Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

One of the leading credit rating agencies, Fitch, had lowered its assessment of credit worthiness of the U.S. from the top level of AAA to AA plus. Though only a notch lower than the top level, the new rating by Fitch may be the start of a disturbing trajectory for American sovereign debt.

The explanation given by Fitch for lowering its rating on U.S. Government debt has been what it views as the deterioration of governance in the USA over a period spanning two decades. The evidence of this is apparent to any observer of political discourse and activity in the U.S. and raises questions about the long-term stability of the American political system. The economic and financial repercussions of those internal developments will now have a steep cost, as Fitch is likely to be followed by other rating agencies.

While U.S. Treasury Secretary Yellen has been joined by leading analysts in decrying the move by Fitch, it is clear that this rating agency is looking far beyond current economic data, which on paper makes the Amerasian economy appear strong, especially compared with other major economies. It must be noted that the U.S government functions on a a sea of red ink. It must constantly borrow vast sums of money to function. What has made that vast debt edifice functional has been credit access tied to the lowest possible borrowing costs. The decision by Fitch is an indication that the costs of sovereign borrowing by the U.S. will escalate. This opens up the possibility of a long-term sovereign debt crisis in the U.S., which would have devastating consequences far beyond\d America’s shores.

In 2022 the U.S. federal government deficit was 1.4 trillion dollars, representing 5.5 % of GDP. Total federal spending was 6.3 trillion dollars, with revenue of only 4.9 trillion dollars. Interest paid on the national debt that same fiscal year was 476 billion dollars, presenting a whopping 35 % increase over the prior year. Now, with the first crack in America’s AAA credit worthiness having occurred, substantial increases in annual debt servicing costs are to be expected, eating up a growing percentage of the federal government’s fiscal capacity.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The Labor Department released its jobs reports for December 2020. It is dismal yet not surprising. In the past month the U.S. shed 140,00 jobs. This is the first monthly contraction  in  employment numbers  since April 2020, and the destruction of millions of jobs in the early stages of the Covid-19  pandemic. Though vaccines are slowly being distributed in the United States, having been developed in record time, the nation is currently experiencing the most severe spread of coronavirus, with states responding with further lockdowns and restrictions on economic activity. This portends to further job losses as the Biden administration takes over the White House in a matter of days.

It is not only the Covid-19 contagion that is damaging  the American economy. The risk assessment consultancy Eurasia Group lists political division in the United States as the number one global risk, ahead of the Covid pandemic. As if on cue, 48 hours after the release of Eurasia Group’s, report  on top global risks, riots erupted within  the Capitol building in Washington DC.  The growing political stratification within American society, combined with the continuing damaging impact of Covid on economic  activity, points to a very negative economic outlook for the United States and inevitably for the entire global economy.

A milestone of misery has just been reached in the United States. The Covid-19 pandemic has now claimed more than 100,000 lives in the U.S., and the country’s Labor Department has issued a weekly jobs report showing another 2.1 million Americans have filed jobless claims. This means that in the last 10 weeks, more than 40 million American workers have lost their jobs.

In addition to the above grim statistics, the U.S. Q1 economic report has been revised, showing a higher level of economic contraction of negative 5%. However, this is a mere harbinger of what is to come. The Q2 economic report is forecast by several experts to reveal a contraction of between 20 and 40 percent.

The bad economic news in America is being replicated globally. Virtually every major economy has witnessed an economic shutdown based  on combating the coronavirus. The result has been economic suicide in numerous countries. We are clearly already in a severe recession, far worse than the Global Financial Crisis of 2007-09. Increasingly, we are entering a global economic depression, the Global  Economic Crisis of the 2020s.

In an interview with the CBS news magazine 60 Minutes, the Fed Chairman warned that the American economy could “easily” contract by 30 % in the current quarter. He also told the interviewer that the U.S. unemployment rate could peak at 25 %.Though the Fed chairman tried to put a positive spin on his message, using such rhetorical phrases as his “never bet against the American economy,” the reality Powell presented minus the spin was anything but rosy.

Even the Fed chairman’s prediction that economic growth would resume in the second half of 2020 was conditioned by developments on the health front, and that a full economic recovery required the development of an effective Covid-19 vaccine.

The Federal Reserve is clearly worried about a full-blown depression, a prospect that is increasingly likely. In fact, there is a growing consensus that a possible short-term recovery will be followed b y a sustained economic depression, transforming the global health crisis engendered by the coronavirus into the Global Economic Crisis of the 1920s.

The U.S. Bureau of Economic Analysis released its report on GDP growth for Q 1 of 2020. The numbers were dismal, negative 4.8 percent. Though this was the worst decline experienced by the American economy since 2008, at the height of the Global Financial crisis, it was merely a harbinger of much worse to come. It must be recognized that the impact of the demand destruction inflicted by the Covid-19 pandemic only began to emerge in the last two weeks of Q1.

A more telling pointer of whist to expect in Q2 was the latest jobless claims report issued by the U.S. Labor Department. According  to the report, an additional  3.8 million American workers filed unemployment claims. Cumulatively, this means that during the past 6-weeks more than  30 million U.S. workers have filed jobless claims. In other words, over a period of only six weeks, the U.S. unemployment rate has skyrocketed from 3.5 percent to more than 18 percent. This is an unprecedented rate of accelerated employment contraction. Not even during the Great Depression has the American economy witnessed such appalling statistics.

The collapse of the job market in the United States brings with it a radical contraction in aggregate demand. This would point to the Q2 report showing that, at a minimum, the nation’s GDP will  shrink by more than 20 percent, and possibly as high as 40 percent.

The collapse of the world’s largest economy at unprecedented velocity is only a reflection of a global economic implosion. The Global Economic Crisis will linger after the health crisis  created by the coronavirus has receded. This is indeed the Great Depression of the 21st century.

As the coronavirus ravages our planet, decimating economies large and small in its wake, it distinguishes itself from the 2007-09 global financial crisis in this way: it is an economic disaster brought on by a health crisis, as opposed to the GFC, where economies were harmed by a major financial crisis. However, this distinction will soon vanish, for the following reasons.

The enforced shutdown of the global economy created by the health response to the Covid-19 panic has led to massive spikes in unemployment, at a faster pace than even during the Great Depression of the 1930s, while businesses large and small are shuttered, severely constricting activity, while households are on the verge of insolvency. To prevent complete economic and societal collapse, sovereigns have launched emergency stimulus measures, at unprecedented levels of deficit spending, typically in the range of 10 to 15 % of GDP, as in the United States with Congress recently passing a 2 trillion dollar stimulus bill (representing ten percent of pre-crisis GDP).

However, with millions of workers now jobless and corporate activity at a near standstill, tax revenue from personal and corporate income, as well as capital gains, will shrink precipitously.

Before the onset of the coronavirus crisis, the U.S. economy, supposedly operating at its best level of performance, and with unemployment at a record low, was still requiring an annual budget deficit of one trillion dollars to fund federal government operating costs. Factoring everything we now know, the actual U.S. government deficit for the current fiscal year will be substantially higher than 20 %.

Should large developed economies such as the United States run annual deficits in the range of 20 percent of a shrinking GDP, notwithstanding debt monetization by the Federal Reserve and other central banks, a sovereign debt crisis of unparalleled dimensions will complement the Covid-19 pandemic in its negative impact on the global economy, and endure long after a vaccine is developed for coronavirus.

The increasingly likely sovereign debt crisis makes it more certain that the global economic crisis will not only be long-lasting, but will manifest the characteristics of an economic depression as opposed to a less virulent recession. Furthermore, long-term monetary measures a sovereign debt crisis will compel policymakers to implement will heighten the risk of severe global inflation, leading to a period of prolonged stagflation.

The corrected data released by the Commerce Department for the second quarter of 2016 is even a little worse than the already bad initial estimate. In Q2 the American economy registered GDP “growth” of a lackluster 1.1 percent. This follows similar data for Q1, indicating that in the first half of 2016 the U.S. economy grew by only a dismal one percent.

Despite hundreds of billions of dollars in deficit spending, the U.S. economy remains at stall speed. Without hundreds of billions of dollars in deficit spending, America’s economy would without a doubt plunge into a technical recession. Thus, less than three-months ahead of the U.S. presidential election, the Obama economy will not be one of the arrows in Hillary Clinton’s quiver. This may also provide Donald Trump with more ammunition, as the perception of a robust economic recovery in the United Sates fades from reality.

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The U.S. Labor  Department has issued its employment data for May, and it is an unmitigated disaster. A mere 38,000 new jobs — many of them part-time — were created, while the supposedly stellar jobs numbers for previous months were revised downwards.  This is an appallingly bad employment report, yet the same Labor Department claims that the unemployment rate in the United States actually declined to  4.7 percent

It should be recalled that to keep pace with population growth, the American economy must add at least a quarter of a million new jobs each month.  If the result of a dismal 38,000 jobs in May is a supposed decline in the unemployment rate in the U.S., the only explanation is that many discouraged job seekers have supposedly “left” the work force, meaning that they are no longer considered by the Labor Department to be unemployed.

The jobs report for May, a disaster by any definition, explains the official and unofficial realities of the U.S. economy in 2016. The Obama administration maintains that the employment situation in the country is excellent; the data , devoid of spin, displays the exact opposite.

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The revised data released by the Commerce Department indicates that America’s economy expanded by an anemic 0.7 percent in the final quarter of 2015. This level of GDP “growth” is essentially stall speed, indicative of the world’s largest economy being stuck in stagnation, reminiscent of Japan’s  L-shaped recession.

Despite Labor Departed figures that are spun to suggest a robust economy based on artificially low unemployment rates, the GDP data is more reflective of reality; an American economy that is stuck in the mud. And this, despite a recently increased projected deficit for the U.S. federal government of $544 billion for 2016.

Massive deficits combined with a stalled economy that may face a recession as global economic disarray grows will likely impact the upcoming 2016 presidential election, in which it appear more likely now that Donald Trump will challenge Hillary Clinton.

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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.

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