Economic Crisis has proven to be so severe, sustained and virulent that if it is not yet a global depression, it is embarked on that dangerous trajectory. However, another flaw in the Obama administration’s approach is its failure to recognize that a substantial part of the financial system is rotten to the core, and not merely a fundamentally sound system with a few bad applies populating it, who can be restrained by improved regulation. More importantly, the Obama economic team seems to have convinced themselves that “mind over matter” is the best palliative for the nation’s stricken banking system. When a sovereign’s private banks are essentially insolvent and not engaged in normal loan activities, this is another manifestation of an economic depression. Rather than admit the truth, the Obama administration cobbled together a make-believe series of bank stress tests, which supposedly show that America’s banking system, with a few minor problems, is essentially sound and fiscally healthy. This conclusion is an utter fraud, designed to artificially create a climate of economic confidence. It won’t work, and by delaying an honest approach towards the nation’s crippling level of bank insolvency, the policymakers are insuring that the final cost of the inevitable day of reckoning will be far more costly to the taxpayers.

The economist Hernando de Soto has captured the essence of the Global Economic Crisis as few others have. In his view, the Western world, and principally the United States, who have for so long railed against Third World inefficiency and corruption, have created the largest, most toxic shadow economy in the history of human civilization. More than one quadrillion dollars in unregulated financial derivatives paper, according to de Soto, has destroyed inter-bank and financial counterparty trust to such an extent, credit flows have largely frozen despite unprecedented levels of taxpayer-funded borrowing to bailout the global financial system. Nothing short of an honest accounting of the true value of the toxic assets underlying these colossal derivatives products, which equal twenty times the entire world’s GDP, can put the global economy on the road to recovery. Until these unregulated “unknown unknowns” become fully transparent, all other government interventions, including Obama’s massive borrowing binge, are doomed to failure. Sadly, as the bogus bank stress tests reveal, President Barack Obama and his Clinton-era economic advisors have financial transparency as the least important objective on their agenda.

It seems that President Obama, despite his obvious leadership gifts and towering intellect, has chosen to place his faith in a team of advisors who are tied to the Wall Street oligarchy by an umbilical chord than cannot be severed. In a sense, Obama is following the path of the last Soviet leader, Mikhail Gorbachev, who also sincerely wished to resolve his country’s economic problems, but believed that the system was fundamentally sound and only required a modicum of reform to correct its distortions. Only after the collapse of the USSR did Gorbachev conclude that the system itself was unsustainable. Now it appears to this observer that President Obama may be fated to travel the same path as Gorbachev, and like him end up as a valiant failure.

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In addition to the $750 billion TARP program to bailout banks and Wall Street that was approved last October by Congress, untold trillions of dollars have been provided or promised to the financial industry by Treasury and the Federal Reserve, off the books of the official budget. A most recent estimate puts this figure up to $13 trillion, nearly equal the entire GDP of the United States. The official national debt of the U.S. now tops $11 trillion, and may surpass the GDP within two years. In addition, state, county and local governments across the country are sinking into an ocean of red ink. In effect, the entire credit worthiness of the United States has become the “lender of last resort” for the “too big to fail” entities. The financial elites of America are no doubt uncorking their champagne bottles, as their privileged excesses are held whole through the ultimate backstop; the indebtedness of not only the current generation of Americans, but also their children and perhaps even their grandchildren. It appears that the oligarchs are so devoid of historical understanding, they fail to recognize that this subsidization of their Wall Street empire of credit default swaps and gargantuan compensation packages can only be sustained if the United States can forever go into debt. And in order to believe that the U.S. is ultimately “too big to fail,” they have to be equally ignorant of basic mathematics, the ultimate irony for the supposed magicians of high finance.

But what if a point is reached when the rest of the world is no longer willing to lend its scarce capital to the United States, and subsidize its Wall Street bailouts and extravagant military industrial complex? No doubt, the oligarchs would then use their political muscle to enact higher taxation on middle income Americans. This may come in the form of higher consumption taxes; however, a growing possibility is the hidden tax of inflation. A dirty secret that is increasingly being discussed by economists in quiet corners is that there is no way the United States can possibly pay for the servicing of its massive, expanding national debt without resorting to inflation.

What the financial and political elites have not analyzed are the consequences for America’s social cohesion and viability should the nation’s exploding debt burst beyond the point of containment. For unlike AIG, Citigroup and Goldman Sachs, the United States does not have the option of calling upon others to rescue it from its own excesses, with the justification being that it is “too big to fail.”

It strikes me that most Americans, not only the financial elites but across the nation’s social fabric, have a distorted image of how their country fits in with the rest of the world amid the Global Economic Crisis. In a chilling parallel to our times, Amalrik writes about the paralysis of isolation as a factor that would eventually bring about the collapse of the Soviet Union. In 1970 he wrote, “This isolation has created for all—from the bureaucratic elite to the lowest social levels—an almost surrealistic picture of the world and of their place in it. Yet the longer this state of affairs helps to perpetuate the status quo, the more rapid and decisive will be its collapse when confrontation with reality becomes inevitable.”

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