The Spectacular, Sudden Crash of the Global Economy
The Spectacular, Sudden Crash of the Global Economy
By Joshua Holland, AlterNet. Posted February 24, 2009.
In a short period of months, the entire system of global capitalism has screeched to a halt. No one knows what happens next.
The worldwide economic meltdown has sent the wheels spinning off the project of building a single, business-friendly global economy.
Worldwide, industrial production has ground to a halt. Goods are stacking up, but nobody's buying; the Washington Post reports that "the world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores." A Hong Kong-based shipping broker told The Telegraph that his firm had "seen trade activity fall off a cliff. Asia-Europe is an unmit igated disaster." The Economist noted that one can now ship a container from China to Europe for free -- you only need to pick up the fuel and handling costs -- but half-empty freighters are the norm along the world's busiest shipping routes. Global airfreight dropped by almost a quarter in December alone; Giovanni Bisignani, who heads a shipping industry trade group, called the "free fall" in global cargo "unprecedented and shocking."
And while Americans have every reason to be terrified about their own econopocalypse, the New York Times noted that everything is relative:
In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.
Chinese manufacturing declined in each of the last five months; according to the Financial Times, "More than 20 [million] rural migrant workers in China have lost their jobs and returned to their home villages or towns as a result of the global economic crisis." The UN estimates that the downturn could claim 50 million jobs worldwide, prompting Dennis Blair, the U.S. National Intelligence Director, to warn Congress that, "instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism."
Riots, strikes and other forms of civil unrest have become widespread the world over; governments have fallen. In Europe, parties of the far right and left have seen their fortunes rise.
The model of economic globalization that's dominated during the past 40 years is, if not dead, at least in critical condition. Few progressives will mourn its demise -- it was both a proximate cause of the economic meltdown in which we find ourselves today, and one of its victims. But if we are reaching the end of an era, questions arise about not only what will replace it, but also how we'll finance the government spending that most economists agree will be required to stave off a long, painful depression.
Always a Flawed Model
For almost 40 years, smooth-talking snake-oil salesmen in well-tailored suits have pitched the wonders of a globalized economy. Politicians and pundits alike insisted that the wealthy states at the core of that worldwide economy could shift labor-intensive production to the poorer countries at the edges, in search of a cheaper pair of hands and less nettlesome regulations, and that ordinary working people would benefit. Whatever pain Americans might feel as a result of the project was merely temporary “displacement,” they argued, and anyway those cheap toys at Wal-Mart more than offset any problems that might come along with the decimation of America’s middle class. After all, a little lead never hurt anyone.
The same hucksters sold a similar bill of goods to the developing world. Look outward, they said, build export economies and turn those peasants into factory line workers. Sign treaties forcing governments to let multinationals move goods and capital freely, keep their regulators out of the way of Big Business’s profits and prosperity will surely follow. Most governments adhered to this pro-corporate orthodoxy, slashing taxes on foreign companies and scrapping various controls on foreign investment. Largely unregulated “free trade” zones proliferated along the world’s significant shipping routes.
The result was an explosion in international trade and a distinct increase in economic inequality in both poorer and richer countries.
Among the wealthy countries, nowhere was this truer than in the United States, with its fealty to a mythic “free market” and its elites’ scorn for a robust safety net. After union-busting, global trade deals have done the most damage to workers’ bargaining power. Whereas companies used to negotiate with their employees in relatively good faith, those negotiations are now overshadowed by the threat -- ubiquitous in labor disputes today -- to simply move the whole plant to Mexico or China.
The result was an illusion of prosperity. Corporate profits rose (in 2004, corporate profits took the largest share of national income since they started tracking the data in 1929 and wages took the smallest), and high earners did very well too. When the oil shock hit in 1973, those in the top one percent of the income ladder took in just over 9 percent of the nation’s income; by 2006, they grabbed almost 23 percent. In the intervening years, their average incomes more than tripled (Excel file).
The rest of us didn’t do as well. In 1973, the bottom 90 percent of the economic pile -- most of us -- shared two-thirds of the nation’s income; by 2006, we got half. If you take off the top ten percent of the income ladder, the rest of the country in 2006 earned, on average, 2 percent less than they did 30 plus years earlier, despite the fact that the economy as a whole had grown by 160 percent over that time.
But we continued to buy; it's become almost a cliché to say that American consumerism is the engine of the global economy.
How did we do it with incomes stagnating? First, women entered the workforce in huge numbers, transforming the “typical” single-breadwinner family into a two-earner household. (Between 1955 and 2002, the percentage of working-age women who had jobs outside the home almost doubled.)
After that, we started financing our lifestyles through debt -- mounds of it. Consumer debt blossomed; trade deficits (which are ultimately financed by debt) exploded and the government started running big budget deficits year in an year out. In the period after World War Two, while wages were rising along with the overall economy, Americans socked away over 10 percent of the nation’s income in savings. But in the 1980s, that began to decline -- the savings rate fell from 11 percent in the 1960s and ‘70s, to 7 percent in the 1980s, and by 2005, it stood at just one percent (household savings that year were actually in negative territory).
After the collapse of the dot-com bubble and the recession that followed it, the economic “expansion” of the Bush era was the first on record in which median incomes never got back to where they were before the crash. Fortunately for Wal-Mart shoppers, a massive housing bubble was rising. Americans started financing their consumption by taking chunks of equity out of their homes. The result: in 2005, long before the housing bubble crashed, the average amount of equity Americans had in their homes was already the lowest it had ever been.
We hear a lot of chatter about a “credit crunch” being at the root of our economic woes -- that banks aren’t lending to otherwise qualified individuals and businesses. The truth, however, is that before the housing (and stock) markets crashed, the average American household already had 20 percent more in debt than it earned in a year.
Already deeply in the hole, when the markets crashed, consumers stopped spending, and that's fueled millions of layoffs, led to a mountain of foreclosures, and left state budgets decimated. The connection between decades of false prosperity, the piles of household debt that resulted, and the degree to which that left American families vulnerable to the bubble’s crash is not difficult to see.
Globe and Mail Update
February 23, 2009 at 6:45 PM EST
Harvard author and financial crisis guru Niall Ferguson has landed with a thud in Ottawa, spreading messages that could make even the most confident policy makers squirm.
The global crisis is far from over, has only just begun, and Canada is no exception, Mr. Ferguson said in an interview before delivering a presentation to public-policy think tank, Canada 2020.
Policy makers and forecasters who see a recovery next year are probably lying to boost public confidence, he said. And the crisis will eventually provoke political conflict, albeit not on the scale of a world war, but violent all the same.
“There will be blood.”
Will invoking the Great Depression bring it on?
The Buy America penchant pushed by the U.S. Congress in passing the recent stimulus bill was only the tip of the iceberg.
Abu Dhabi buying Nova Chemicals at bargain-basement prices on Monday is a sign of things to come, with financial power quickly being transferred over to the world's creditors – namely sovereign wealth funds – and away from the world's debtors.
And much of today's mess is the fault of central bankers who targeted consumer-price inflation but purposefully turned a blind eye to asset inflation.
The Laurence A. Tisch professor of history at Harvard University, and author of The Ascent of Money, A Financial History of the World, sat down with The Globe and Mail's economics reporter, Heather Scoffield.
Heather Scoffield: Canadian leaders frequently argue that Canada is in better financial shape than elsewhere in the world, and therefore should fare better during this crisis. Do you agree?
Niall Ferguson: Canada is [considered] a winner because its banks are less leveraged, bank regulation here has been tighter, because its housing market hasn't been in a bubble quite the same way. It's tempting to conclude from that ... that Canada will be less hard hit in the crisis than the United States. But that is unfortunately wrong. Because this is a very unfair crisis. The epicentre is the United States, but the rest of the world, and particularly America's trading partners, will get hit harder than the U.S.”
“It suggests virtue is its own reward. You don't get any reward beyond the self-satisfaction of having been virtuous. This is a crisis of globalization. Therefore, the more an economy depends on the global system, the harder it hurts. Canada is not finding the worst. Asian economies are going to be really slammed this year. But it's an unfair world. The U.S. won't be as badly affected as most countries.”
Heather Scoffield: Is the U.S. able to escape with less pain because it has more resources to throw at its problems?
Niall Ferguson: “Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair. Here is the world's biggest economy, which gave us subprime mortgages, rampant securitization, the collateralized debt obligation, Lehmann Brothers, Merrill Lynch. It is, in a sense, the fons et origo of this crisis. And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields. It's almost paradoxical that an American crisis ... reinforces the status of the United States as a safe haven.”
Heather Scoffield: Surely that safe-haven status would be revoked if China loses faith in the U.S. ability to finance its debt?
Niall Ferguson: As you know, Chimerica – the fusion of China and America – is one of my big ideas. It's really the key to how the global financial system works, and has been now for about a decade. At the end of The Ascent of Money, I speculate about whether or not that relationship will survive. If it breaks down, then all bets are off, for the U.S. and indeed for Asia. I think that's really the key point. Both sides stand to lose from a breakdown of Chimerica, which is why both sides are affirming a commitment to it.”
“It's very interesting that the Chinese in the last week were saying such soothing things around the [Secretary of State Hillary] Clinton visit. This was only days after Treasury Secretary Tim Geithner used the dreaded ‘m' word – currency manipulation.
Heather Scoffield: Why would the U.S. administration poke a stick in China's eye like that?
Niall Ferguson: “You obviously have to recognize that Democrats have been more hawkish on China for some time, than the Republicans ... But I think Tim Geithner is smart enough to know that this is a very dangerous game to play and I would be very surprised if you heard that word again pass his lips.”
Heather Scoffield: Did the Clinton visit improve the China-U.S. relationship?
Niall Ferguson: It looks like it....The line is very clear from China. They've consistently made their position clear. They want the status quo. They do not want this thing to break down. They were kind of appalled when Geithner said the ‘m' word. And they took full advantage of Hillary Clinton's visit to smooth ruffled feathers and restate their commitment. It's a very good bilateral relation. That bilateral will is important here. The Chinese believe in Chimerica maybe even more than Americans do.
Continued on Page 2…
The question is, with Franz running the treasury, will Obama be able to re-instate glass /steegle and regulate derivatives or is he bought out?
My guess is Brezinski and Bernake has him cheerleading and doing many good things, but hands off the fed.
Derivatives need to go the way of the dodo or be regulated.
This "Free world trade mantra is getting old about 10 years ago.
And WTF are we doing in the Khyber pass?
Control of monetary policy is the key issue. No US prez has had control over it since JFK.
That's one BIG reason they offed him. LBJ immediately surrendered control to the fed and so has every Prez, since.
Our stocks, banks, autos are ALL seriously under capitalized and vulnerable to foreign takeovers.
brush up on your Cantonese. ;D
Where is the money going?
Where is it???
What would you do with a mountain of US dollars? I would buy undervalued assets in the USA so all you realtors out there brush up on your Cantonese. ;D
China bought America by making cheapo can openers?
LOL interesting you used 'can openers'
They did in fact open the big Can.
China could demand exchange of real value for its hundreds of billions in US dollars. We could lose not only our last remaining productive industries -- but even our crown jewels -- our national parks and forests.
That would be the final blow. I worry about this.
And Japan was buying America up too with the wealth they made off
of selling us cars and electronics. And what did it get them?
The lost decade.
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