.....The fiscal packages in many countries are "economic nationalist" encouraging spending on domestically produced goods and supporting national champions and local industries. The US, France, Germany, Spain have announced bailouts for domestic companies. Asian countries are seeking to weaken the currencies to support exports to maintain global competitiveness. The US Treasury Secretary recently accused China of manipulating its currency drawing angry responses from Beijing.
Financial protectionism has also emerged. Governments are supporting domestic banks and increasingly "directing" lending to domestic firms and households.
Concerns about immigration are emerging. There have been protests in UK against hiring foreign workers. This has serious implications of countries like Mexico, Eastern Europe, India and the Philippines that depend on worker remittances that are already slowing.
In an essay titled "The Great Slump of 1930," published in December of that year,
Keynes observed: "We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand." The current crisis calls into question the ability of government and policy makers to maintain control of the economy – Lenin’s "commanding heights".
Governments may not be able to address the deep-rooted problems in the current economic models. Government spending, if it can be financed, may not be able to adequately compensate for the contraction of consumption and lack of investment made worse by over capacity in many industries.
Government spending has little multiplier effect or velocity. The badly damaged financial system means that the circulation of money in the economy is at a standstill. While government spending may provide short-term demand boost and capital injections may partially rehabilitate banks, it is far from clear what will happen when all these measures are reversed.
Governments and central banks have limited available tools. Keynes famously described monetary policy as the equivalent of "pushing on a string". Given that interest rates are now at or approaching zero in many developed countries, there is no string at all. ......
Correcting global imbalances provides greater challenges. The world has relied heavily on debt fuelled American consumption to drive global growth. With 5% of the world’s population, the US is 25% of global GDP, 20% of global consumption and 50% of global current account deficit.
The US needs to decrease consumption, increase savings, reduce debt, export more and import less. The countries with large savings and trade surpluses need to do exactly the opposite, specifically encourage domestic consumption. Currently both surplus and deficit countries are doing the opposite of what is required.
The challenge is evident in two telling statistics. Consumption is around 40% of the economy in China against over 70% in the US. Average earnings in China are only 10% of that in the US. The size of the adjustment is substantial.
David Rosenberg, an economist from Merrill Lynch, described the process of adjustment: "This is an epic event; we’re talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007. Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, the US housing stock must fall to below eight-months’ supply, and the household interest coverage ratio must fall from 14% to 10.5%. It’s important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there, this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets."
Corrective action will only deepen the recession and disrupt global funding flows. Wen Jiabao, the Chinese Prime Minister, recently indicated that China’s "greatest contribution to the world" would be to keep it’s own economy running smoothly. This may signal a shift whereby China uses its savings to invest in the domestic economy rather than to finance US needs.
Redirection of capital held in central banks and sovereign wealth funds to domestic economies affects the global capital flows needed to finance banking system recapitalisation and spending packages in the debtor countries. Maintenance of the cross border capital flows to finance the debtor countries budget and trade deficits slows down growth in emerging countries and also perpetuates the imbalances.
There is now acknowledgement that the economic model itself is the source of the problem. Zhou Xiaochuan, governor of the Chinese central bank, commented: "Over-consumption and a high reliance on credit is the cause of the US financial crisis. As the largest and most important economy in the world, the US should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits." More ominously Chinese President Hu Jintao recently noted: "From a long-term perspective, it is necessary to change those models of economic growth that are not sustainable and to address the underlying problems in member economies."
In the GFC, politicians, bureaucrats and central bankers have been exposed to have no more powers than the Wizard of Oz – old desperate men (they are mainly men) behind the curtain running from one lever to another in a desperate attempt to maintain illusions.
In the US alone, more than 3.6 million jobs have been lost. In Spain, unemployment has reached the middle teens. Exports and production have fallen in countries as varied as Spain, Japan, South Korea and Taiwan by amounts that beggar belief. An astonishing US$30 trillion of wealth has been obliterated in America alone. Entire countries – Iceland and Ireland – have been savaged.
The GFC coincides with another crisis: the GEC or Global Environmental Crisis. "Toxic debt" and "toxic emissions" increasingly clamor simultaneously for politician’s attention.
Irreversible climate change, scarcity of vital resources (food and water) and falling biodiversity are not unconnected with the existing economic system. Economists and politicians implicitly assume that high levels of growth drive increased living standards, rescuing people from poverty and social development. No limit to economic growth is recognised............www.eurointelligence.com/article.581+M54f756d50c9.0.html
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