Where Is the World Economy Heading?
EDITORIAL, 31 May 2010
Washington DC: Difficult to tell. And this column has to admit that Greece+, and the fall of the euro, came as a surprise. The fall of the DOW not, nor the rampant unemployment in both regions.
The euro story: 19 November 2009 1 euro = $1.49, half a year later 1.24, 0.89 pounds to 0.86, 1.51 Swiss franc to 1.40. Much is flight to safety from stocks and bonds. But: Greece+:
The Greece story: deficit 14% of GDP, debt 115% of GDP.
The Portugal story: deficit 9% of GDP, debt 77% of GDP.
The Spain story: deficit 11% of GDP, debt 53% of GDP.
Why? Trivial: too low income, too high expenditure. An aging population (18% over 65 in 2005, 25% in 2030) produces less, pays less in taxes and costs more for health. Remedies? Trivial: cut pensions 11%, public sector wages 14%, VAT up from 21 to 23% in return for massive bailouts. Result: massive strikes, riots. Winding down a welfare state is running history backward.
Better remedies: let people work productively as long as they want, make massive propaganda for a healthy life style; and maybe welfare communities, not only states? Did anyone mention Muslim zakat, togetherness, sharing? Let us see how this all plays out.
Not tied to the EU-euro they have milked so well they could have devalued their drachma. The other side of that story: if the EU had not only a single currency for 16 of the 27 countries but also a treasury, a single, enforced economic policy, Greece could not have their accounting cooked by Goldman Sachs, and changes could have come earlier and been less dramatic. The EU may have to move closer to a federation as result. Or, further away.
The debt for Japan is 200% of GDP, but 95% is to Japanese, at very low interest, not to pressing foreign investors. For the USA the deficit is 14% and the debt 60%; but the US $ being still world currency they can print and inflate themselves out of much of it.
Can they? It is hard to believe that a $ crash is not down the road, and easy to believe that the USA is fighting the euro by all necessary means, including short selling. Conspiracy theory? No, the USA is hard pressed, losing three wars, with Goldman Sachs in the finance, and BP in the real economy spewing derivatives and oil causing finance and environment crises. And, they are tails wagging the government dog, not on anything like a tight leash.
Daily turnover of derivatives was in April 2007 $4.2 trillion and foreign exchange $3.2 trillion. But credit default swaps are not traded on exchanges where who does what to whom is visible. They are basically bets with other people’s money on the health of companies (stocks) and government (bonds). Betting with your own or the family’s money is done at casinos. Anyone like the German IKB that accepts deals designed against them deserves to sink.
Imagine you are ill. A health rating agency, let us call it Moody & Poor, publishes your rating. Somebody bets on your death. Others withdraw life support; what might have been a self-denying becomes a self-fulfilling, demoralizing, prophecy. The betting company cashes in “some serious money”–the expression used in Goldman Sachs when they celebrated the fall of the US housing market (Washington Post 24 April 2010). Remedy: outlaw most, make credit rating–teleconferences by 5 voting experts–transparent. They are paid by the people who issue the debts to be rated.
From the CIA The World Fact Book the current account balance, the net transfer payment of all kinds, for 190 states to abroad:
Eleven most positive: China-$296 billion-Japan, Germany, Switzerland, Norway, Russia, Netherlands, Taiwan, South Korea, Hong Kong, Malaysia.
Six East Asian, five European (two oil-gas).
Eleven most negative: USA-$380 billion-Spain, Italy, France, Canada, Greece, Australia, UK, Iraq, Belgium, Portugal.
Five Mediterranean, four Anglo-American. China No 1, USA No 190.
A shift in economic point of gravity from Anglo-America to East Asia, and from South to North Europe.
Again, the USA can print and inflate but internal demand growth is low and exports can be outcompeted. Changing the $/yuan rate?–US customers love affordable “Made in China” at Walmart. Debt and health service costs will spiral, and yet health at 16% of GDP buys less life expectancy than 8% of GDP for (still) welfare state Finland.
As a summary, the three major arenas of the world economy.
There is the real economy with Nature as a major actor. The Copenhagen game was a scandal, BP adds visible oil to the greenhouse gas murder of Nature (“Mother Earth is angry”, says Evo Morales). The welfare state was partly based on exploiting the South, the Southeast has been coming for a long time. Walmart will survive. Prediction: there will be switches in the West toward the Buddhist local-spiritual and the Muslim togetherness-sharing models, with basic needs on top. Green; actually easier for diverse USA than for uniform Europe.
There is the finance economy, with ever more exotic products, very similar to formerly rich trying to make up for losses by gambling, losing, because the dice are loaded by the banks. Prediction: a return to classical savings banking, also Islamic style.
There is the gap between real and finance economy, like the gap between GNP growth and Dow Jones growth. A double digit real growth could accommodate the DJI climbing from 7,609 first quarter of 2009 to 10,857 a year later. Some days ago the Dow made a major drop, wiping out some investments; nothing like the drop from the 12,000s to the 6,000s September 2008, but signaling volatility. Prediction: crash. Remedy: stimulus rather than bail-out, roughly what China does.
Europeans live above their means, Americans gamble and attack, East Asia is working hard–heading for Europe-America? Islam? The US military 4% of GDP–42% of world military expenditure–fuels war with six Muslim countries. Will they add Iran and use a world war to fight themselves into solvency, the way they did in the Second World War?
This article originally appeared on Transcend Media Service (TMS) on 31 May 2010.
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