Global Economic Crisis

Ian Bremmer, the highly regarded political scientist, has predicted a global depression in his most recent column in TIME. “The Next Global Depression  Is Coming and Optimism Won’t Slow It Down,” read the morbidly-stated headline of his column. He bases his forecast on the global nature of the evolving economic crisis, and the severe impact of Covid-19 on economies that far surpasses what occurred during the Global Financial Crisis of 2007-09.

The column by Bremmer follows last week’s release of Q2 economic data in the United States, which revealed that quarterly GDP had contracted by a staggering 33%. Unemployment rates in not only the U.S. but in all major economies are at double digit rates, as Coronavirus induced lockdowns continue to destroy consumer and industrial demand.

Meanwhile, stock markets worldwide are soaring, including the Dow Jones, as delusional investors continue to believe in the phantom of a V-shaped recovery. However, a spike in Covid-19 infection rates following a temporary receding after the initial lockdowns, reveals that such optimistic thinking is totally illusory. The likelihood of a second wave of infection in the Fall, coinciding with a likely divisive presidential election in the United States, makes Ian Bremmer’s dire economic forecast  the most likely future trajectory for the global economy.

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.

The trillion dollar Eurozone rescue package may have been as recent as almost yesterday, but it is already being forgotten and discarded by investors across the globe, as equity markets tank and financial volatility indexes embark on a steep ascent. It is quite clear that what began as a Greek debt crisis has now morphed into a full-fury European debt crisis.

We are in a most precarious phase of the ongoing global economic crisis. It is inevitable that the European debt crisis will spread to the United States, ushering in a dangerous global sovereign debt crisis. Despite the reassuring words of politicians throughout Europe, including Angela Merkel and Nicolas Sarkozy, as well as their counterparts in the U.S.A., this is a train wreck that cannot be prevented, and will transform a financial crisis and severe recession into a synchronized global depression.

It is not only those who were myopic a year ago that want to avoid talk of a depression, at all costs. Even the most prescient analysts and experts have held back on their vocabulary in defining the Global Economic Crisis. However, more and more credible economists and experts have begun describing our current economic catastrophe as a depression. The Economist magazine was one such authority, as was the most recent recipient for the Nobel Prize for economics, Paul Krugman.

Perhaps the most astute observer of the unfolding disaster resulting from the implosion of the U.S. housing bubble has been NYU economics professor Nouriel Roubini. A year ago, amid the happy talk being proffered by Hank Paulson and Ben Bernanke, he accurately warned of the systemic financial collapse that would ensue in short order, unless urgent, coordinated steps of global intervention were swiftly undertaken. History vindicated the judgement of Roubini, while also applying to him the moniker of “Dr. Doom.”

As clear-cut as Nouriel Roubini has been in assessing the Global Economic Crisis, even he has been reluctant to use the “D” word. Now, however, he is warning that the worldwide economic crisis will get much worse, and in the absence of effective global intervention that is coherent and synchronized, a “near depression” was a serious possibility. His most recent warning comes in conjunction with his current assessment of the losses he projects for the global financial system due to “toxic assets,” in the range of $3.6 trillion. His conclusion is chilling in the extreme: the banking system in the U.S. is effectively insolvent.

Added to the mounting evidence of banking insolvency, not only in the United States but other major economies, in particular the U.K., are the horrendous unemployment numbers. The U.S. Labor Department has released its statistics on job losses for January of this year, indicating that another 600,000 Americans joined the ranks of the unemployed. This translates into an official unemployment rate of 7.6%. However, in reality, the situation is far worse than those numbers indicate. In the first place, the Labor Department’s monthly reports are never complete, owing to lagging tabulations from small firms and businesses. This is reflected in that the current report revised substantially higher the unemployment numbers for November and December of 2008. In all probability, more than 700,000 Americans were terminated in January, with every indication that this trend will continue far into 2009. In addition, the official unemployment rate, since the 1960s, subtracts “discouraged” workers, meaning the permanently unemployed, as well as part-time workers unable to find full-time employment. If these numbers are added into the unemployment figure, it exceeds 14%.

At its worst level, the unemployment rate in the U.S. during the Great Depression stood at 25%. After the advent of the New Deal of President Franklin Roosevelt, it temporally declined to near 10%, but then rose to a much higher level, reaching the range of 16-17% prior World War II. Accordingly, a true current unemployment rate of 14% is within the levels experienced by the United States during the 1930s. Factor in the structural insolvency of the American banking sector, the rampant demand destruction infecting the global economy and other catastrophic asset bubbles set to burst during the next several months, and it becomes clear that the United States and the rest of the world have now entered a dark economic territory that can no longer be defined as merely a recession.

The Global Economic Crisis has now achieved levels of economic contraction in all major indices that can only be described as a depression of worldwide dimensions. The global depression train has left the station, and will bring a level of economic and financial carnage to every corner of our world on a scale so staggering, it would have been unimaginable to even the most sober pessimists-until recently.