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G20 Summit Confronts “Unknown Unknowns” Of The Global Economic Crisis

April 2nd, 2009 Comments off
As the 20 leading economic powers gather in London for their summit on the Global Economic Crisis, an anxious world awaits with high anxiety the emergence of an effective, coordinated prescription to the synchronized recession that has spread like the plague. Much of that hope is enshrined in the symbolism of a single head of state, U.S. President Barack Obama. Undoubtedly, some contrived communiqué will be unveiled at the conclusion of the G20 Summit, if nothing else then as a cosmetic palliative to assure a ravaged world that it can have confidence in the leading political figures of our planet Earth to somehow figure a way out of the Global Economic Crisis.
The logical impediment to such hopes is that one must comprehend the major dynamics of this global financial and economic crisis to formulate effective policy responses. I don’t expect anything in the G20 communiqué that will even hint at those destructive currents. For an answer, we must actually turn to a discredited former cabinet secretary of the recent Bush administration.

As Bush’s defense secretary and a leading architect of the Iraq war, Donald Rumsfeld is not fated to go down in history as one of the most inspiring and admired government officials. However, without actually realizing it, Rumsfeld gave a tortured explanation of what may go wrong with the Iraq war that is a perfect description for what underlies the Global Economic Crisis. Before commencing “shock and awe,” Rumsfeld told a news conference that he was a bit nervous about what he referred to as “unknown unknowns.” That two-word paradox actually defines the essence of our current global economic calamity.

Capitalism is based on risk management. Those who place large bets with capital investments but are able to effectively manage those risks win big, in the process facilitating overall economic growth. That has been the core of classical capitalist, free enterprise ideology. However, in our post-regulatory world, risk management as a scientific business concept broke down in many economies, including one as large as the United States and another as small as Iceland. Derivatives were sliced and diced upon a black hole of debt, with a system of incentives that led decision-makers to abandon sound risk management principles, and instead embrace reckless gambling. Classical capitalism morphed into casino capitalism, leading the global economy to our present catastrophe. In effect, the financiers and tycoons have transformed global capitalism from a system predicated on sound risk management to the Rumsfeld alternative universe of unknown unknowns.

What does this Rumsfeld verbal masterpiece mean in economic terms? Fundamentally, we are all now inhabiting a global economy infused with uncertainty. No one knows how bad bank balance sheets really are, or how much value can be placed on toxic assets. Counterparties are paralyzed with uncertainty, in the process blocking normal flows of credit. If bank number 1 knows its balance sheet is full of worthless assets, it has no basis to believe that bank number 2 has a balance sheet any more solvent. The end result is that banks don’t trust each other; multiply that behavior by a factor of many thousands and one can begin to comprehend how corrosive uncertainty is to the numerous fragile linkages that are the superstructure of the modern global economy.

Nothing is likely to emerge from the G20 that will even begin to address the tyranny of these economic unknown unknowns. As long as no one trusts each other in the financial and commercial world, no rational basis for economic recovery exists. In fact, this Rumsfeld disease is spreading contagiously.

Recently, China’s premier gave expression to the weight of the unknown unknowns that are now impacting Beijing’s perception of the Global Economic Crisis. When the premier told a news conference that he was a “little worried ” about the credit worthiness of the United States, which has received $1 trillion from China to finance its massive government deficits, he was manifesting how acute uncertainty has replaced risk management, even at the level of state-to-state relationships. With sovereigns now regarding each other with suspicion as intense as that which exists between financial counterparties in the commercial world, it is clear that massive uncertainty is metastasizing beyond the point of what an artfully constructed G20 communiqué can hope to contain.

 

 

Japan’s Export Trade Has Collapsed

March 26th, 2009 Comments off
Like the implosion of a collapsing solar mass, Japan’s exports are undergoing a calamitous free fall contraction, unprecedented in the annals of global economics and finance. This is not reflective of a mere recession, but rather the decapitation of the nerve center of Japan Inc. Massive exports are the hyper-center of economic gravity in Japan; it has been the post-war exponential surge in value-added products shipped abroad from Japanese factories and assembly lines that transformed the nation into the number two global economic super-power. However, the Global Economic Crisis is shattering the very core of Tokyo’s economic prowess, as reflected in the most recent Japanese trade figures.

According to official statistics, the month of February witnessed an overall decline in Japanese exports of 49.4% from exactly a year ago. In other words, in just 12 months Japan’s most crucial economic activity, foreign trade, has been sliced in half as though with a meat clever. This is an astonishingly bad economic figure, however, it actually gets worse when one peruses the details underlying the grim aggregate export numbers. The United States, which remains the single most important market for Japanese products, reduced its imports from Japan by 58%. Exports to Europe declined by 54.7% while shipments to China plunged 39.7%. When it comes to one of the most important and visible Japanese exports, automobiles, the decline was a staggering 70.9%. These figures are not just indicative of a mere global recession; these are the signatures of worldwide economic depression.

As with other somber news emerging with rapidity as the Global Economic Crisis worsens, there remains a remnant among the financial analysts and economic “experts” who creatively “spin” some good news out of this menu of accelerating disaster. “These numbers are not as bad as we thought,” some are saying, while others claim that the rate of contraction of Japan’s exports is receding somewhat. That is actually technically correct; when an economy witnesses a contraction by almost 50% in its export trade in only one year, the mathematical rate of descent must slow down or else in a few months Japan’s exports would be at absolute zero. Putting aside the intellectual acrobatics of those “experts” trying to diminish our perception of how severe the Global Economic Crisis has become, these chilling Japanese trade figures actually send an alarming message to the entire world, only days before the onset of the G20 Summit being held in London.

The export collapse occurring in Japan is a manifestation of the free fall in world trade. In an inter-linked global economy, a massive contraction of Japanese production geared for exports means Tokyo imports much less in terms of intermediate products and commodities that go into the manufacturing of goods that are shipped overseas. It also means Japan has less accumulation of capital. This latter detail is especially vital, for Japanese savers have enabled Tokyo to join with China in being one of the primary purchasers of U.S. government debt. In essence, what is being revealed is a convergence of dire trends. Global trade is shrinking, the U.S. budget deficit is soaring through the roof, while the overseas capital resources essential for financing Washington’s debt are becoming increasingly scarce in proportion with the diminution in global trade. In essence, as U.S. consumers purchase fewer goods from Japan and China, Tokyo and Beijing are left with a much-reduced capacity to loan Uncle Sam the credit he is now addicted to.

The global economic and fiscal model that currently exists, in the context of collapsing export trade from major sources of credit for the United States, as is the case with Japan, is unsustainable. Will the politicians and their coterie of economic and financial experts realize this fundamental truth and formulate sound policy responses before the entire global economy has fallen into the abyss? Based on their track record to date, I don’t see solid grounds for optimism. What does appear more likely is that the worst is yet to come, and Japan’s trade figures are only a foreshadowing of deeper global economic doom.