In an Op-Ed  piece in The New York Times, Paul Volcker, chairman of the Federal Reserve during 1979- 1987, issued an eloquent warning against economic policymakers deliberately increasing the inflation rate as a way of dealing with escalating economic and fiscal problems that have defied all other policy measures. Volcker’s Op-Ed, entitled, “A Little Inflation Can Be a Dangerous Thing,” warrants serious reading by all concerned with the global economic crisis. Paul Volcker knows what he is talking about; it was he as Fed Chairman during the Reagan administration who squeezed high inflation out of the U.S. economy through a draconian process of high interest rates.

Here are extracts of what Volcker wrote in his Op-Ed piece:

“There is great and understandable disappointment about high unemployment and the absence of a robust economy, and even concern about the possibility of a renewed downturn. There is also a sense of desperation that both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interest rates.

“So now we are beginning to hear murmurings about the possible invigorating effects of ‘just a little inflation.’ Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the ‘animal spirits’ of business, or so the argument goes… Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth… At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible.”

In particular, due to the global sovereign debt crisis, economists and policymakers are discussing behind closed doors the desirability of a 5-6 percent annual inflation rate as a way of reducing the burden of national debts in advanced economies. As if the experience of Weimar Germany and Zimbabwe wasn’t enough to show the irrationality of such an approach, Paul Volcker again reminds us of the futility of engineering deliberate inflation as a policy “cure” for our economic woes. One can only hope that the former Fed Chairman’s clear warning is heeded.

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In a move that is no longer a surprise, one of the leading credit rating agencies, Moody’s, did the downgrade routine. This time it was two leading French Banks; Societe Generale and Credit Agricole. The cause was their significant exposure to sovereign debt from crisis-ravaged and virtually insolvent Greece. Moody’s made clear that these two French banks may be due for future ratings downgrading.

The Eurozone politicians, especially in France and Germany, are in a panic over Greece and its insoluble debt crisis. They are currently doing what they have done repeatedly since the crisis erupted; reassuring the markets that the brilliant, highly competent politicians in Europe have the situation under control, and Greece will not default. At this point, no one with an iota of common sense believes them. Furthermore, the markets are increasingly aware of-and frightened by- the near certainty of a Greek debt default, perhaps followed by Portugal, Ireland, and in a worst case scenario, Spain and Italy. What this means is that the major banks in Europe, in particular France and Germany, are sitting on a mountain of worthless assets. This crisis is far from over, and the ratings agencies are far from done with the downgrading.

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What savvy observers have long predicted, a default by Greece on her massive public debt, has  until recently  been refuted by Eurozone politicians as even a possibility. These policymakers have already gone through two massive bailouts, funded by European taxpayers, involving more than 200 billion euros, to keep Greece from tottering over the edge. However, the marketplace, and even below the radar some European politicians, especially in Germany, have now been conceding what is so obvious to almost every other knowledgeable observer. Athens will default on her debt. With an imploding economy, in which ironically the austerity measures imposed on Greece as the price of the bailouts have worsened her public debt to GDP ratio, and no possibility of inflating her way out of default by currency devaluation (the trap of being in a common currency-the euro), mathematical certitude cannot be overcome. Greece is in an unsustainable sovereign debt trajectory.

Two year Greek government bond yields have soared above the 50 percent range. Such yields only exist in a universe where the marketplace prices in the certainty of a sovereign debt default.  And this is only the beginning. There is not only Portugal and Ireland next in line; there is also Italy and Spain. Then there are the French and German banks, highly exposed to a Greek sovereign debt default. In other words, Lehman Brothers on steroids. The doomsday debt crisis scenario I predicted in my book (Global Economic Forecast 2010-2015: Recession Into Depression) is being increasingly vindicated by a fiscal architecture that is unraveling with surreal velocity.

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Not much talk anymore about green shoots from U.S. Federal Reserve chairman Ben Bernanke. Despite infinite and very creative attempts by politicians in the U.S., the U.K. and the Eurozone to twist and spin economic statistics to make it appear that the world is indeed recovering from the global economic crisis, the data that is emerging is so bad it can no longer be “massaged.” The latest jobs report from the United States showed that in the month of August, zero jobs were created by the economy. The official news was bad by itself, but it hides an even worse reality. Even with no net new jobs created, the official discounted unemployment rate in America remained at 9.1percent. With approximately 200,000 new adults entering the work force each month, the only way that could have happened with no change in the U3 unemployment rate is if 200,000 discouraged job seekers left the labor market, or were merely eliminated form the ranks of the unemployed by the slick action of a statistician’s pencil.

While America’s jobs crisis worsens, Europe has its own woes to contend with. The sovereign debt crisis is clearly getting more dangerous, with both Spain and Italy increasingly vulnerable to the bond vigilantes. And the U.K. is experiencing sluggish or non-existent economic growth, in the process undermining the objectives of its austerity program. The global economic and fiscal situation is so bad, even the IMF is starting to hit the panic button. I think the happy talk from politicians may just about have run out of steam.

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As I predicted in my book, “Global Economic Forecast 2010-2015: Recession Into Depression,”  President Obama’s $787 billion stimulus package has been a conspicuous failure in positively impacting the staggeringly high rate of unemployment in the United States. As is well known, massive job losses occurred in rapid order after the financial calamities of mid and late 2008. I projected in my book that at a vast price in expanded public debt, at best the Obama administration would stabilize unemployment rates at an historically high level.

Now we have the drumbeat of the 2012 presidential campaign sounding louder. Barack Obama is an astute politician, and knows his chances of being reelected to a second term are dismal unless he can tackle, or seem to be tackling America’s jobs crisis. In that connection, Obama has announced he will make a speech to a joint session of Congress on September 7. The speculation is that he will propose  tax credits for companies that add workers to their payrolls, and stimulus spending on infrastructure. With the Republicans controlling the House of Representatives, there is no chance he will get any serious legislation passed involving additional spending. At best, the Obama speech that is pending is an electioneering gimmick, and will prove as effective as the administration’s  overall economic crisis policy.  In the meantime, while the president drafts his speech and the political establishment engages in its usual partisan games, a growing group of leading economists are forecasting a double dip recession in most advanced economies, including the United States. That increasingly likely development will have more impact on the jobs crisis than even one thousand presidential speeches.

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Following in the wake of Standard & Poor’s downgrade of U.S. government debt, Moody’s Investors Service lowered its rating of Japan’s debt by a notch, now sitting at Aa3. Japan is the most indebted major advanced economy, with a government debt to GDP ratio in the range of 200 percent. In addition to the severe natural disasters that have hit Japan this year, Moody’s stated that, “over the past five years, frequent changes in administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies.”

Japan is the third largest economy in the world, only recently slightly eclipsed by China, which is now number 2 in terms of GDP. Though Japan also has large external assets that in part offset its massive sovereign debt (including U.S. Treasuries!), its worsening demographic situation along with government paralysis  creates a grim trajectory for its sovereign debt. The Moody’s rating downgrade, on top of S&P lowering its rating on U.S. government debt, tied in with the worsening debt crisis in Europe, points to an escalation in the global sovereign debt crisis, with economic ramifications that can only be highly negative.

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 Today the Dow Jones rose by more than 300 points. This was not due to positive economic news; to the contrary, negative news drove the NYSE up. How is it that the cascading torrent of appalling economic data would raise cheers on Wall Street? In the bizarre economic and financial world of today, the computer program traders and investors on Wall Street are convinced that the worsening economic situation globally will compel Ben Bernanke, Chairman of the Federal Reserve, to unleash a third bout of quantitative easing. In the myopic universe of the Wall Street crowd, this is considered the most wonderful  thing that can happen on our planet.

The two bouts of quantitative easing already engaged in by the Fed have been, by consensus of most credible economists, ineffectual. What this mad money printing did accomplish was to inflate commodity prices, creating a drag on the global economy. But if at first you don’t succeed, try again, so say the Wall Street oligarchs. And so when the central bankers convene for their annual conclave in Jackson Hole, Wyoming the Wall Street oligarchs will be hoping and praying for QE3.  Only a clique infused with short-term greed and distorted illusions could believe that bad economic news leading to Bernanke unleashing another round of printing money will end the global economic crisis.

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It is no longer a small group of prognosticators (including this blog) who are expressing grim thoughts on the trajectory of the global economic crisis. More and more, respected authorities on global finance and economics are weighing in with their dire predictions. Nouriel Roubini openly asks the question,  “Is Capitalism Doomed?”  Pimco’s Mohamed El-Erian indicates that the bond markets are pricing in a double-dip recession. Equities trading in bourses throughout the world are experiencing levels of volatility not seen since the onset of the crisis in the summer and fall of 2008.

It is now just a remnant of pundits who still believe that the global economy “recovered” after the reckless expansion of sovereign debt following the collapse of Lehman Brothers. These proverbial neo-Keynesian optimists have chosen to shut their eyes and cover their ears. But others who can sense what is happening in advanced and major developing economies know that we are in the midst of  something that does not have a positve ending.

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Speaking at the Asia Society conference in Australia, Robert Zoellick, president of the World Bank, issued a sharp warning on the direction of the global economic and sovereign debt crisis. He told journalists, “I think we are entering a new danger zone and I think that confidence in economic leadership has been slipping and it will be important that the primary economic actors take steps both short and long term to restore that.”

The words of Zoellick reflect unusual candor from a high level policymaker involved in global economic activity.  In essence, he confirms what my blog has been stating for many months; the empirical evidence suggests that the political actors in the major advanced economies are utterly inept when it come to economic and fiscal policy, and their collective incompetence is sending the whole world over a cliff.

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In 2009, I published a short book entitled “Global Economic Forecast 2010-2015: Recession Into Depression.” At the time I made my original forecast, sovereigns across the globe were accumulating massive levels of public debt, unprecedented in economic history, with supposedly two objectives in mind: 1. stabilize the world’s banking and financial systems, which were in danger of total collapse after the implosion of Lehman Brothers and the near extinction of other investment banks; 2. compensate for a fall-off in private sector demand through stimulus spending in order to halt the free-fall contraction in GDP.

The policymakers cheered their actions, which essentially transferred the bad debts of the private sector onto  the publics’ balance sheet, and created a new modality in sovereign fiscal policy, which I  named “structural mega-deficits.” I did not share the optimism of the policymakers in the United States, United Kingdom and across the Eurozone. The premise of my forecast was that this massive rise in public debt to GDP ratios among the advanced economies would at best buy, at very high cost, a short period of stabilization at a level below peak economic performance. Eventually, however, the level of sovereign debt would exceed the capacity of the afflicted economies to sustain, leading to a full-fledged sovereign debt crisis towards the latter part of 2011. This would precipitate, by 2012, a global economic depression.

The current developments involving the European debt crisis, downgrading of U.S. government debt by S&P and the volatility in the equity markets are tracking to a high degree of exactitude my original forecast, dating from 2009. If these developments continue to track as I expect, my prediction of a global economic depression by 2012 is a virtual certainty.

Is it possible for my forecast to be wrong? Obviously, any prediction about the future can be incorrect, or distorted by unforeseen events. However, one important factor makes my forecast more likely to be proven correct than in error. Unlike the original global financial crisis of 2008, policymakers and central bankers across the globe have largely run out of policy bullets. They lack the fiscal integrity or capacity for further debt expansion to underwrite massive levels of new borrowing  required for future bailouts  of banks, financial institutions and especially larger sovereigns such as Italy and Spain, not to mention the U.S. and U.K. and possibly Japan.  The recent announcement from Federal Reserve Chairman Ben Bernanke that a zero interest rate policy will be maintained for at least another two years is a clear signal that the policymakers realize that their wild gamble with fiscal and monetary policy has failed, and they are baffled as to what options remain for them to exercise. Markets are beginning to render their  own assessment on the results wrought by the policymakers since the origins of the current global economic crisis.

The failure is not only on the level of fiscal and monetary policy. As strongly inferred in the downgrade of U.S. government debt by ratings agency Standard & Poor’s, the democratic political system  in the United States, and by extension in the U.K. and Eurozone, has been rendered dysfunctional due to general ineptitude, economic ignorance and ruinous internecine political conflict.

With a failure of both policies and leadership, I see no hope for preventing an inevitable global economic catastrophe, the likes of which has not yet been witnessed on this earth.

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