States trapped in never-ending financial support of a moribund global economy

The slowdown in the speed of collapse of the global economy (1), at the origin of all the « good news » (2), is only due to the world's enormous public financial effort of the last twelve months (3). But the « time saved » using taxpayers' money around the world should have been dedicated to redesigning the international monetary system at the heart of the current systemic crisis (4). Yet, besides a few cosmetic considerations (5) and huge gifts to US and European banks, nothing serious has been undertaken(6), and, when it comes to the future, the « every man for himself » rule prevails (7).

The last G20 summit of finance ministers provided evidence of the fact that, without this support, the economic collapse would soon resume. For this reason, they agreed to the prolongation of their support policies of all kinds (subsidies, stimulus plans, central bank interventions, Treasury purchases, money-printing…) whilst trying to bring the media to give headlines on their debate about a “coordination of crisis exit strategies ». Instead of talking about the dull present, let’s talk about a bright hypothetical future (8). This is a classical method when a power is at a dead-end.

According to LEAP/E2020, the chart above states facts that cannot be ignored: the global economic, financial and monetary system is drifting at an increasing rate, its weakness is reaching unequalled lows in modern history, and the slightest shock (financial, geopolitical or even natural) can now break it apart (9). The States’ breathtaking plunge into bottomless public debt (10) (governments feel that, without the support of public money, world economies would soon resume their collapse) is creating a literally explosive situation, signalling massive tax increases in Japan, Europe, the US… (11). If there is any recovery in sight, it is that of tax. As a matter of fact, confronted with historic unemployment rates and a free-falling economy, Japanese voters decided to vote their decades-old leaders out of office: they have probably inaugurated the great political upheaval of the next phase of the crisis (12). This summer, the Obama administration was also surprised to discover the importance of popular anger which focused on his health system reform programme (though a much needed one) (13).

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Notes:

(1) Here is a very illustrative analogy of the crisis today that imposed itself on our researchers: a rubber ball on a staircase. It seems to rebound on every step (then giving the impression that the fall has stopped) but it falls even lower to the next step, “resuming” its fall.

(2) For example, the fact of talking in percentage points is part of this summer's « euphoria » operation. Indeed, many banks, whose stock price was close to zero could claim « rebounds » of +200 percent, +300 percent or +500 percent. Taking a look at Natixis, Citi Royal Bank of Scotland stock prices helps to understand the trap: regaining 500 percent when the stock fell down to 1, that makes 5... which would leave you holding a loss of 40 if you bought 2 years ago (or if you borrowed money on this security). Never forget that an increase of a percentage is always less than a similar decrease (the greater the fall, the truer it is)… a reality that the financial world is keen on making you forget! But the evaporation of your investments and savings probably helps you to remember. By the way, that is one of the obstacles on the way to the « recovery in sight » song sung by our leaders: for business to return to previous levels (« recovery »), people must forget the crisis and its consequences. This could happen with the « small crises » of the past decades, but not with this crisis, one which is literally « unforgettable » for the growing numbers of its victims: the intensity, duration and scope of the event and of its consequences, do not allow one to simply « turn the page ».

(3) This is illustrated by France's recent announcement that the state wishes to continue to support the banking system until the end of 2010. Source: Reuters, 09/13/2009

(4) See LEAP open letter to the G20 published last April in the Financial Times on the eve of London's G20 summit.

(5) The great « traders' bonus hunt » is morally praiseworthy. However it should not make us forget that traders are nothing but the « privateers » of the banks hiring them and of the financial centres hosting the latter. These employers and their hosts give them their « letters of marque » (or should we say « of bonus »?) authorizing them to buccaneer the seas of global finance. Limiting their bonuses to their total salary would compel banks to hire them as master mariners instead of filibusters. It belongs to the States to come to a decision, knowing that of course Wall Street and the City have most to lose, being at the centre of this system. As an anecdote, not only did the US not ratify the 1856 Paris Treaty which outlawed privateering, but they even reactivated the system after 9/11 with the « September 11 Marque and Reprisal Actes of 2001 ».

(6) The Bank of International Settlements, which is at the centre of the central banks' system, does not say anything else in its 79th annual report, published in July 2009. Two short excerpts sum up its current thinking: « Institutions that are too big to fail – those that create intolerable systemic risk by themselves because many others are exposed to them – pose a significant challenge in this context. And the mergers and acquisitions that have formed a part of the crisis response in the past two years may have increased the number of such institutions; although this is understandable as a transitional phenomenon, officials realise that it creates an unsustainable structure. » And, « Two enormous risks to long-term recovery lurk amid the massive short-term efforts. First, policy actions taken so far may be insufficient to restore the health of the banking system. Second, a lack of well articulated exit strategies for the monetary, fiscal and financial repair programmes threatens to hinder rather than support necessary macroeconomic adjustments. ». Source: BIS, 07/2009

(7) Source: Times, 09/02/2009

(8) Meanwhile also, why not blow the whistle on some health disaster and fill the media front-pages with risks of a swine flu pandemic. On this subject, though we have no medical expertise to bring in the debate, we could not help noticing that the Southern hemisphere did not experience any significant pandemic during their summer currently. It should therefore be surprising that the virus bursts in the Northern hemisphere. But it is a fact that the space occupied in the media and political debate on this subject reduces a lot of the space available to inform on the current extent of the global systemic crisis. Nothing better than one crisis to chase another… at least in the media!

(9) In the next GEAB, the October issue N°38, we shall update our country- and big region-based anticipations, including, of course, an assessment of the situation regarding US and UK defaults.

(10) With a record-high debt issuance in Europe (EUR 1,100-billion in 2009, and more than EUR 250-billion for the UK alone), and with USD 9,000-billion federal deficit over the next ten years, there is no doubt of the fact that the situation is uncontrollable. Source: Yahoo/Reuters, 09/04/2009; CBS, 08/25/2009

(11) Tax pressure is indeed gaining momentum: carbon-tax , recently invented by French President Nicolas Sarkozy (source: Le Monde, 09/10/2009), rumours about a VAT tax in the US (source: Reuters, 09/08/2009), tax increases on oil in Great Britain (source: Sunday Express, 09/13/2009), and all sorts of fines invented and heavily enforced by local authorities and states.

(12) In the US, Europe and China too. Sources: Reuters, 09/08/2009; Financial Times, 09/06/2009; BBC, 07/26/2009.

(13) The extent of this anger, which recently expressed itself in relation to the healthcare reform protest in Washington (source: New York Times, 09/12/2009), reaches far beyond the healthcare system and Republican appropriation attempt: it embodies a public rejection of Washington altogether and its collusion with Wall Street. Health is just a pretext (certainly not the best one to choose), just like the 2005 project of a European constitution focused the European citizens’ general frustration regarding the way the European Union is governed.