Global Economic Crisis

It was the night before Christmas, when normally nothing newsworthy stirs. Like a thief in the night, that was the moment selected with precision by U.S. Treasury Secretary Timothy Geithner to stealthily announce a radical policy shift regarding the two bankrupt Government Sponsored Entities (GSEs), Fannie Mae and Freddie Mac. When both of these mortgage giants teetered on the edge of  insolvency in September 2008, they were placed under the largesse of the federal government and the overburdened American taxpayer. In the early days of the Obama administration, $400 billion was established as the maximum guarantee the Treasury Department would provide to these two GSEs to ensure their survival. It was highly unlikely that anything close to $400 billion would be the ultimate cost to the American taxpayer, so assured the Treasury Department. But amid the reassuring rhetoric, something very peculiar is obviously being hatched by Geithner and Company.

On Christmas Eve, one of the quietest news days of the year, the U.S Treasury announced that in lieu of the previous $400 billion backstop, the U.S. taxpayers will now provide unlimited financial support to ensure the survival and liquidity of Fannie Mae and Freddie Mac for the next 3 years. Apparently, by slipping in this policy change near year end, no new legislation is required from Congress. Which is just as well, since it is unlikely that such an unfathomable level of bailout support would be approved by Congress during a mid-term election year.

The real question is this: if, as Treasury originally claimed, a $400 billion guarantee was more than sufficient for these two GSEs, why sneak in a new taxpayer commitment, with no limits?  Speculation is rife, and being fed by the total lack of transparency on the part of Timothy Geithner and his minions. However, this much is clear: Fannie Mae and Freddie Mac collectively underwrite or guarantee half of all the residential mortgages in the United States. If the U.S. Treasury is privy to data on emerging trends on mortgage defaults and residential real estate deflation, there must be something Geithner and his team are cognizant of that they are too frightened to share with the American public, and are spooked to a level that requires such a surreal form of taxpayer guarantee.

With more than $5 trillion of mortgages sitting on the balance sheets of these two GSEs, a new wave of bad real estate news could conceivably  witness the American public assume responsibility for another trillion dollars in bad debts, without a single vote by Congress. There is much more to this story than meets the eye, and the policymakers at U.S. Treasury desperately want to keep the full picture as to why they enacted such a massive overdose of moral hazard in the dark of night under wraps. But a Christmas Eve news dump only obfuscates reality, as opposed to making it disappear. Red lights and shrill klaxons must be going off at Treasury. As with much else involving the global economic and financial crisis, however, the public will be the last to be enlightened when the  rationale underlying the decision to guarantee all the financial obligations  of Fannie Mae and Freddie Mac to infinity can no longer be suppressed.

It was with triumphant fanfare that the Obama administration initially announced that the Q3 results for the U.S. economy showed a robust 3.5% annualized growth, signalling and end to the Great Recession. Predictably, the Dow Jones index soared. Then, somewhat latter, a revised number came in from the Bureau of Economic Analysis; the Q3 GDP growth was a much more modest 2.8%, indicative of a sluggish recovery, at best. But even that is not the end of the story.

A second revision has now been released from the BEA, and it is even more anaemic, a mere 2.2 %. God only knows what another revision might reveal. However, even if the 2.2% positive growth figure holds, it must be recognized that is it based on gimmickry such as the infamous “Cash for Clunkers” program, which merely pushed demand for automobiles forward, in the process artificially inflating the Q3 number. As much as 1.45% of the 2.2% growth came from increased automotive sales due to this boondoggle. Subtract gimmicks and the vast level of increased government spending based on adding substantially to the national debt from the equation, and it becomes clear that the real economy of the United States is still in recession.

After emerging from bankruptcy, the supposedly “new” General Motors is in reality a nationalized, government-owned automotive corpse. Courtesy of Obama economic policy, the American taxpayer now owns 62% of GM, which is increasingly (and accurately) being referred to as “Government Motors.”

The United States, which has long preached to the world the virtues of unbridled free market capitalism, unpolluted by any form of state intervention, is now prepared to subsidize any unprofitable corporation, be it in finance or manufacturing, as long as it is “too big to fail.” GM is now a ward of the state, something President Obama claimed he had no intention of bringing into fruition.

And what about this supposedly new GM? In the last few months, we have seen a lot more of the old GM; irrational last-minute reversals on key decision-making, such as ditching the long-negotiated sale of Opel, and the recent dumping of the corporation’s CEO, who had only months before replaced a previous CEO, fired on the orders of the Obama administration.

The tens of billions of dollars in taxpayer money being dumped down the sinkhole that is GM may be the worst manifestation of “cash for clunkers.”  Instead of sound economic and industrial policy, the politicians in Washington seem content to add even more public indebtedness on to the balance sheets of generations of Americans yet unborn, all for the sake of keeping zombie companies on taxpayer-subsidized life support.

First there was Dubai World, and now Greece. As 2009 comes to a close, the first stirrings that the massive deficits and public debts being accumulated by governments across the globe may pose greater risks in the future are beginning to emerge. Recently, a senior Australian politician even warned that the world should anticipate what was once unthinkable-the U.S. federal government defaulting on its debt.

As the United States, in particular, plans on trillion dollar annual deficits for at least the coming decade, one should recall the warning issued by one of the wisest presidents ever to serve in the White House, Dwight D. Eisenhower.  On January 17, 1961 President Eisenhower  delivered his famous farewell address to the nation. His warning about the dangers regarding the emerging military-industrial complex are well known. Much less recognized was the equally urgent warning Eisenhower  articulated regarding excessive government debt. He believed excessive public debt could lead to national insolvency, which would not only bankrupt the American economy, but also its democratic traditions. Here is his prescient warning, which I believe is more timely than ever:

“As we peer into society’s future, we — you and I, and our government — must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.”

President Dwight D. Eisenhower
Farewell Address to the Nation; January 17, 1961

The American weekly news magazine, Time, has an annual ritual of naming the man, woman, or people of the year. Its selection for 2009 is now official, and it is none other than  the Chairman of the U.S. Federal Reserve, Ben Bernanke. Here is Time magazine’s rationale for picking Bernanke:

“The main reason Ben Shalom Bernanke is Time’s Person of the Year for 2009 is that he is the most important player guiding the world’s most important economy. His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivalled power over our money, our jobs, our savings and our national future. The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.”

I think the praise being heaped on Bernanke by Time is premature, to say the least. No doubt, the massive borrowing and money printing facilitated by the Fed did prevent a total financial collapse in 2008, after the collapse of Lehman Brothers-a disaster that Time conveniently forgets Bernanke’s monetary policies helped to facilitate. The consequences of Bernanke’s policies, all born of extreme desperation, are totally off the radar screen as far as Time Magazine is concerned. In my view, Bernanke has sown the seeds of a far worse economic catastrophe than that which he is praised for preventing. Bernanke has begun a process that will destroy the U.S. dollar, and bring about the sovereign fiscal collapse of the United States. In effect, Ben Bernanke has not saved the economy; he has postponed one disaster in order to enable a catastrophe that will be far worse.

President Barack Obama’s chief economic advisor is Larry Summers, the man who served as Treasury Secretary to Bill Clinton. It was during the Clinton administration that Summers led the drive to deregulate the financial industry, a policy measure that contributed significantly to the financial collapse of 2008. This same Summers, speaking on behalf of Obama, is now doing the rounds, providing the media with his characteristically optimistic economic forecast for 2010.

According to Summers, the Great Recession is already over, and job recovery will gather momentum during 2010. For those seeking fact based economic forecasts in lieu of happy talk from Larry Summers, I suggest getting a hold of my new book, “Global Economic Forecast 2010-2015: Recession Into Depression.”

When Japan’s political leadership reported that their economy had grown by 4.8 % in the third quarter of 2009, the business media throughout the world proclaimed that the second largest economy on the planet had emerged from recession with flying colors. After all, a growth rate of almost 5% is nothing to sneeze at. Too bad that when it came to correct its Q3 numbers, Japan revealed that its statisticians had massively over-estimated the pace of their economy’s recovery. The revised Q3 number is actually a miserable 1.3% annualized growth.

There are two lessons from this statistical embarrassment to be scrutinized. In the first place, Japan’s economic output grew over the 3 months of  Q3 by a meaningless .3%, which computes to an annualized 1.3%. This imperceptible level of growth follows a massive contraction in the Japanese economy, and came about only after a significant infusion of borrowed money as part of Japan’s economic stimulus program. Secondly, the difference between an actual 1.3% and imaginary 4.8% growth rate is so huge, especially in an economy as large as Japan’s, that this anomaly is no mere mathematical rounding error. Either Tokyo’s statisticians are egregiously incompetent, or the numbers were manipulated for reasons of political expediency.

In the same light, it is wise to be sceptical regarding all official claims regarding GDP quarterly growth and unemployment rates stemming from major economies impacted by the global economic crisis.

Within the Eurozone Greece has the highest ratio of public debt to GDP, currently at 125%, prompting Fitch to lower the nation’s credit rating. Other rating agencies are likely to follow. The Greek stock market is in a tailspin, while Athens is coping with both an acute financial crisis and social unrest, as a wave a riots has broken out to mark the anniversary of a previous violent outburst.

The level of public debt in Greece is clearly unsustainable. The question being asked is if the Eurozone will bailout the Greek government. Such a policy move is not likely to be  well received by the taxpayers in other Eurozone economies with lower debt to GDP ratios, namely Germany and France. More importantly, the dismal economic and financial crisis in Greece, compounded by ruinous public debt problems, follows on the heels of the debt conundrum facing Dubai World. In addition, other Eurozone economies face looming public debt crises in the not too distant future, including Ireland, Spain and Portugal.

Is the next bubble to burst in the global economic crisis a string of sovereign debt crises? Readers of my report, “Global Economic Forecast 2010-2015: Recession Into Depression,” are aware that I project a catastrophic sovereign debt crisis afflicting both the United States and the UK by 2012.

It is said that history does not exactly repeat itself, but it often rhythms.  Such is the case which President Barack Obama’s ill-conceived decision to escalate the American military intervention in Afghanistan.  The rationalizations and flawed assumptions offered by President Obama in his West Point address to the nation could be lifted from the oratorical flourishes that another president, Lyndon Johnson, offered more than 40 years ago in defence of a disastrous military intervention in the internal civil war that transpired in Vietnam.

The ultimate tragedy is that Barack Obama is fully aware of the inevitable comparison his critics will offer with the disastrous Vietnam enterprise. He gave expression to his awareness with a lame rebuttal of the arguments advanced by those who are deeply concerned about another Vietnam. The essence of Obama’s case for why Afghanistan is not Vietnam is based on three points, which he articulated as follows:

“Unlike Vietnam, we are joined by a broad coalition of 43 nations that recognizes the legitimacy of our action. Unlike Vietnam, we are not facing a broad-based popular insurgency. And most importantly, unlike Vietnam, the American people were viciously attacked from Afghanistan and remain a target for those same extremists who are plotting along its border.”

Obama presents as his leading argument for deploying an additional 30,000 troops the claim that a “broad coalition” of 43 countries supports the U.S. war in Afghanistan. For a politician who opposed the Bush administration’s invasion of Iraq, I am surprised that Barack Obama must scrape from the bottom of the barrel of intellectual credulity and present one of the leading reassurances of the Bush administration for going to war with Iraq. I am certain that I am not the only observer who recalls Donald Rumsfeld, Defence Secretary under President Bush, who boasted to the American people that when America invaded Iraq, it would be joined by one of the largest international coalitions in history, the so-called “coalition of the willing.” Ironically, it is now Obama who must resurrect Rumsfeld’s unique verbal contortions to justify his policies.

So what about those 43 nations that President Obama heralds as partners in a grand military coalition? As with the Rumsfeld “grand coalition” in Iraq, it is largely smoke and mirrors. Very few of those nations have deployed more than a battalion of soldiers to Iraq. More commonly, these coalition members have provided a microscopic military presence, with rules of engagement that often preclude their forces from combat. For example, in early 2009 Singapore had 9 soldiers in Afghanistan, Ireland 7 and Iceland 2.  Yet these three nations are included in Obama’s “grand coalition” of 43 nations.

All told, there are fewer than 40,000 foreign troops deployed in Afghanistan, alongside approximately 70,000 American soldiers.  During the Vietnam war, by comparison, South Korea sent 300,000 combat troops and Australia 50,000 in support of the U.S. war effort. So while Obama can claim more countries are assisting the United States in Afghanistan than occurred during the Vietnam war, if one counts actual soldiers as opposed to using Rumsfeld-style bookkeeping, Lyndon Johnson was far more successful in enlisting foreign support in terms of actual troop deployments to the operational theatre.

President Obama also claims that the U.S. is not facing a popular insurgency in Afghanistan, as it was during the Vietnam conflict. This statement betrays a level of historical ignorance that is truly inexplicable, especially coming from a man with an impressive level of intellectual acumen. The Soviet Union also claimed it was not confronting a popular insurgency when it invaded and occupied  Afghanistan. One almost senses that Obama lifted this rationalization from a Kremlin talking-points document. If nothing else, President Obama`s characterization of the insurgency in Afghanistan as lacking popular support is contradicted not only by current events on the ground, but by the essential continuity of Afghan history. This is a land that is genetically hostile to foreign occupiers, irrespective of the justification the external power employed for its military intervention in Afghanistan.

The final point offered by President Obama in defence of military escalation in Afghanistan  is linkage with 9/11; this was the base where Al-Qaeda initiated the attacks on America. In the wake of September 11, 2001 the United States had complete justification to destroy Al-Qaeda, including its infrastructure in Afghanistan. However, for many years a previous administration decided that America’s military priorities lay elsewhere, specifically Iraq. It was also the U.S. that installed an utterly corrupt and inept government in Afghanistan, an act which in itself has proven to be the greatest enabler for the resurgence of the Taliban. Due to American mistakes and strategic miscalculations, the current situation in Afghanistan is far different than what existed  in September 2001.

As with Vietnam, and not distinct from that Southeast Asian catastrophe of so long ago, the U.S. is left with the sole recognizable goal of propping up an unpopular and corrupt government, in this case the Karzai regime and its coterie of drug-trafficking warlords. And inevitably, as with Vietnam, a growing segment of the population in Afghanistan  will increasingly resent the foreign military presence on their soil, and join the insurgency.

A final point which should be raised was unfortunately ignored in Obama`s speech. If Al-Qaeda is the central enemy in this conflict, what is their strategy?  Osama bin Laden has been very clear in stating his objective, which is to reduce America to a shadow of itself. He knows this cannot be achieved on the battlefield, witnessed by the estimate offered by America’s own intelligence agencies, which calculates Al-Qaeda’s contingent in Afghanistan at not more than 100 fighters, an insignificant fraction of the insurgent forces confronting the U.S. and its “grand coalition.”  However, Al-Qaeda leaders have in the past suggested that their core strategy is to compel the U.S. to wage wars in the depth of the Islamic world, in the process economically and financially bankrupting America while arousing hostility towards the U.S. among Muslims worldwide.

With the  U.S. economy in tatters, and the continuation of America’s military project costing $100 billion per year, President Obama has chosen a  path that can only lead to the creation of a new quagmire. In that outcome, it is sadly President Barack Obama, and not his critics, who has engaged in a false reading of history.

After only nine months on the job, Fritz Henderson is resigning as chief executive officer of GM. He had replaced former GM boss Rick Wagoner, who was fired at the direction of the Obama administration, which has injected up to $ 50 billion in taxpayer money into the bankrupt automotive manufacturer.

So this is the “new” GM? It seems apparent that a major internal conflict has arisen within the corporation’s board of directors. A sign of this internal strife was the last-minute decision by the GM board to scrap a deal Henderson had worked out to sell Opel, the company’s European subsidiary, to a Canadian led consortium. In an earlier post, I expressed my view that GM was mad to tear up this agreement, which provided a sound  means to unload a loss-making entity GM simply did not know how to manage.

What does the sacking of Henderson mean in the long-term? Probably confirmation of my earlier assessment, which was that General Motors is toast. Unfortunately, a lot more taxpayer money will be expended before the truth can no longer be denied.