Global Economic Crisis

The U.S. Commerce Department revised slightly downward its already meager assessment of the third quarter of 2015. The updated data reveals that in Q3 the American economy grew at only 2 percent. Overall, the first three quarters of 2015 indicated GDP growth in the United States of two percent. Unless there is an unexpected and massive pickup in Q4, the overall rate of GDP growth  in the U.S. will remain at about 2 percent for 2015.

Marginal growth, far below potential, has been the reality since the “recovery” from America’s Great Recession of 2008, sparked by the global economic and financial crisis. Despite unprecedented fiscal and monetary stimulus, the “recovery” still only generates a level of subpar growth that is not only counter to previous  recoveries, but is at virtual stall-speed. As the Fed begins to ramp up interest rates after nine years, should another major recession strike the U.S. economy, there are no quivers left in the arsenal of government policy measures.

DONALD TRUMP 2016: America’s Next President? is available on Amazon: http://www.amazon.com/DONALD-TRUMP-2016-Americ…/…/B0156PAAVM

Seven years after the outbreak of the global economic and financial crisis, there are growing indications that the temporary solutions that were largely imposed through monetary policy by central banks are becoming increasingly ineffective. In all likelihood, a new global downturn in economic growth is in the cards.

The weakening economic data from China, slowdown in the U.S. economy’s job growth, worsening data in emerging economies and the Eurozone, not to mention Russia, collapse of commodity prices and volatility in the equity markets are all indicators of distress. Furthermore, the continuation of near-zero interest rates by major central banks many years after the “Great Recession” supposedly ended means that there are no more arrows in their quiver when the next major global recession strikes.

One other factor to be assessed are the fantasy employment numbers in the United States. While the official unemployment rate has supposedly been cut in half since the darkest days in 2009, in reality labor force participation is at historic lows (http://www.ibtimes.com/us-labor-force-participation-drops-absence-paid-parental-leave-keeps-women-out-jobs-2124175), revealing that the American economy is functioning well below its potential. In addition wage stagnation, and the latest revelation from the Bureau of Labor Statistics that earlier job creation figures were highly exaggerated (http://www.npr.org/sections/thetwo-way/2015/10/02/445244030/economy-adds-142-000-jobs-unemployment-steady-at-5-1-percent), demonstrates that even the U.S. economy, supposedly the healthiest on the planet, is manifesting growing signs of structural weakness.

In the wake of the global economic and financial crisis of 2008, policymakers in major economies made a bet on the same financial sector that unleashed the worldwide systemic disaster. Their decision was to engage in massive, unprecedented fiscal indebtedness and monetary loosening to prop up the investment and commercial banks, in the hope that this would stimulate reinvestment in the general economy (“main street”) and revive sustainable economic growth. There is growing evidence that this gamble made by decision makers in the world’s major economies is faltering. With staggering levels of sovereign debt, and central banks across the developed world having expanded their balance sheets almost to the point of infinity, the policymakers are left only with hopes and prayers that another massive crisis does not strike on their watch.

Nobel Prize winning economist Paul Krugman, in his recent column, has declared that the crisis in the global economy is now a depression.  Since the onset of the global economic crisis, policymakers and media pundits have resisted using the “D” word, instead preferring terms such as the “Great Recession.” However, this is what Paul Krugman wrote in his  December 11, 2011 New York Times column:

“ It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege. .. Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained.”

Krugman points out in his piece that the economic disaster now unfolding in Europe threatens a resurgence of anti-democratic, populist authoritarianism of the type that infected European civilization during the Great Depression of the 1930s.Of course, the same dangers also lurk in the United States.

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I predicted in 2009 that the policy responses following the collapse of Lehman Brothers in 2008 would not only fail to resolve the global financial and economic crisis; they would create a sovereign debt contagion that would transform the recession into a depression.  Paul Krugman has confirmed the validity of my forecast made in 2009.

In his closing observation, Paul Krugman offers an ominous warning. After describing how Hungary, one of the new democracies in Eastern Europe, is receding into authoritarian rule as its politics become more extremist, all due to the economic crisis in Europe, Krugman writes about the Eurozone political leaders,  “they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.”

It appears that the global economic crisis, and Eurozone debt crisis, are increasingly becoming a political crisis.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

The NBER has issued a consensus determination that America’s Great Recession, which it said began  in December 2007, came to a technical end in June 2009, after GDP growth resumed. It is the NBER that economists look to in making the call on the initiation and termination of economic recessions in the United States.

While declaring the Great Recession over, the NBER concedes that the recovery has been unusually weak, after enduring the sharpest and longest downturn since the Great Depression of the 1930s.

I will put my own spin on the NBER report. It may be technically correct, but the resumption of GDP growth was based entirely on a massive explosion in public debt, the consequences  of which are excluded from the NBER’s take on the American economy. However, by acknowledging the anemic character of the recovery, it is indirectly pointing to the unsustainability of the recovery. Declining consumer spending capacity, essential for sustained economic growth, will ensure that the massive public debts cannot be serviced in the long term. This will lead to a global sovereign debt crisis and likely long-lasting economic depression.

We all exist in an interconnected global economy, meaning a major financial crisis in one country is virtually impossible to contain before it has metastasized abroad. The financial implosion that began with the collapse of Lehman Brothers in September 2008 was an object lesson in this aggregation of global financial fragility, as credit markets worldwide froze solid. We are now seeing a similar though far more dangerous phenomenon unfold, this time involving sovereign debt in Europe as opposed to private investment banks on Wall Street. The United States is far from immune to the long-term consequences of the Eurozone’s public debt and currency crisis.

We all recall the state of petrified panic that engulfed key political actors in major economies throughout the world as LIBOR and Ted spreads soared to the heavens in the fall of 2008. Policymakers made the fateful decision to dump the impediment of moral hazard, bailout Wall Street at taxpayers’ expense, and to transfer private toxic debt into public debt. This policy measure was further exacerbated by massive increases in deficit-driven stimulus spending to offset the economic contraction that resulted from this same credit crisis.

Ever since, policymakers have engaged in an orgy of self-congratulation, praising themselves for “saving the world” from another great depression. However, not so clever. The massive increase in public debt in virtually every advanced economy has now given rise to the next phase of the global economic crisis. We are in the midst of the initial stages of a full-blown sovereign debt crisis that potentially may inflict far more havoc on the global financial system than the turmoil that erupted less than two years ago.

A few months ago, the Eurozone politicians claimed that there existed a sovereign debt crisis only in Greece, that it was contained and would not even require an actual bailout, only the possibility of aid if it was needed, the implication being that this reassurance would be sufficient to calm the bond markets without any Eurozone rescue money actually flowing to Athens. Then, as the situation deteriorated further, we were assured that only a few tens of billions of Euros would put Greece back on its feet. When the markets weren’t fooled, the increasingly frantic Eurozone politicos offered a vastly higher level of bailout cash for Greece, translating into more than $140 billion. However, even that princely sum didn’t stop the spreads on Greek public debt from expanding, while Spain, Portugal and Italy came under increasingly harsh scrutiny from the bond vigilantes.  The result is a joint Eurozone and IMF bailout package for all the so-called PIIGS nations in the Eurozone (Portugal, Ireland, Italy, Greece and Spain) totalling a cool $1 trillion.

The unprecedented scope of the Eurozone  bailout package in its latest form (bereft of a plausible explanation as to how this money would actually be raised),  saved the euro from further deterioration for all of 24 hours. The embattled currency has now resumed its descent into fiscal oblivion, as global markets correctly question how other European nations that are themselves faced with massive structural deficits and ballooning public debts can bailout the PIIGS. There is a growing consensus that Europe is confronting a mounting  and insoluble sovereign debt crisis. In the short run, the U.S. is the beneficiary, as a flight to safety sentiment channels investors towards Treasuries as a safe haven. However, the economic consequences of the crisis in the Eurozone, combined with the public debt crisis in the UK that the new government is committed to resolving through severe budget cuts, will inevitably imperil the U.S. economy’s fragile recovery from the Great Recession, at a time when America itself is faced with structural mega-deficits far into the future.

The International Monetary Fund has now weighed in with its own expression of concern on the looming danger of a sovereign debt crisis impacting all major economies. The IMF’s recent fiscal monitor projects that by 2015, the proportion of public debt to GDP will reach 110% in the U.S., 250% in Japan and 91% in the UK, with comparable figures for most other large economies in Europe.  These numbers do not even recognize unfunded contingent liabilities, which in the United States would add another 400-600% to the debt to GDP ratio.

What began in Greece and now grips the entire Eurozone economy will inevitably impact the United States. When Washington is compelled by the bond market to finally confront the full force of a sovereign debt crisis, it may prove as impotent in the face of global market forces as is the Eurozone. Furthermore, when that day arrives, unlike the Wall Street bailout of 2008, there will be no taxpayers in some far-off magical land that will be able to bailout Uncle Sam.

We are indeed living through interesting times.

A highly tangible outcome of the global economic crisis and its first stage, the so-called Great Recession, has been the deleveraging underway by households and businesses throughout major advanced economies. In the United States and United Kingdom, consumers who boosted consumption on the basis of easy credit as opposed to higher disposable incomes are now tightening their belts and battening down the hatches. The predictable result has been a decline in aggregate demand. This is where the neo-Keynesians enter the fray, preaching the gospel of mega-deficit spending by governments.

The classical economic theory as developed by John Maynard Keynes holds that in times of severe economic contraction in the private economy, it is permissible for the sovereign to go into debt and increase spending to compensate for the falloff in consumer and other private sector expenditures. The rationale is that this short-term increase in the public debt will retard the rise in unemployment, limit the impact and duration of the economic recession and in the long run lead to overall better economic performance, with limited effect on the ratio of public debt to GDP. Though advocates and opponents can offer differing views on the historical validity of Keynes and his counter-cyclical concepts of sovereign  intervention in the economy, there is no doubt that his theory is intellectually cogent and based on a serious analysis of economic problems, particularly in regards to the Great Depression of the 1930s. However, is the current wave of unprecedented sovereign indebtedness equally cogent? If John Maynard Keynes were still alive, he would likely take issue with the massive tidal wave of red ink being unleashed by politicians as their antidote to the global economic crisis.

Though John Maynard Keynes is portrayed as a deficit-loving interventionist, in reality he was not. What is left out of the description of his theory in regards to counter-cyclical fiscal policy is that Keynes also believed that in times of relative prosperity sovereigns should create budget surpluses. He belief was that booms and busts were an integral characteristic of modern capitalism, and that  the accumulation of reserves during times of plenty would enable governments to engage in temporary deficit spending to combat a severe recession, without creating the long-term danger of exploding national debt to GDP ratios. This is an aspect of Keynes’s views on fiscal policy that has been conveniently forgotten by the modern interpreters of Keynesian economics.

Since World War II, the U.S. has seldom run balanced budgets. If generally accepted accounting principles were applied to official U.S. federal government budget reports, which require taking into account future liabilities for Social Security and Medicare, then during this period the United States has always run large fiscal deficits, even during times of relative economic prosperity. What this means in reality is that the conditions laid out by John Maynard Keynes for allowing a sovereign to engage in deficit spending during a recession, namely building budget surpluses during periods of economic expansion, have never been adhered to.

During the Great Depression,  the U.S. government did engage in substantial deficit spending within the framework of the New Deal, but with a ratio to GDP far lower than what is currently occurring on President Obama’s watch. This fiscal policy was engaged in with a cumulative national debt to GDP ratio nowhere near the current level, and with a large base of domestic savers prepared to buy U.S. government debt, in contrast with the present day reliance on foreign buyers of U.S. Treasury Bills.

If John Maynard Keynes were alive today, I suspect he would be horrified at the manner in which his economic theories have been distorted, and the likely outcome of such fiscal profligacy.

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.

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.”

Economics is a social science, not an exact science.  Theories on how a nation’s economy and financial system should function  proliferate the body politic, ranging from Reagonomics to Keynesian pump-priming. However, as the past year’s global economic crisis has demonstrated, dogmas and theories, such as market fundamentalism, are largely impotent in the face of brutal economic realities. It was not out of conformity with a particular economic dogma, but rather sheer panic, which drove  key policymakers in major advanced and developing economies throughout the world to plunge their nations into unprecedented levels of public debt, all in a frantic effort aimed at halting the free fall collapse of the global financial system that had erupted after the downfall of the investment bank Lehman Brothers.

One year later, throughout the world and especially in the United States, political decision makers are proclaiming to their constituents that the worst of the economic crisis is behind us, “green shoots,” in the words of Fed Chairman Ben Bernanke, are starting to emerge, and the stock market has regained much of its losses. Yet, as Wall Street awards record bonuses to many of its stakeholders, unemployment in the U.S. and other developed countries continues to rise, while the credit crunch constricts small and medium size businesses. Amid the contradictory images regarding the Great Recession, I have written “Global Economic Forecast 2010-2015:Recession Into Depression,” http://www.createspace.com/3403422 , in which I look at the likely economic trends over the next 5 years. As the title suggests, my projection is not an optimistic one.

While the trillions of dollars poured into the global financial system by the United States and other sovereigns did prevent a total financial collapse in late 2008, this achievement has not come without a high cost, and growing danger.  The level of public debt being accumulated by governments across the globe in response to the global economic crisis, and especially in the U.S., will reach a point of unsustainability, likely by 2012. This will occur simultaneously with continuing high rates of unemployment, which equates with weak consumer demand. The United States is dependent on the American consumer for at least 70% of GDP output. Overleveraged and underemployed consumers dampen growth prospects and  retard government tax revenues. While public finances remain weak, policymakers will likely maintain stimulus spending programs, which translates into structural mega-deficits. The Congressional Budget Office is currently projecting a $9 trillion deficit over the next decade; based on the CBO’s past record, this is likely a lowball estimate.

In my look at the probable economic trajectory for the U.S. and other major economies over the next five years, I had to confront the strong possibility that amid America’s growing fiscal imbalance, there exists a serious danger of future shocks to the global financial system, which may possibly rival the implosion of the investment banks which occurred in 2008. During the next two years, $2 trillion in commercial real estate loans will come due. These were loans initiated when commercial properties were at their peak valuation, and largely securitized, as was the case with subprime loans that triggered the financial crisis in 2008. Should a commercial real estate implosion replicate the carnage that the banking system experienced in 2008, how will sovereign governments, the United States in particular, find the money to finance another financial system bailout? My conclusion is that it will not be mathematically possible for the U.S. and other governments to sustain a future rescue of the banking system. In essence, sovereign  governments will become overwhelmed with public debt, reaching a point of fiscal collapse. The result will be sovereign insolvency, leading to a synchronized global depression.

In his farewell address to the nation in January 1961, President Dwight D. Eisenhower warned his countrymen about the long-term consequences of soaring public debt. Mortgaging the assets of future generations, Eisenhower believed, could transform today’s democracy into tomorrow’s “insolvent phantom.” In the midst of our current economic crisis, it would be wise to pay heed to the sage advice that President Eisenhower offered nearly half a century ago.

As if on cue, the Dow Jones index soared to the skies in sequence with the Commerce Department’s triumphant announcement that the third quarter GDP growth in the United States was a robust  3.5 %. After 4 consecutive quarters of economic contraction, the pronouncement that the American economy was now growing, and at a stronger rate than many experts had forecasted, the cheerleaders on Wall Street are celebrating the end of the recession. Hallelujah, the Great Recession is over, the stimulus package has worked!

Not so fast.

Let us journey back into recent history of just over one year ago. It is August 28, 2008 and the Commerce Department has just released its revised growth figures for the second quarter of 2008. It turned out, according to the statisticians at  the Commerce Department, that the American economy grew at a much faster pace than originally reported. The revised Q2 GDP growth figure for 2008 was 3.3%, nearly identical with the Q3 figures now being reported in 2009. The pundits rejoiced at this magnificent economic news, proclaiming that these numbers reflected the success of the $150 billion deficit-driven  stimulus package approved by Congress at the beginning of the year. Analysts proclaimed that the impressive growth figures for  Q2 of 2008 meant that the U.S. economy had dodged a bullet, and thanks to loose fiscal and monetary measures, there would be no recession.

Two weeks after the release of the revised and supremely optimistic quarterly growth figures by the Commerce Department, Lehman Brothers went bankrupt, the global financial system went into cardiac arrest and a synchronized recession struck virtually every economy on the face of the earth.

Before celebrating the glorious Q3 numbers for the U.S. economy, I recommend that prudent observers reflect on the massive levels of public indebtedness required to create the accounting metrics that can demonstrate economic growth simultaneously with the devastation of the real economy  and continuing increases in an already staggeringly high level of unemployment. Furthermore, digest the reality that car sales generated by the recent “cash for clunkers” program contributed nearly  1.7% of the 3.5% growth in GDP in Q3. Then, looking at the recent history referred to above, ask the hard questions on how sustainable the trajectory suggested by the third quarter numbers really is.

In my view, the 3.5% Q3 numbers of 2009 are as reliable an indicator of future economic growth as were the 3.3% GDP growth figures in 2008. As George Santayana stated, those who forget the past are condemned to repeat it.

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com