Opinion Sur
The International Monetary Fund, at its latest meeting, attempted to enforce the notion that the global economic crisis had come to an end.
This claim began to crumbleThe International Monetary Fund, at its latest meeting, attempted to enforce the notion that the global economic crisis had come to an end. This claim began to crumble when it was later announced that, in the US, the GDP growth had slowed down to 1.8% in the first quarter 2011 and, finally, shattered on Friday, June 3, when it was reported that the world’s largest economy had only created 54,000 new jobs in May, contrary to the 165,000 expected by analysts, this figure already standing below the 232,000 jobs created in April. As a result, the unemployment rate rose by 0.1 percent to hit 9.1 percent.
On top of the gloomy news by the Labor Department, consumer confidence first reached a plateau and, then, declined. In the rounds following these announcements, Wall Street reflected the shattering of the optimistic make-believe in relation to the economic recovery of the United States and the world as well. Investors’ confidence crunched, and the three largest indices crawled back to last September’s figures, with the Dow Jones closing at below 12000.
The investors’ reaction was not any worse because, concurrently, a new installment of the “Greek tragedy” ended with partially favorable results: the Greek government announced that the European Union and the IMF had given their thumbs up to the new austerity and privatization measures, and, consequently, released the €110,000 million-tranche of the international loan that Greece had already been granted. Such measures are aimed to reduce the 10.5 percent fiscal deficit to 3 percent in three years. If this cosmetic fix of the ruinous Greek economy —its debt amounts to 145% of the GDP— had not taken place, all Europe would have been in jeopardy, as the Greek default would have impacted on the fragile agreement reached with Portugal, Ireland’s frail economy, in addition to worsening Spain’s economic, social and political crisis.
Four years after the outbreak of the global crisis, we wonder with mounting concern: What is actually going on in the central countries’ economies? In early June, President Obama admitted that the economy “is still facing strong headwinds”. Later, Ben Bernanke acknowledged the US economic slowdown, and avoided talking about new incentives, “so far, there might not be any further stimulus program”.
Irrespective of the statistical evidence and the government’s acknowledgement of a weakened recovery, we should ask ourselves what the true nature of this new episode is: it does not seem to be a circumstantial or temporary dip, as the government claims. A more realistic approach would indicate that we are in the presence of a “balloon” that was artificially pumped through the injection of a US$ 600-billion liquidity oversupply (QE2), which is coming to an end, and there are no hints of any additional stimulus. Understandably, budgetary needs, fiscal deficit and the level of indebtedness of the US economy prevent the continuation of successive economic stimulus programs with which the economic recovery was being buttressed. Most probably, the “Ben Bernankian” way of coping with the crisis has come to an end. What had not been foreseen was that, after more than four years of unprecedented indiscriminate liquidity injections, the real economy would not show clear signs of sustainable recovery. And it obviously was unable to spur recovery.
The political leaders of developed countries, however, are not saying candidly enough that we are starting of a much more dangerous cycle than a circumstantial, temporary crunch, as President Obama is keen on characterizing the present situation. “Lately, it’s high gas prices, the earthquake in Japan and unease about the European fiscal situation what explain the weakening of our economy”, he has said.
In my opinion, the problem is deeper. To begin with, the markets have warned that we have run out of “fuel” for stimulus plans, issuing of currency and liquidity. Or what is even worse, they have concluded that, to continue to grow, the US needs deficit, debt, issuing, i.e., a global downpour of dollars. The markets argue that either the money machine stops working and the economy is slowed down and unemployment grows, or the machine is turned on, there is issuance and there is an oversupply of liquidity that the economy will be unable to absorb and this will, hence, translate into inflation, loss of purchase power, consumption crunch and, again, recession and unemployment: a vicious circle leading to a “balloon” being inflated by the systematic injection of an oversupply of liquidity intended to pump up consumption and, ergo, economic activity. Four years later, consumption remains depressed, manufacturing activity does not pick up, and unemployment grows. How will this story —which has been “on air” for four years, with unthinkable consequences— continue?
I believe we have reached a point where we should accept that several pillars of the world’s capitalist economy have changed radically: some of those changes are economic and others, sociological. Consumers have changed; they are no longer liquidity-propelled. There are even changes in behavior and values. Saving is now a word, as well as an attitude, highly valued by consumers and society. Unfortunately, not by governments yet. We see that we must accept that we will live with a lower consumption rate and, hence, a lower growth rate. Wall Street will not go back to its days of artificial and irresponsible bonanza. Growth rates in the developed world will flatten at lower values. We have gone one step downstairs; we have slowed one gear in the crazy race for growth and consumerism. Homes will not regain their original values, securities will not necessarily go back to their pre-crisis prices, and, likewise, many other variables will stand at lower yet more realistic levels. We must admit that a great deal of wealth was “burned”, and that it was burned precisely because it consisted in “papers”. Little by little, investors and their financial agents’ anxiety to go back to the pre-crisis values of securities and assets will subside. Only the value of investment shelters —which practically boil down to gold, commodities and bricks— will transitorily rise.
The other side of milder growth will imply a more favorable scenario for the environment as well as for climate change threats, which are much riskier than those resulting from economic slowdown. If currency issuing does not continue, and the governments of central countries spend moderately, the economy will slowly absorb liquidity surpluses, certainly not without facing turbulences, and the developed world will gradually reduce public spending, certainly not without facing political and social challenges.
The most negative aspect of this likely scenario lies in the classical economic equation that characterizes the capitalistic dynamics: consumption – level of activity – level of employment. We will have to look more at China and many other Asian countries in order to learn how to design and make employment policies. For certain, these will require much less money than the billions allocated to the different bank bailout and consumption stimulus programs.
Meanwhile, emerging countries will continue to march towards a scenario of greater development, perhaps at a slower pace if global trade and economic activity wane: they are, generally speaking, much better prepared to face a world economic crunch than they were in 2007. Their macro equilibriums have become consolidated and, probably, a little cold water will prevent heating and inflation. So far, stock exchanges in Brazil, India, China, and even Argentina, have not felt the impact of the chaotic weeks in Wall Street and Europe.
