Global Economic Crisis

There are two conflicting versions of reality emerging  regarding  long-term economic trends generated by the global health crisis. On the one hand, enforced lockdowns of key economic activity in response to the Covid-19 pandemic has already led to a worldwide recession that is by all measures far worse than the Global Financial Crisis of 2007-09. On the other hand, central banks, multinational economic forums and leading investment bankers are predicting  a V-shaped recovery; a sharp rise in economic activity following the steep decline due to the coronavirus.

A lesson from 2007-09 is that reality and data trump optimism. It must  be recalled that at the onset of the Global Financial Crisis, well into 2008, the U.S. Federal Reserve predicted that there would be no recession. Only months later, Lehman Brothers collapsed.

In the Global Economic Crisis created by the Covid-19  pandemic, the collapse of key industries such as tourism and airlines, the energy sector and manufacturing, the implosion of retail trade  and decline of exports and imports already rival the level of contraction that occurred during the Great Depression of the 1930s. This implosion in economic activity has occurred in 2020 in a matter of months, not years as with the Great Depression. Furthermore, the massive deficit spending by sovereigns, combined with the collapse in tax revenue, points to a staggering debt crisis globally in the near future.

Health experts warn of a second or even third wave of the coronavirus, thwarting attempts at restarting the global economy. A vaccine, in the most optimistic scenarios, is at least a year away. And even if a vaccine is developed and widely distributed,  the cumulative damage to the global economy will linger for years.

The most realistic scenario is that the 2020s will be a decade of unprecedented economic depression.

World Bank president Robert Zoellick has issued a chilling report that leaves no doubt that our entire planet is in the midst of a raging Global Economic Crisis. While framed in the context of the impact of the crisis on emerging economies, the overall assessment of the World Bank is what strikes a note of gloom and doom for the few remaining financial optimists. For the first time since the Second World War, the entire planet will be in recession.

Since the Great Depression, the global economy has suffered through numerous recessions, both large and small. Yet, even in a severe recession, there were always parts of the world, and frequently entire regions, that still experienced economic growth. The quantitative manifestation of that reality is that even in prior recessionary periods, the overall GDP of the planet still witnessed net growth, through at a reduced level. That was then; but this is now. Welcome to the super-globalized economy.

In the report issued by the World Bank, the current forecast is for an overall decline in global GDP. The mathematical modeling that leads to this conclusion provides for a devastating negative feedback loop that integrates the decimation of exports from major economies with collateral damage to smaller but equally essential export trade from emerging economies. As Zoellick puts it in the World Bank Report, with the overall World economy shrinking for the first time since the Second World War, ‘‘this global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis.” The World Bank president warns that with global trade witnessing its sharpest decline in 80 years, an additional 46 million people will be forced into poverty.

The sober assessment being offered by the World Bank points out with clarity why this worldwide financial and economic disaster has become the Global Economic Crisis. No one is coming out of this man-made cataclysm intact. Entire countries, powerful and weak, rich and poor, face ruination as the first great economic depression of the 21^st century wreaks havoc on our world.

As the American people feast on their Thanksgiving turkeys, there will be little to cheer about this holiday as the global economy in general, and the U.S. economy in particular, descend into the abyss. The latest economic data portents to a dismal future, with consumption spending plummeting, along with the continued and accelerating collapse of new homes sales to record lows amid falling consumer confidence. The unemployment rate is rising rapidly, one manifestation being the high initial claims for unemployment benefits. Simultaneously with all the other bad news, orders for durable goods such as cars, home appliances and factory equipment continues to fall through the floor.

Though the current economic news seems dismal enough, it is clear to many economists that the worst is yet to come. The global macro-economic data that will be forthcoming will define a staggering global economic recession that will defy policy prescriptions being enacted by panicky governments.

On January 20^th, 2009, Barack Obama will be inaugurated as the 44^th President of the United States. When Obama takes office, he will likely inherit from George W. Bush an enfeebled economy that is contracting at a rate in excess of 5%. The fourth quarter GDP data will certainly make dismal reading, as it will undoubtedly chronicle an economy that is in free-fall.