Global Economic Crisis

Official statistics just released indicated a worse than expected decline in Germany’s GDP. The Q2 of negative 10.1 % follows a less sharp contraction in Q1. This is the most severe quarterly decline in economic activity in Germany since then end of the Second World War and the establishment of the Federal Republic. Germany is Europe’s largest and most successful economy, and the decline reflects the widespread economic damage being inflicted by the Coronavirus pandemic.

Optimists will point to a likely strong rebound in Q3, as economic activity picks up with a reduction in Covid-19 lockdown measures. Such a rebound is likely to be temporary. The renewal of Covid-19 outbreaks in various hotspots throughout Europe, and forecasts of a second pandemic wave this Fall, are predictive of future bad economic news. In addition, the export-dependent German economy will likely be buffeted by Coronavirus infection rate  increases in many of its major export markets, in particular the United States.

The latest German economic data reinforces the growing consensus that the pandemic-driven global recession, already the worst since the Great Depression of the 1930s, will likely evolve into a full-blown economic depression lasting many years.

In a startling forecast published in Project Syndicate entitled, “The Coming Greater Depression of the 1920s,” NYU economics professor Nouriel Roubini outlines ten negative trends that ensure the inevitability of a full-fledge economic depression sometime during the current decade. Professor Roubini achieved notoriety for predicting with uncanny accuracy the Global Financial Crisis of 2007-09.

Roubini points out that even prior to the coronavirus pandemic there were downside trends involving structural issues left over from the financial crisis of 2007-09, coupled with deglobalization and the balkanization of supply chains, decoupling between China and the United States and other geopolitical rivalries, and environmental factors  such as climate change. What the COVID-19 pandemic has done is accelerate and magnify those negative trends, which already  have created a perfect storm, leading to a “greater depression” later on in the present decade.

The current economic crisis created by the coronavirus will bring about a severe, U shaped recession, which moist economists now believe will exceed the 2007-09 Global Financial Crisis in  severity. There will be no V shaped recovery, in Roubini’s view. The most chilling aspect of Professor Roubini’s forecast is that even if the COVID-19 enabled recession eventually has a U-shaped recovery, it will only be temporary, with a 21st century Great Depression to follow in its wake, making the 1920s  a time of Global Economic Crisis, with prospects of recovery being differed until the 1930s, all predicated on new technologies and the emergence of more competent political leadership.

The secretary general of the Organization for Economic Cooperation and Development (OECD), Angel Gurria, has warned that the global recession unleashed by the coronavirus pandemic will take years to recover from. He stated that the shock to the global economy created by the Covid-19 outbreak had already exceeded the damage created by the 2008 global financial crisis.

The head of the OECD told the BBC that claims by some political leaders that the world will quickly bounce back from the Global Economic Crisis now underway was “wishful thinking.”

There is growing consensus that the world is heading into a full-blown economic depression.

The imposed shutdown of much of the world’s economy, all being done in a frantic effort to contain the rapidly spreading coronavirus, has set the stage for possibly the worst contraction in economic history. JP Morgan has now issued its first projection on the impact of Covid-19 on economic growth. They forecast in Q1 and Q2 of this year combined contraction of negative 14 percent in the United States, and negative 22 % in the Eurozone. This rate of decline exceeds the initial period of the 2008 Global Financial Crisis and 1929 stock market crash that unleashed the Great Depression.

What is unique about the 2020 Global Economic Crisis is that is being initiated by self-imposed demand destruction predicated on a public health emergency. We are entering uncharted territory.

He was dubbed “Dr. Doom”  for his uncanny and highly accurate prediction of the 2008 global financial crisis and global recession. Now, Roubini is again making dire predictions of a catastrophic global economic recession. This time, however, the decisive driver of the meltdown won’t be subprime mortgages but rather the increasingly tense relationship between the two largest economies in the world – America and China.

In an article for Project Syndicate entitled, ” The Coming Sino-American Bust Up,” the noted economist  writes,  “Whether or not US President Donald Trump and his Chinese counterpart, Xi Jinping, agree to another truce at the upcoming G20 summit in Osaka, the Sino-American conflict has already entered a dangerous new phase. Though a negotiated settlement or a managed continuation of the status quo are possible, a sharp escalation is now the most likely scenario.“

Roubini sees a global recession occurring as soon as 2020, a predictions that other economists have also prognosticated on. With the previous global economic crisis of 2008 having consumed all the policy perceptions that central  banks and sovereign fiscal stimulus had available for decision makers, the coming global economic recession will find policy makers with  few silver billets remaining. In the meantime, nationalism may replace rational economics in determining the course of the next recession, which Nouriel Roubini believes will be largely determined by the increasingly strife-ridden relationship between the United States and China.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

This is a disaster-laden forecast, which essentially describes a developed global economy mired in staggering contraction, while the developing world is experiencing a collective growth rate of just above 1%, which undoubtedly would have slipped into negative territory without the inclusion of China’s GDP, which received the only positive projection from the World Bank, which has upped its China GDP forecast to a growth level of just above 7%. However, China’s economic growth is almost entirely based on borrowed money; a massive stimulus program comprising nearly $600 billion to subsidize domestic demand as a counterweight to the sharp decline in Chinese exports.

In 2010, the global economy is projected to return to growth, though on a lackadaisical scale. Even in projecting growth for next year, the World Bank reduced its already weak forecast. What the data seems to reflect, on the macroeconomic level, is that global trade is in free fall, and with the severe contraction of export-driven economic growth, massive borrowing by the sovereign to fund domestic stimulus activity is about the only major economic expansion still occurring. Unfortunately, fiscal policy is only a short-term driver of growth. Even sovereign states eventually exhaust their capacity to borrow and engage in vast levels of deficit spending.

With the World Bank pointing towards more bad news for the global economy, the European Central Bank has come out with a wet blanket of its own. The ECB is warning that pump priming by governments as their primary policy response to the Global Economic Crisis must soon come to an end, or create unacceptable levels of risk to sustained economic development. In particular, the ECB is concerned about the danger of rampant inflation and uncontrolled fiscal imbalances, as national debts of major developed economies, especially within the Eurozone, comprise a growing proportion of their GDP. More alarmingly, the ECB is not alone; other central bankers and economists are also warning that economic policymakers must soon find what they refer to as an “exit strategy” from the massive fiscal deficits that are currently being accumulated with such reckless abandon.

The World Bank’s June forecast data presents economic decision-makers with a conundrum. With 2009 shaping up to be the single worst year for global economic performance since World War II, and 2010 being projected as a year of anemic growth at best, there will be immense pressure on policymakers to enact follow-up stimulus programs, with even greater levels of public borrowing. For example, Nobel Prize wining economist Paul Krugman has consistently called for a much larger stimulus package than the nearly $800 billion Obama package. The argument will be that without more deficits, the globalized recession will be prolonged, and create higher levels of unemployment. However, the fact that in this fragile economic environment some voices within the policymaking establishment are beginning to question the continuation of debt-driven public financing is a sign that there is no clear consensus on how to resolve the Global Economic Crisis.

To add to all the other bad news, economist Nouriel Roubini, the most astute observer of the global financial and economic contraction, is now warning that while a slight economic upturn is possible in early 2010, there is now a growing risk of a “double dip” recession towards the end of 2010, facilitated in large part by the fractured finances of sovereigns that have accumulated staggering levels of public debt.

Finally, even the most optimistic projections concur that global unemployment will continue to accelerate, well into 2010. With fewer wage earners and a continuing credit contraction, it is hard to see any tangible basis for a sustained economic recovery. Remove deficit spending from the equation, and we could see a second Great Depression. Maintain high levels of public borrowing, and the global credit and bond markets will impose their own will, leading to equally cataclysmic economic consequences.

The World Bank’s updated economic forecast does not present a clear roadmap for the future of the global economy. What it does provides is more evidence that the Global Economic Crisis is far from over, and that there is no clear answer to the question of how to bring this globalized disaster to an end, and restore healthy, sustained growth to a battered world economy.

No one can accuse Obama of not recognizing that the U.S. faces a severe economic recession. Most of his administration’s initial activity has centered around crafting policy responses to the recession, primarily involving the unprecedented expenditure of borrowed money in an attempt to revive growth. However, the very character and essence of his administration’s economic policymaking reveals the lack of comprehension of how dire and unique the Global Economic Crisis is on the part of President Obama. At his core, Obama believes that the American economic system is basically sound, but slid into a severe recession because of irresponsible behavior on the part of some actors within the financial oligarchy. Hence, by restoring growth through deficit spending and enacting a new regulatory regime to restrict the destructive greed of some Wall Street tycoons and bankers, we can return to the happy economic days of yore. In effect, Obama is acting like a nostalgia buff, hoping that the correct policies will recapture the solid economic model of pre-George W. Bush America. Unfortunately, this view of America’s political economy is mythological. The U.S. economy was unhinged under the presidency of Bill Clinton as much as it has been under Bush, yet Obama has chosen Clintonites to serve in the most important economic policymaking positions in his administration. Cheerleaders for a failed model will not lead America to a new economic Jerusalem.

A major part of the problem Obama is facing is philosophical. He is following a conventional view of counter-cyclical economics; when a recession occurs, the sovereign can go into debt and use borrowed money to artificially increase demand and thus arrest the decline in growth. Once the recession is arrested, government fiscal policy can return to a more prudent policy of balanced budgets, as restored economic growth eliminates the need for the government to maintain demand. Sounds simple, as this has been enshrined as the recession-fighting bible created by economist Maynard Keynes. The only difference, the Obama administration would argue, is that this recession is much bigger than previous economic downturns, and therefore requires much more significant deficit spending. Otherwise, the Keynesian model remains unaltered.

This perspective by the Obama administration, in my view, is myopic. Like many contemporary politicians and economists, President Obama and his senior economic advisors have misread Maynard Keynes. Contrary to public perception, Keynes was no economic radical, but a centrist in dealing with the challenge of managing economic cycles within a capitalist system. Though Keynes did believe deficit spending was justified as a means to stimulate economies in deep recession, he also advocated budget surpluses during times of relative prosperity. In effect, Keynes believed in “rainy day” economics; in times of plenty you put away a little fiscal cushion that can then be spent during a recessionary period to enable the sovereign to maintain economic demand during a time of private sector contraction and declining tax revenues. This is actually a conservative philosophy that many farmers are familiar with.

In the United States, even during times of sustained economic growth, massive government deficits have been de rigeur during the past nine years, in the process doubling the national debt. There is no rainy day fund to speak of, so the staggering deficits that are now being enacted by the Obama administration are, in my judgement, fiscally unsustainable. Already, the projection for the current fiscal year’s deficit has risen by $200 billion to a stratospheric $1.8 trillion; my own estimate is that it will top $2 trillion. Looking into the future, the current Obama fiscal agenda foresees annual deficits of $1 trillion or more for several years into the future, gambling that the recession will be short-lived, with growth returning as early as the last quarter of 2009, leading to increased tax revenue and declining deficits.

But are we in a recession? The current downturn is already the most protracted and destructive since World War II. However, there is another ingredient that has been added into this toxic economic stew: globalization. We are in a Global Economic Crisis in which synchronized contractions across the world create multiple negative feedback loops that reinforce the underlying negative causation. The subprime collapse in the United States crippled banks in the U.K. and devastated Japan’s export machine; the Eurozone economic contraction is now impacting America’s export driven manufacturers. When China’s exports to America decline, commodity exporters and peripheral economies that supply value-added components to China’s export goods get whipsawed. This phenomenon is occurring at an accelerating pace, despite attempts by the Obama administration to portray minor statistical anomalies to the prevailing trend as “rays of hope” and “green shoots.” Reading tealeaves is no substitute for critical analysis.

The ongoing Global Economic Crisis has proven to be so severe, sustained and virulent that if it is not yet a global depression, it is embarked on that dangerous trajectory. However, another flaw in the Obama administration’s approach is its failure to recognize that a substantial part of the financial system is rotten to the core, and not merely a fundamentally sound system with a few bad applies populating it, who can be restrained by improved regulation. More importantly, the Obama economic team seems to have convinced themselves that “mind over matter” is the best palliative for the nation’s stricken banking system. When a sovereign’s private banks are essentially insolvent and not engaged in normal loan activities, this is another manifestation of an economic depression. Rather than admit the truth, the Obama administration cobbled together a make-believe series of bank stress tests, which supposedly show that America’s banking system, with a few minor problems, is essentially sound and fiscally healthy. This conclusion is an utter fraud, designed to artificially create a climate of economic confidence. It won’t work, and by delaying an honest approach towards the nation’s crippling level of bank insolvency, the policymakers are insuring that the final cost of the inevitable day of reckoning will be far more costly to the taxpayers.

The economist Hernando de Soto has captured the essence of the Global Economic Crisis as few others have. In his view, the Western world, and principally the United States, who have for so long railed against Third World inefficiency and corruption, have created the largest, most toxic shadow economy in the history of human civilization. More than one quadrillion dollars in unregulated financial derivatives paper, according to de Soto, has destroyed inter-bank and financial counterparty trust to such an extent, credit flows have largely frozen despite unprecedented levels of taxpayer-funded borrowing to bailout the global financial system. Nothing short of an honest accounting of the true value of the toxic assets underlying these colossal derivatives products, which equal twenty times the entire world’s GDP, can put the global economy on the road to recovery. Until these unregulated “unknown unknowns” become fully transparent, all other government interventions, including Obama’s massive borrowing binge, are doomed to failure. Sadly, as the bogus bank stress tests reveal, President Barack Obama and his Clinton-era economic advisors have financial transparency as the least important objective on their agenda.

It seems that President Obama, despite his obvious leadership gifts and towering intellect, has chosen to place his faith in a team of advisors who are tied to the Wall Street oligarchy by an umbilical chord than cannot be severed. In a sense, Obama is following the path of the last Soviet leader, Mikhail Gorbachev, who also sincerely wished to resolve his country’s economic problems, but believed that the system was fundamentally sound and only required a modicum of reform to correct its distortions. Only after the collapse of the USSR did Gorbachev conclude that the system itself was unsustainable. Now it appears to this observer that President Obama may be fated to travel the same path as Gorbachev, and like him end up as a valiant failure.

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.