Since the global financial crisis began in 2008 the end to the crisis
appears as distant as ever and in 2011 further cracks have appeared.To
remind us of how we have got here – growth in Western economies in the
last decade was driven by the real estate bubble which stimulated the
remainder of the economies of the West.The bubble reached colossal
proportions because banks were able to create various financial products
from debt which were then sold to other banks based upon the assumption
that the housing bubble will continue to expand.The subsequent collapse
in housing prices exposed gaping holes in lending practices of the
worlds largest banks, many banks were forced to write off billions in
debt, as they on mass were being defaulted upon. As banks collect
customer deposits and lend to new businesses and projects all of this
came to a grinding halt and due to this a crisis that was inherently
financial, shifted to the real economy, hence production fell, many
companies collapsed and unemployment soared.
The response of Western economies was to either nationalise failing
banks, provide bailouts to others, and a new invention – quantitative
Easing (QE) a new electronic way of creating money. The cost of this was
huge and as a result this eventually led to a period of austerity –
government cuts across the Western world to repay the money used to
bailout the bankers.These measures were all meant to kick start economic
growth and end the economic crisis, however the US debt ceiling debacle
and the sovereign debt crisis in Europe show that the global economic
crisis is far from over.
US DEBT DEBACLE
The debacle that took place in the US between the Republicans and
Democrats was over increasing the debt ceiling – the amount the
government can borrow. The US government needs the permission of
Congress to raise the ceiling re the amount of money it can borrow. If
Congress didn’t grant an increase then Obama’s regime would have hit the
debt ceiling limit and would have had difficulties in meeting its
repayments. Ironically the US borrows to repay previous debts.This is
not the first time the US has been forced to increase its debt ceiling.
In February 2010 a similar fanfare took place.This rather flexible
“ceiling” has been raised 33 times since it first was raised over the $1
trillion level in September 1981. Noble Laureate Paul Krugman outlined
the fanfare:“The facts of the crisis over the debt ceiling aren’t
complicated. Republicans have, in effect, taken America hostage,
threatening to undermine the economy and disrupt the essential business
of government unless they get policy concessions they would never have
been able to enact through legislation.And Democrats – who would have
been justified in rejecting this extortion altogether – have, in fact,
gone a long way toward meeting those Republican demands.”And, oh yes,
the President had some big skin in the game.”
The debt impasse in reality concealed America’s bankruptcy.America’s
fundamental problem is that it is http://www.hizb.org.uk/wp-
content/uploads/2011/08/top-ten- holders-of-US-Debt.jpgdrowning in a sea
of debt.The US economy generates around $14 trillion annually, however
the national debt – the money the central and federal government owes to
the US public and the world through the bonds (or IOU’s) they have
issued – stands at $14.3 trillion. Interest payments on this debt alone
was $414 billion in 2010. Those who are expecting to be repaid by the US
one day include governments such as China, companies and banks.This
debt emanates from US citizenry’s huge appetite for imports and credit
cards and as a result consumer debt stands at $2.4 trillion.The desire
by American’s to own their own homes has resulted in mortgage debts of
$13.2 trillion.The debts of US companies amount to $20.8 trillion.This
makes the US indebted to the tune of $50.7 trillion – more than the
combined economies of Japan, China Britain, Germany, France, Brazil,
Canada and Italy twice over.The US trade deficit also continues to
balloon, the amount the US imports compared to the amount it exports –
in essence the money the US owes to the world – stands at $500
billion.And these figures exclude the future – so far unfunded –
obligations of the American people including pensions, medicare/Medicaid
and so on which amount to many trillions more.
With the US economy faltering and struggling to create sustainable
growth, questions are being asked about the ability of the US to repay
its debts. China who holds most of America’s debt should duly be
concerned as the credit rating of the US is being downgraded. Due to the
size of America’s economy, if it’s not growing then this will also drag
the global economy down, as the US is its largest constituent. China
and other creditors are also highly worried by the constant devaluation
of the dollar represented by the constant increase in gold prices and
other precious commodities – caused by growing indebtedness and QE.
EUROPE’S SOVEREIGN DEBT CRISIS
The European Union now has a growing list of states that are
considered the sick men of Europe. European attempts at defence against a
deep recession has now created a new crisis of unsustainable and
un-serviceable sovereign debt. Much of this can be attributed to
stimulus packages passed by European governments in order to blunt the
effects of the economic crisis, especially in preventing massive
employment layoffs. Europe’s heavyweights spent massively on stimulation
packages.This led to debt levels skyrocketing across the Eurozone, but
especially in the PIIGS countries.
At the centre of the crisis is the fractional reserve banking system
where a small amount of physical money in notes and coins can be used to
create debts many folds over.The Greek debt crisis is a good example.
Greece has debts of €300 billion, with an economy of only €240 billion
and a government budget of only €91 billion.The Greek economy is in no
better position today after 3 bailouts and massive public sector
layoffs.
The Euro was hailed as the replacement to the dollar. However the
financial crisis has brought a damning fact to the surface, whilst
countries such as France and Germany will be able to service their
debts, nearly all of the other eurozone nations have pitiful financial
situations where they have spent well beyond their means and now when it
has come to repay this debt the feasibility of meeting the regular
monthly repayments is looking impossible.The issue the Euro has faced
from its inception is the fact that all the eurozone nations have very
divergent economies and hence the strength of the euro is in the
strength of the Eurozone economies and only as strong as the weakest
link.
When the economic problems were confined to small countries such as
Greece and Ireland, it was assumed that any fallout could be contained.
Now however the crisis has threatened to engulf nearly all of Europe.
Italy which is the eurozone’s third-largest economy and the world’s
fourth-biggest debtor is also reaching breaking point.
ECONOMIC GROWTH
The crisis that engulfed the world in 2008 is clearly not over, this
is why Western economies are being forced into austerity to balance
books before economic growth can eventuate.The world’s largest economies
attempted to kick start economic growth via stimulus plans, however any
stimulus was always a high-octane boost and a temporary measure.They
are designed to kick-start stalled economies, not to fuel sustained
economic growth.The growth that was achieved in late 2009 until now is
really the inflated results of stimulus measures achieving their
intended effect to be temporary.
With Western economies dominated by the service sector, and with the
driving engine being the financial industries it is difficult to see
where economic growth will come from. Printing more money and bailing
out the banks has not kick started growth, whilst the stimulus packages
have had limited impact and failed to jump start economic growth.
CONCLUSIONS
With the crisis of debt now firmly engulfing Europe and the US a
double dip recession is being viewed as a certainty.Analysts have begun
to cut their outlooks for growth, which were originally based on the
premise that the worst of the economic crisis was over. The leg up’s
provided by the Capitalist world in no way dealt with the underlying
economic problems of unsustainable growth, debt driven spending, casino
finance and bubble economies.What such stimulus packages have done is
kept Capitalist economies artificially afloat.Whilst the global economy
has seen some growth for the last 18 months once all the temporary
initiatives have worked their way through the economies of the West we
will be back in the original position of how to create sustainable
growth.With the core failure of a number of interventions is it not time
that more radical alternatives be considered? Particularly with the
unhealthy fractional reserve banking system and defence of banking
interests coming before the needs of the common man. (K)
