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Just A Cyclic Economic Ripple Or Structural Long Term Recession ?

Economics / Recession Jun 25, 2012 - 10:35 AM GMT

By: Andrew_McKillop

Economics


Best Financial Markets Analysis ArticleFor global media, the 2008 crisis was signalled by the so-called "near collapse" of banks, insurers and mortgage lenders like the UK's RBS and Northern Rock, the USA's JP Morgan, AIG and a string of smaller players like Bear Stearns, but was above all symbolized by the outright collapse of Lehman Brothers in the autumn of 2008. Since the start of 2012, revealing the supposed "surprising weakness" of the OECD economies, and the more (or really) surprising weakness of the Chinese and Indian economies, the events of recent months ram home the basic facts. Emerging from what in 2008 was a finance-sector crisis in the OECD, easily explained by the perils of casino capitalism operating on debt to get and then lose its betting chips, the subsequent and present financial collapse: 1) is systemic not temporary; and 2) is global, affecting every country in the world. Through globalization of the economy, and supposed "global integrated capitalism" we now have a globally integrated catastrophe.


This "perfect storm" is of course grist to the mill of conspiracy theorists. How could the global economy fall apart, after the OECD economies fell apart, without this being planned at Davos or by the Trilateral Commission, the Rothschilds and George Soros ? Equally revealing of the way that idiot friendly sweeps away any other explanation, the European debt-and-deficit crisis, week after week, is hailed by commentators in government-friendly media as being on the point of final settlement. Happy times will soon be here again - because Germany will pay ! First of all, however, Germany has to be able to pay before we can even try the question of do Germans want to pay. The other storyline of the Happy Henries - that China will pay by operating its own type of QE, which in turn will magically aid the western economies it runs vast trade surpluses with - has already slipped off the front pages, as both China and India report increasingly weak data.

In fact, and very easily verified, industrial production in both Germany and China is contracting, for the most simple and basic reason: mostly because of falling exports. Major indices like purchasing managers and production indices in Germany, China, India, Brazil, Turkey and other supposed "unaffected fast growing Emerging economies" are all softening, sometimes for more than 6 months in a row. Commodity price indices, especially led by global oil prices, tell the same story: growth is in retreat, debt is still growing, exports are falling.

In the majority of European countries, including Germany, the reality of accelerating contraction of the economy - exactly as in the US - draws heroic covering action in the shape of honeyed words, but above all no more QE, because the tills are empty. The most classic-possible signal of economic recession - mass unemployment - is the reality in most EU27 countries and the US, where the Labor Department reports that recent falls in the number of available jobs include the 1-month hit of 325,000 in April, the single biggest monthly decline since September 2008. Several European countries, despite the most heroic possible doctoring of the figures, are forced to report unemployment at 15% - 25% of their adult populations and 30% - 45% of their younger workers.

THE BANK BAILOUTS RESUME

Also similar to the sequence of 1929-1933 during which the firstly US, and then European economic recession switched leading roles on a regular basis, but always intensified, Europe's debt-and-deficit crisis has seamlessly morphed into a continent-wide economic crisis. This has left the continent's so-called deciders, who prefer not to decide because that reveals their incompetence more starkly then when they do nothing, in a Russian doll system of crises where they reel from one to the next. Their always preposterous claims of being on the point of sealing yet another 1-trillion-euro bailout pact are ritually welcomed by stock market operators, with highly predictable and organized surges, following each claimed bailout. The most recent was the Spanish Bankia bailout, and like previous surges lasted a day or so before the bears returned and the selling pressure restarted. Exactly like the recent and totally failed Rio + 20 conference, the preceding G20 summit in Mexico, which was supposed to conclude with a common agreement on Europe, in fact ended in complete discord and refusal to act among the major powers.

My argument is clear: there is nobody in the driver's seat or cockpit. The supposed "classic bourgeois reaction", of racking the working classes for more work at lower wages has already morphed into the 1930s recession mould of all out austerity. The bourgeois survival instinct, of siphoning more of the declining wealth pile into their coffers, is already contradicted by the fragile and sinking fortunes of the bank-insurance-finance sector, declining major stock market indices, an unsure rebound in gold and silver prices, the retreat of commodities - and a flight from money itself. The example for Marxists, of Greece being racked into penury by global capitalism, is but a low budget version of what happened to dozens of "Third World" developing countries in the 1980s and 1990s, and to Argentina and Russia itself - the home of Marxism ! Each time, the process aborted. Each time, global capitalism was weakened, not invigorated and triumphant. Each time, globalization rolled on like a bulldozer.

Monday June 25, Spain's banks will probably receive about 100 billion euros, based on ratings agency Fitch's estimate of what it calls its worst case scenario, not the "only" 60 billion that hopefuls claimed is needed, because Spain's banks will need a higher level of capital reserves to ensure that markets will resume large-scale lending after the banks' massive losses. Media reports suggest the bailout will be set as loans for at least 15 years with interest rates of at most 3.5pc: this is far from total triumph for global capitalism, and much closer to total loss.

Marxists will pump up their music saying how capitalism's mobility will shift any remaining "real riches" to the sweat shops of Asia and restart the process of spoliation, but a systemic and global financial crisis interlocked with a global economic crisis is bad news for old style capitalism. After Spain's banking sector crumbles, cascade bank collapse threatens Italy and France, next, because the bad and bankrupt banks now include the central banks of an always increasing number of so-called, or formerly rich countries. In a context of multi-crisis, that is balance of payments crisis, bank and finance sector crisis, monetary crisis, liquidity crisis and economic crisis the only possible way to "save the system" is a sharp rise of interest rates. If that happens, all out and total economic recession is not just possible, but 100% sure and certain.

THE NATURE OF THE CRISIS

Panic is the real nature of the present crisis. This can easily be seen as the flipside of know nothing-care nothing laisser faire style "management" of the economy, which has been the collective disease of political and economic deciders for 30 years. At one and the same time, today, saving the system needs a massive deleveraging or debt reduction of the economy - which is deflationary - and a large (or even massive) increase in real liquidity - which is inflationary. The probable already set medium term trend for a decrease in world trade and falling exports, can in theory only cause declining capital transfers and investment flows, unless expansionary action is taken. In fundamentally weakened economies, this can only be inflationary.

This no-win readout is already far too complex for average Liberal deciders of today's capitalism or neo-capitalism to understand. This is shown by the European debt-and-deficit charade, stumbling forward every day to further and higher extremes of panic, increasingly likely to result in a pure and simple refusal to accept reality, therefore refusal to act. Options seemingly abound: the euro could be devalued close to 1 USD, aiding Europe's failing export industries including those of Germany, some form of debt pooling or Federal Debt Union could be thrown together, probably with (rather than without) the expulsion of the lamest ducks from the Eurozone; a weak or symbolic 1% of European GDP, about 125 bn euros could be injected into various make-work programmes, as the "Hollandistes" want, and things could seem a little less abnormal for a certain period of time, if only for a few weeks: in panic mode, each day counts.

The impact of this on the global economy will of course be massively exaggerated. Europe is already in recession and will stay in recession; the US can only stay in low growth mode; the Japanese and South Korean economies are in slow growth mode, oil prices will stay low - reducing Arab and Russian spending power - therefore China and India will go on recording ever slower growth. The increment of de-growth or increase in global recession due to Europe will be minor, until and unless the European economy literally implodes, which is in no way excluded.

Under panic mode, global capitalists can be expected to try out a series of tried-and-failed recipes for "crisis management", the most courageous or radical of which is global QE, hinted at by the highest level European bailout plans targeting the mobilization of about 2 trillion euros. This would signal a breaking of ranks between Europeans and The Rest, a global monetary challenge comparable with the US Marshall Plan under which the global economy (of the time) was inundated with dollars, providing the US with monetary hegemony for decades ahead. The basic problem with this European panic move of today is that when or if there is a huge printing fest by the ECB this can only, and would only bring down the dollar with the euro.

At this time in late June it is not possible to say which strategy will play. Accumulated layers of political and economic dysfunctionality have created a perfect no-win context, explaining the panic. The race is on between "purely political" solutions, and supposedly economic solutions all of which imagine the global economy can be saved and should be saved.

This at present is about the only outcome we can be sure is not going to happen.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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