Archive for December, 2008

Roubini Warns Global Economic Crisis Will Worsen In 2009

December 31st, 2008 Comments off

Nouriel Roubini is known as “Dr. Doom” for his earlier predictions that a housing bubble in the United States would lead to disaster for the international financial and banking system. Roubini, Professor of Economics at the Stern School of Business, New York University and also Chairman of RGE Monitor, an economic and financial consultancy, was proven correct. Now he is considered the wisest sage on the future course of the Global Economic Crisis. His latest prediction will not lighten the hearts of investors.

In a recent article, Roubini stated that “the worst is still ahead of us. In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.”

Nouriel Roubini adds that the credit crisis will grow worse, pointing to a grim year ahead for global financial markets. He suggests in his article that “2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies. Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.”

While Roubini has thus far avoided using the term “Great Depression” to describe what he thinks may happen, it is clear that the world’s top economist on forecasting the Global Economic Crisis sees no grounds for optimism. His sobering assessment of what lies ahead for 2009 makes clear that a catastrophic year ahead awaits the global economy. He warns that the severe deflation now threatening will nullify monetary policy as a means of addressing the economic crisis, further enhancing the grave danger of a liquidity trap.

Japan’s Economy Sinking Into The Abyss As Global Crisis Worsens

December 29th, 2008 Comments off
Japan’s economy, the world’s second largest after that of the United States, is sinking into the abyss. After a lost decade of stagnation, the global economic crisis threatens to transform the Japanese economic recession into a full-blown depression. This is reflected in recently released economic data on Japan’s industrial output.

According to the most recent data, Japan’s industrial production dropped by more than 8 % in November from the previous month. This is the steepest one-month decline in Japanese industrial output on record, and is directly related to the demand destruction resulting from the global economic crisis. Japan’s economy is largely based on export-driven manufacturing, so the latest economic data indicates that worldwide demand for Japanese manufactured products is dropping like a lead stone.

Japanese automakers are among the major producers that have seen a sharp decline in orders for their products from overseas customers, especially in the United Sates. Many analysts and economists are issuing dire forecasts that the Japanese economy, highly dependent on export-driven trade, will contract sharply as the Global Economic Crisis grows more severe

“Production is falling off a cliff,” said Naoki Iizuka, a senior economist in a statement to the Reuters news agency. “The Japanese economy is unlikely to bottom out until October-December next year as output is expected to remain very weak until then,” he added, reflecting the gloomy cloud now hanging over the world’s second largest economy.


America And Economic Collapse: Will Obama Share the Fate Of Gorbachev?

December 28th, 2008 Comments off
An economic crisis can destroy an empire. It was financial bankruptcy that led to the liquidation of the British Empire. More recently, economic stagnation and paralysis led to the demise of the once-powerful Soviet Union. Will the global economic crisis sink the United States, and end American hegemony? The success or failure of the incoming Obama presidency will determine the ultimate answer to this millennial question.

When the global financial crisis first arose, leading to a worldwide credit crunch, it became apparent that the economic policies of George W. Bush would be the defining issue of the 2008 presidential campaign, spelling doom for the Republican nominee. When the Republican candidate, Senator John McCain, proclaimed that the economic fundamentals of the U.S. were sound, he insured that Barack Obama would win the election and become the 44th president of the United States. In fact, the fundamentals of the American economy are as feeble as were those of the Soviet Union before it collapsed.

Barack Obama is a very intelligent politician, and is already being compared to President Franklin Roosevelt, who presided over the New Deal economic policies of the 1930s in the depths of the Great Depression. However, Barack Obama may also be compared to Mikhail Gorbachev, the last leader of the once-mighty Union of Soviet Socialist Republics.

Gorbachev, like Obama, is a highly intelligent man. He was selected by the Soviet elite as their last-ditch candidate to save the crumbling Soviet Union. In spite of his best efforts, he failed. The economy of the Soviet Union imploded, leading to the total disintegration of the Soviet State, which once was deemed an equal superpower rival to the United States of America. Will Obama’s fate be that of Franklin Roosevelt, or Mikhail Gorbachev? There are disturbing parallels between the United States of 2009 and the Soviet Union in its last years of existence. These may prove more relevant than the comparisons some American economists are trying to draw between Obama’s and Roosevelt’s America.

Consider the following: prior to its extinction, the Soviet Union was driven to bankruptcy by bloated military expenditures, exacerbated by a losing war in Afghanistan. Its economy was immune to reform due to the tyranny of central planners. In the America that gave birth to the global financial crisis and credit crunch, the government’s finances have been driven to the brink of bankruptcy by vastly excessive military expenditures, run amok by a losing war in Afghanistan and an unnecessary war in Iraq. Its economy, supposedly a paean of free-market flexibility, has now proven to be a myth constructed by the financial alchemists of Wall Street and pseudo central-planners of the Federal Reserve and Treasury Department. Just as the Soviet Union used tax-payer money to bail out failed industries, the United States through its Treasury Department and Federal Reserve Bank have deemed failed financial enterprises “too big to fail,” warranting hundreds of billions of dollars in deficit borrowing that tax payers are responsible for in an equally futile rescue bid.

Obama, like Gorbachev, will be tied to an elite that has a vested stake in salvaging a doomed system, even at the risk of national insolvency. If Barack Obama has the intellectual stamina to resist the American financial elite and recognize that the Global Economic Crisis calls for a total restructuring of the economic order of the United States, he will go down in history as the president that saved America’s economy and preserved its status as the dominant economic power in the world. If, however, he is unable to unshackle himself from the failed policies of the American financial elite, he will be doomed to share the fate of Mikhail Gorbachev as that of being a valiant failure.


Obama’s Stimulus Program And Deficit Spending: An Alternative Response To The Economic Crisis

December 25th, 2008 Comments off
The incoming Obama administration has yet to finalize the size of its economic stimulus package. Clearly, however, it will be of vast proportions. The numbers being speculated on keep inclining upwards, most recently in the $800 billion range. When it is put into effect after Barack Obama is inaugurated as America’s 44th president, it is likely to approach one trillion dollars, a sum equal to 20 % of the entire national debt of the United States only 8 years ago, when George W. Bush became the 43rd president. With the global economic crisis raging and financial markets imploding, most politicians and economists argue that only a gargantuan infusion of deficit dollars can stimulate the American economy to the point where the recession can be arrested. The question is, are the politicians and experts correct?
No doubt, the U.S. economy is undergoing its worst crisis since the Great Depression. Many experts point to the failure of the Hoover administration after the 1929 stock market crash to inject stimulus into the economy with deficit dollars as a significant contributing factor to the aggravation of the Great Depression. Other experts, acknowledging that the New Deal of President Franklin Roosevelt did not entirely eliminate the worst ravages of the Great Depression, claim that the decision by Roosevelt in 1937 to end the pump priming and restore fiscal balance in the Federal Budget initiated a severe recession following initial recovery after 1933.

The weakness with all these arguments is that those advocating them have tried to construct an economic rescue paradigm based on 1929 and its aftermath. While some parallels between the current Global Economic Crisis and Great Depression no doubt exist, every epoch in history, including economic crises, have their own unique reality. What may or may not have worked in the Roosevelt administration’s New Deal is not necessarily analogous to the prescription required for the current economic emergency confronting the United States.

The years leading up to the collapse of the world financial system and current global economic crisis were ones of unprecedented deficit spending by the U.S. government. Under President Bush, taxes for the most affluent Americans were slashed while government spending across the board, but especially in the military sphere, skyrocketed. The result was that even before massive governmental spending was initiated, as the economic crisis became more acute, Bush’s economic policy had already in place budgetary practices in the category of major fiscal stimulus. The fact that the national debt of the United States doubled from $5 trillion to nearly $10 trillion before the onset of the global financial crisis is a reflection of that fiscal reality.

Economists rightly point to the demand destruction that is crippling the world economy. In the United States this has had a severe impact, considering that more than 70 % of America’s GDP is derived from consumer spending. Accordingly, in this time of economic crisis, the government must substitute for the downfall in retail and business activity by regenerating demand in the economy. However, replicating the fiscal and monetary indiscipline of the past 8 years will only lay the seeds for far worse financial turmoil. There is another alternative for policy makers to consider, which offers a structural as opposed to a Band-Aid cure for the global economic crisis, especially in its impact on the American economy.

If the incoming Obama administration were to reverse the massive increases in military spending undertaken by George W. Bush, several hundred billion dollars a year can be redirected from unneeded defense department allocations to the civilian economy, including funding for massive infrastructure projects. Since the staggering increases in military spending are premised on the threat posed by one enemy, a non-state actor called Al-Qaeda, a fundamental question must be answered by the incoming Obama administration: what poses the greatest risk to America’s national security- a non-state actor with a few thousand adherents, or a global economic crisis that threatens to bankrupt the United States, and destroy its economic power, which is the basis of its military power? It may very well be that redirecting hundreds of billions of dollars from expensive new weapons systems that may be unnecessary for the defense of the nation to the civilian economy will be a sounder approach to financing a major economic stimulus program than continuing to add to the indebtedness of the national economy.



Global Economic Crisis May Doom Detroit Automakers

December 21st, 2008 Comments off
Despite the ideologically counter-intuitive decision by the Bush administration, in its final days, to transfer some of the TARP money as a bridge loan to GM and Chrysler, the prospects regarding the survival of the domestic automobile industry in the United States are gloomy at best. While the political leaders in Washington have concluded that the economic reverberations from the bankruptcy and liquidation of the automakers would be calamitous, they have not yet drawn the proper conclusion amidst the ravaging global economic crisis.
During the 1920s, more than 300 automobile manufacturing companies existed in the United States. The Great Depression of the 1930s killed off almost all of these manufacturers, leaving just the big three and a handful of independents. Among the firms that vanished was the Pierce Arrow motor company of Buffalo, New York, which made the first cars to become the official mode of transportation by the American president. Even the relatively prosperous 1950s saw the disappearance of the one-time superstar of American motordom, Packard, after its disastrous merger with Studebaker, which itself went extinct in the 1960s.
The lesson of history is that it is extremely expensive to maintain a viable major automobile maker, unless it is sustained by huge demand. Small niche manufacturers can survive, such as Ferrari, since they are structured to be profitable on small volume due to exceptionally high unit prices for their vehicles. However, volume manufacturers struggle to maintain profitability during an economic downturn, since their manufacturing infrastructure, including fixed labor costs, cannot be sustained by the thin margins extracted from each vehicle sold.

Contrary to the image politicians and critics have created regarding GM, Ford and Chrysler, all three have sharply reduced their payrolls, while increasing productivity through enhanced use of robotics in manufacturing. While the domestic manufacturers are criticized for producing fuel wasting SUVs, the critics conveniently ignore the fact that supposedly more professionally managed foreign rivals, including Toyota, Honda and Nissan have also introduced large SUVs. BMW and Mercedes-Benz built assembly plants in the Southern United States for the sole purpose of building large, expensive luxury SUVs.

The primary reason why Detroit is facing extinction is the ongoing global economic crisis, which has created vast demand destruction throughout the consumer economy, especially regarding hard durable items such as cars. The concomitant world financial crisis has created a credit crunch that inhibits the ability of the big three American car producers to weather the impact of the global economic crisis until it has receded to the point where consumer demand for automobiles has sufficiently recovered.

The only government solution that would work would be to substitute for the demand destruction of the current economic crisis with hundreds of billions of dollars in direct purchases related to infrastructure. The precedent for this is World War II, when the U.S. government required the automakers to stop all civilian car manufacturing, while retooling to fill vast government orders for defense equipment. It was the direct government purchases from major American manufacturers, in particular the auto industry, which not only ended the Great Depression, but also led to the long-term ascendancy of the U.S. economy.

Anything short of a World War II style government mass purchasing program will doom the automobile industry to financial implosion, kept on life support only as long as the government is prepared to borrow money it cannot generate from current revenue. With the worsening global economic crisis, it is unlikely that perpetual government deficit spending to prop up failing industries is a sustainable economic model.

For both the auto industry and the U.S. economy in general, the outlook for 2009 is becoming increasingly dark and gloomy. Short of radical governmental intervention similar to what occurred during the Second World War, Detroit’s once-proud automobile industry may be fated to being the iconic casualty of the global economic crisis.




Fed Rate Cut Threatens U.S. Economy With Liquidity Trap

December 17th, 2008 Comments off
One of the most acute dangers to an already fragile economy is the phenomenon referred to by economists as a “liquidity trap.” With the radical reduction in its interest rates by the U.S. Federal Reserve, Nobel Prize winning economist Paul Krugman has warned that this very danger now confronts the American economy, courtesy of the Fed, as it continues to act erratically amidst the worst global economic crisis since the 1930s.
A liquidity trap involves radical rate reductions by a nation’s central bank that translates into virtual zero interest being charged. The result, in a recessionary economy, is that the economic downturn becomes even more traumatic, since a zero rate discourages investment by stakeholders retaining capital. A zero interest rate provides no incentive for long-term investing with its concomitant risk-taking. Those with capital tend to hoard it while an effective zero interest rate is maintained, defeating the stated purpose of such monetary policy, which is to inject liquidity into the economy. In actuality, a liquidity trap prevents liquidity from circulating, no matter what other extreme monetary measures are enacted by the central bank. This phenomenon plagued the Japanese economy during its recent “lost decade.”

Though the New York stock market reacted in a celebratory way to the Fed issuing its effectively zero rate, more thoughtful observers are terrified. This is clearly another panicky response by the Fed, acting out of desperation rather than thoughtful analysis. If America through the Fed’s actions does indeed fall into a liquidity trap, the result will go beyond the severe recession already being forecasted. The likely result will be the protraction of the global economic crisis, with the U.S. economy crippled beyond the worst nightmares of even those predicting another Great Depression.

For the American economy, due to the Fed’s actions, the worst outcome possible is practically assured. The real tragedy is that the radical cuts in interest rates by the Fed under the reign of Alan Greenspan are now recognized as a cause of the mortgage meltdown that led to the current global economic crisis. For Ben Bernanke, current chairman of the Federal Reserve, to replicate his predecessor’s disastrous monetary policies is utterly inexplicable.



Bernard Madoff Charged In $50 Billion Financial Ponzi Scheme

December 16th, 2008 Comments off
Bernard Madoff was once chairman of NASDAQ, and a scion of the American investment banker and money manager community. Now he is at the center of what may be the worst financial con game in history, shaking confidence at a time of global economic crisis.


On December 11, 2008 the FBI arrested Bernard Madoff. He was charged with securities fraud, this coming on the heels of an admission, supposedly to his sons, that Madoff’s business was “a giant Ponzi scheme.” This is connected with an asset management component of his firm.

Contained in the criminal complaint is the allegation that investors lost a staggering $50 billion from Madoff’s Ponzi scheme. After his arrest and booking, Madoff was released after posting $10 million in bail. If convicted, Madoff faces up to 20 years in prison and a fine of $5 million.

Amidst the raging global economic crisis, Madoff’s emergence reveals another dimension of danger to already shaken global financial markets. The current credit crunch is related to lack of trust and transparency, contributing to excess counter-party risk among banks and other financial institutions. The charges against Madoff, and the vast sums of vanished wealth that may be involved, will increase distrust regarding the already fragile hedge funds and their managers. It also raises the question: how many other schemes leading to vast degrees of wealth destruction are yet to be uncovered while the global economic crisis continues? Perhaps there are other Bernard Madoffs still to be uncovered, leading to further erosion of trust by investors big and small with the major financial institutions of the global economy.


Global Economic Crisis Ravaging World’s Auto Companies

December 14th, 2008 Comments off

America’s car industry is on the verge of extinction amidst the global economic crisis. The Senate tuned down a bill offering Detroit automakers a $14 billion dollar bridge loan. Now it is up to the Bush administration to grant the 3 domestic auto manufactures the money from its TARP fund for the temporary rescue of the Detroit automakers; TARP was originally set up by Congress to save the financial industry from the global economic crisis.

The downturn in the auto business is not only an American phenomenon. The global economic crisis has ravaged auto producers throughout the world. Among the major European car producers come warnings of a bleak and barren 2009. The indications are growing that the deepening crisis in the automobile sector is global, going beyond the American auto industry’s desperate life and death struggle.

Recently, the CEOs of Renault-Nissan and Fiat stated that the automobile markets would undergo sustained declines in 2009. This parallels the catastrophic sales declines that have pushed the American “Big Three,” Ford, GM and Chrysler, to beg for bailouts from the government. The global economic crisis is destroying demand for cars in virtually every market.

The world’s number one car company, Toyota Motor Corp, will be reporting a loss of about 100 billion-yen ($1.11 billion at current exchange) for October-March. This is according to Japanese media. If even Toyota is losing money and cutting automobile production, how many weaker car companies will become extinct during the global economic crisis? For the auto business, as with many other enterprises, the worst is yet to come as the global economic crisis picks up the pace of its destructive impact on the world economy and global financial system.

American Economy In Freefall

December 12th, 2008 Comments off

What began as a financial crisis in the U.S. housing and mortgage market has metastasized as a virulent global economic cancer. The U.S. economy is imploding, and taking down much of the world with it. In a tsunami of financial panic, central banks across the globe have been slashing interest rates to virtual zero, while simultaneously borrowing and printing trillions of dollars, which are being injected into failing banking systems.

With global financial arteries clogged, the economies of the planet are now cratering, with the United States economy in particular imploding at an alarming rate. A concrete example of this is the impending bankruptcy of the American automobile industry, which directly and indirectly represents the core of what is left of the domestic manufacturing industry in the United States. Ford, Chrysler and especially GM have told the U.S. government and its elected representatives in no uncertain terms that unless the government injects untold tens of billions of dollars into their virtually empty coffers, those companies will go bankrupt in a matter of months. GM has even indicated it could be forced to shut down within weeks.

With a federal budget deficit that has grown from the hundreds of billions to the trillions of dollars, where is the U.S. Treasury going to get these vast funds for the industrial bailout requests that are now piling on? Perhaps soon the retail sector of the American economy will be coming to Capital Hill, hat in hand. However, an infinite series of bailouts is not a solution to the global economic crisis.

U.S. Trade Deficit Grows Due To Global Economic Crisis

December 12th, 2008 Comments off

The global economic crisis accelerated the US trade deficit, which rose in October by 1.1 percent to 57.2 billion dollars. The October results also showed that America’s trade gap with China had widened, according to U.S. government official figures.

The trade numbers caught economists and experts off guard, as they had forecasted a drop to $53.5 billion. Results show that the American trade deficit with China grew slightly to $27.9 billion in October from 27.8 billion dollars the previous month. The U.S. Commerce Department released the trade figures.

The trade results also show that total trade volume had fallen by 1.7 percent. Declines were registered in imports and exports, a manifestation of the growing impact of the global economic crisis in both the United States and throughout the world. October imports declined by 1.4 percent from September to 208.9 billion dollars. Exports also showed a decline, dropping 2.4 percent to 151.7 billion dollars.

The dismal trade figures highlighted the third straight month of a drop in both imports and exports. The Commerce Department numbers reflect a weakening in the performance of the U.S. economy simultaneously with a reduction of international trade. In the first ten months of 2008 the cumulative American trade deficit was a staggering $590.9 billion.