Winnipeg Free Press - PRINT EDITION

Global economy has serious chronic condition

  • Print

Financial market indicators suggest the global economy's condition is brighter than an examination of the real economy would suggest.

Following the economic downturn in 2007-08, liberal injections of taxpayer cash avoided catastrophic failure and resulted in a modest recovery. Governments ran large budget deficits in the period after the crisis. Interest rates around the world were reduced to historic lows, zero or negative in many developed countries. Balance sheets of major central banks have increased to US$18 trillion from around US$6 trillion, an unprecedented 30 per cent of global gross domestic product (GDP).

As evident from the anticipation of and reaction to decisions by the U.S. and European central banks to provide further support, the global economy is now addicted to monetary heroin.

The U.S. is in marginally better condition than others -- the "cleanest dirty shirt" is the expression that comes to mind. But despite a US$1 trillion annual budget deficit (six per cent of GDP) and expansionary monetary policy, growth is a tepid two per cent.

The housing market's rate of descent has slowed but prices remain 30 to 60 per cent below highs.

New housing starts have stabilized, at around 50 per cent below peak levels. Benefiting from a weaker dollar, manufacturing has improved. Lower oil and natural gas prices have benefited the economy.

Employment remains weak. Consumer spending remains patchy. Job insecurity, lack of earnings and wealth losses are causing households to reduce spending and repay debt.

Record corporate profits have been achieved mainly through cost reductions and minimal revenue growth. Investment is weak due to the lack of demand.

Bank lending is sluggish due to lower demand for credit and problems of financial institutions.

Federal public finances remain unsustainable. Cuts in spending, mandated under the 2011 increase in the national debt ceiling, would improve deficits but adversely affect growth. State and municipal finances are under severe stress, with an increasing number of borrowers filing for bankruptcy.

Europe remains trapped by high debt levels, budget and trade deficits, social spending inconsistent with tax revenues, poor industrial competitiveness (with some exceptions), a rigid monetary system and inflexible currency arrangements.

This is compounded by weaknesses of the European banking system with large exposure to sovereign bonds issued by peripheral nations.

Intellectually and institutionally, Europe is unable to deal with its debt crisis. Europeans believe stabilization and recovery can be achieved through greater integration.

Even if issues of national sovereignty can be overcome, integration will not work. The monetary arithmetic of European debt problems is that the EU and Germany, its main banker, does not have enough funds to rescue the beleaguered eurozone members.

Austerity dooms Europe to a prolonged and severe recession as the debt burden is worked off. The alternative, a debt writeoff, would result in significant loss of wealth for the mainly northern European lenders, triggering an economic contraction and prolonged period of economic stagnation.

Japan is in a state of advanced atrophy. Its primary investment merit is that almost all possible man-made and natural disasters have happened and the worst is factored in.

The BRIC (Brazil, Russia, India, China) nations are unlikely to be able to offset weakness in more-developed economies.

China's growth is slowing rapidly. India and Brazil have also lost momentum, with growth weakening. Russia is dependent on high energy prices.

BRIC weakness is a function of lower demand from developed countries reducing exports and weaker commodity prices.

The withdrawal of European banks that are historically major lenders to emerging markets has decreased the flow of money to countries needing foreign investment.

Emerging markets show signs of the developed world-credit virus. A rapid expansion of domestic credit in China, Brazil, eastern Europe, Turkey and India will result in banking-system problems. The combination of external and internal weaknesses threatens emerging economies, naturally prone to serial crises.

Most importantly, necessary structural changes have simply not occurred.

Borrowing levels remain unsustainable. Debt levels for 11 major nations have increased to 417 per cent of GDP in 2012 from 381 per cent of GDP in 2007.

Debt has increased in Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the U.K. and the U.S.

Global imbalances -- major current account surpluses and deficits -- remain. Little progress has been made in bringing the banking system under control.

The global economy has a serious chronic condition with limited prospects for a full cure. It exists in a no- or low-growth state. The threat of a sudden life-threatening seizure cannot be discounted.

Financial markets and investors seem strangely oblivious to the reality and risks and are taking rock star Steven Tyler's advice: "Fake it until you make it."

Next time: The Global Economy: Policy paralysis.

Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money and is a consultant to Jory Capital.

Republished from the Winnipeg Free Press print edition November 13, 2012 B5

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes

    No

  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on winnipegfreepress.com. You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.

letters

Make text: Larger | Smaller

LATEST VIDEO

Many things to do at ManyFest and the weather is great

View more like this

Photo Store Gallery

  • A one day old piglet glances up from his morning feeding at Cedar Lane Farm near Altona.    Standup photo Ruth Bonneville Winnipeg Free Press
  • A mother goose has chosen a rather busy spot to nest her eggs- in the parking lot of St Vital Centre on a boulevard. Countless cars buzz by and people have begun to bring it food.-Goose Challenge Day 06 - May 08, 2012   (JOE BRYKSA / WINNIPEG FREE PRESS)

View More Gallery Photos

Poll

What should the legal drinking age be?

View Results

View Related Story

Ads by Google