A Catastrophic Global Economic Breakdown May Be Unavoidable!

The Global Economy Is In Crisis

The global economy is in crisis… it is unstable and unsustainable… and a catastrophic economic breakdown may be unavoidable. Government intervention on a multi-trillion dollar scale is the only thing preventing a worldwide collapse into a new great depression. [Let me explain.] Words: 1177

So says Richard Duncan (www.richardduncaneconomics.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted and edited […] below for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Duncan goes on to say:

The Economic Crisis is Structural, Not Cyclical

At the core of the crisis is the fact that global production, swollen by limitless credit denominated in fiat money, greatly exceeds the consumption that can be financed by the income of the individuals who comprise the world’s population. Governments around the world are borrowing, printing and spending on an unprecedented scale to absorb the global excess capacity and to prevent asset prices from deflating, but these measures cannot continue indefinitely.

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Globalization has put intense downward pressure on wage rates in industrialized countries at a time when the abandonment of sound money unleashed an explosion of credit that allowed industrial production around the world to soar. Tens of millions of new manufacturing jobs have been created in developing economies, but adverse demographic trends have prevented wages from rising. [With] the prevailing wage rate in the manufacturing sector [at] roughly $5 per day across much of the developing world… [and] two billion out of the world’s seven billion people [i.e. 28.5%] living on less than $2 per day, this crisis must be understood in terms of excess production relative to purchasing power.

Between 1970 and 2008, the ratio of total credit to GDP rose from 170% to 370% in the United States as American consumers became caught up in the culture of credit. [This] rapid credit expansion fuelled asset price bubbles in stocks and property that allowed Americans to continue spending more each year even though average wage rates had stagnated [and] allowed the American social contract, premised on steadily rising prosperity, to remain intact despite the downward pressure globalization exerted on wages. Credit-financed consumption pulled imports into the U.S. [with] the rest of the world responding [with] expanding industrial production to sell into the U.S. market.

The Americans Are to Blame for the Crisis – in Part

In 2008 when the U.S. private sector became incapable of supporting its debt load [which had acted as] the driver of global growth [everything became unravelled:]

a)  U.S. consumption went into reverse,

b) global trade crashed

c) the global economy spiraled toward disaster

d) governments stepped in and caught the collapsing global economy in a safety net woven with the equivalent of trillions of dollars in deficit spending and trillions more in newly fabricated money

e) global demand was maintained by government spending and transfer payments

f) bankrupt banks were made whole by access to free money from central banks

g) asset prices were supported by ample liquidity.

Continued Government Life Support Will cause Currencies To Lose ALL Value Unless… 

That is where we are today – on government life support – [but] there are two problems [with that:]

1. the government intervention is unsustainable

2. nothing, whatsoever, is being done to address the causes of the crisis: the flaws in the global monetary and trade superstructure, and insufficient aggregate demand.

Governments will only be able to conduct deficit spending on the current scale for a few more years before the public sector becomes as bankrupt as the private sector – and if the Fed and other central banks around the world carry on with the current pace of Quantitative Easing (i.e. money printing), their currencies will lose all value within a decade.

There Are Solutions to the Crisis BUT…

The crisis will not end until the structural defects responsible for causing it have been corrected. This will require:

1. the creation of a new international monetary system designed to prevent large and persistent trade imbalances between nations. The Dollar Standard, the current international monetary system, is inherently flawed because it lacks any mechanism to ensure balanced trade. That flaw is responsible for the growth of the global imbalances at the root of this crisis.

2. the gap between the capacity of the world to produce and the level of income available to fund consumption must be filled by increasing income. The alternative, significantly decreased production, is the very definition of a depression. At present, no steps are being taken in this direction. Wages in the developing world are stuck at $5 per day; and depressed wages there are putting downward pressure on wages everywhere else.

The United States is the world’s largest economy, comprising more than 20% of global GDP. Unemployment there is nearly 10%. The U.S. economy is no longer viable because wage rates in the U.S. manufacturing sector are 40 times higher than wage rates in the developing world. There is no sign that either political party has a strategy that could reverse the country’s rapid economic decline.

[The BUT is that, unfortunately,] a protectionist backlash against free trade appears increasingly inevitable.

The Likely “American Solution” To the Crisis Would Be Disasterous for the Entire World

U.S. trade tariffs would be bad for America, terrible for the world and catastrophic for China and all the other countries dependent on export-led growth. It is important to understand that as grave as the challenges confronting the United States are, those faced by China are even worse. The U.S. can’t produce as much as it consumes, but China – and most other export-led economies – can’t consume as much as they produce. If international trade breaks down, production in China would collapse, unemployment would soar and political unrest would explode…

Conclusion

Run away credit growth, mismanaged trade, financial sector deregulation and numerous other policy mistakes have brought the world to the brink of disaster.

If a breakdown of the global economy is to be averted, policymakers must confront the structural nature of this crisis and quickly implement an aggressive strategy within the next 5 to 10 years to restructure and rebalance the global economy… [but] beyond that timeframe, the financial resources now available to governments to fund that transition will have been exhausted and [should that happen:] a global economic calamity, with untold geopolitical consequences, will become unavoidable.

*http://www.richardduncaneconomics.com/2010/12/15/the-present-on-the-brink-of-disaster-2/ (Mr. Duncan worked as a consultant for the International Monetary Fund (IMF) in Thailand and as Financial Sector Specialist for the World Bank in Washington, DC and is the author of the book “The Dollar Crisis: Causes, Consequences, Cures” .