Opinion Sur
The bursting of the sovereign debt bubble in Europe and the weakness of the German and French banks resulting from their high exposure levels, as well as the persistence of high unemployment rates and the loss of consumer confidence in the US, have revived the debate concerning the time frame and nature of the way out of the world economic crisis. Is this only a postponement of the IMF and OECD optimistic forecasts concerning the beginning of recovery? Are we close to confirming Nouriel Roubini’s prediction sustaining that recovery has a “W” format? Are we experiencing the central economies “Free Fall” frenzy Joseph Stiglitz analyzes in his recent book with the same title? Or, put more apocalyptically, are we witnessing the onset of the final decline of late capitalism Santiago Becerra dares to foresee in his best seller “2010 Crash”?The bursting of the sovereign debt bubble in Europe and the weakness of the German and French banks resulting from their high exposure levels, as well as the persistence of high unemployment rates and the loss of consumer confidence in the US, have revived the debate concerning the time frame and nature of the way out of the world economic crisis. Is this only a postponement of the IMF and OECD optimistic forecasts concerning the beginning of recovery? Are we close to confirming Nouriel Roubini’s prediction sustaining that recovery has a “W” format? Are we experiencing the central economies “Free Fall” frenzy Joseph Stiglitz analyzes in his recent book with the same title? Or, put more apocalyptically, are we witnessing the onset of the final decline of late capitalism Santiago Becerra dares to foresee in his best seller “2010 Crash”?
The bursting of the sovereign debt bubble in Europe and the weakness of the German and French banks resulting from their high exposure levels, as well as the persistence of high unemployment rates and the loss of consumer confidence in the US, have revived the debate concerning the time frame and nature of the way out of the world economic crisis. Is this only a postponement of the IMF and OECD optimistic forecasts concerning the beginning of recovery? Are we close to confirming Nouriel Roubini’s prediction sustaining that recovery has a “W” format? Are we experiencing the central economies “Free Fall” frenzy Joseph Stiglitz analyzes in his recent book with the same title? Or, put more apocalyptically, are we witnessing the onset of the final decline of late capitalism Santiago Becerra dares to foresee in his best seller “2010 Crash”? We do not know the answer or nobody can assure it with complete certainty. However, we can assert that there is structural evidence that allows us to sense that the 2007 crisis, which has not been resolved yet, will deeply reform the global capitalist system and the current international economic order. Let us see.
To start this analysis we need to ask a first question that has a very complex answer. We will try to simplify by focusing on the essential: how did the global economic engine work up until 2007? In the pre-crisis period, this engine was activated by one single and powerful “propeller”: the insatiable appetite of the American consumer and the bellicosity of the George W. Bush administration. Both generated a powerful global demand supported, in the case of the American homes, by their growing wealth as a consequence of the sustained increases of housing prices and the stock market, and in the case of military expenses, by the permanent growth of public deficit. The expansion of private consumption was furnished by low rates at which banks were willing to lend money. Also banks were funded by the Stock Exchange on the basis of the creation of sophisticated financial products, which also had at their core the mortgages banks themselves generated by granting the loans. In the case of public spending, the deficit was financed by the emission of Treasury bonds which were acquired by Central Banks (mainly the Chinese), sovereign funds and private investors, all of them in search for reserve assets and protection. The Fed, on the other hand, would print the dollars necessary to lubricate an economic system that worked at high speed driven by extreme consumption and greed. At the beginning of 2008 the global economic engine overheated and collapsed. The subprime mortgage bubble exploded with the ensuing collapse in home prices and the stock market. An example of this excessive consumerism can be found in Spain, where people would buy a new mobile phone every 2.5 months, or in the United States, where people would buy a new car every 2.5 years. This kind of consumerism is absurd and impossible to sustain from a financial and environmental standpoint.
When the crisis broke out in 2007 all this perverse mechanism inducing hyper-consumption “exploded” and this explosion generated deep changes in the world economy. In the first place, the crisis in the US destroyed approximately $14 trillion of wealth, a figure that is similar to its Gross Domestic Product, and more than 7 million jobs since it started. That wealth will not be restored because it was fictitious, created on the basis of sophisticated financial devices and “has now disappeared”. As a consequence, consumption by American households – which accounts for 70 % of GDP – has come down substantially and now becomes the starting point of the economic recovery. The same holds true for Europe; overnight the newfound wealth was replaced by huge amounts of debt. Moreover, in many of the EEC countries, their debt is twice as much or three times as much as their GDP. Even worse than in the US, in the old continent, unemployment fluctuates between 10 to 20 %. It will tend to grow in the next quinquennium as a result of the “brutal”, yet inevitable, adjustment plans whose implementation, to different extents, has started in the EEC countries.
In the second place, a deep cultural change has occurred in the American and European consumer. Consumption levels had been exacerbated to such an extent that in 2007 the indebtedness of American homes represented 120 % of American GDP. The destruction of wealth and the loss of jobs have generated a sensitive and lasting change in the savings-consumption relationship. I believe this change will last for many years. According to Wesley Hutchinson, Marketing professor at Wharton, “in the coming years consumers will learn to behave in a more frugal way and will not abandon this attitude in the short term although the economy regains stability”. As a result, we will witness austere capitalism and thus economically depressed capitalism for a while. The low growth rates and high unemployment rates that we now have in the US and Europe will remain for a long period of time. Furthermore, companies have responded to global demand contraction with deep restructuring plans, based upon the reduction of personnel. Thus, the high unemployment level has become a structural problem and, as a consequence, we have entered a world led by a central capitalist system with high rigidity levels for the creation of new jobs.
In the third place, and regardless of Obama’s financial reform approval, we will never go back to a process of risk acquisition with the recklessness that characterized the first years of this century. Therefore, for many years the financial sector will not grant credit to individuals (mortgage and consumption loans), and to small and medium sized businesses, that could significantly stimulate global demand. In other words, “recovery” does not have a clear correlation with the real and productive economy.
Unlike the central economies’ scenario, the emerging economies of Asia and Latin America, especially the BRICS, but also smaller economies such as Peru, Uruguay and Malaysia, among others, are experiencing an opposite phenomenon. Supported by the price raw materials have reached, most of these economies have implemented anti-cyclical policies geared at encouraging domestic consumption within reasonable indebtedness levels and fiscal deficits. This has been done in the context of a successful policy of reserve accumulation. China, with an incentive plan of $ 750 billion that supported consumption and small businesses, has become the engine of the global economy: its GDP grows by 9 % and its exports grew by 50 %. China shakes and the stock markets crumble; as it happened with the reactions produced by the re-appreciation of the yuan (gradual and well managed).
Thus, while a weak recovery takes place in the central countries vigorous growth occurs in most of Asia and Latin America: according to CEPAL, growth will be 4 % to 4.5 % in LA in 2010. Economic progress will be headed by Brazil with rates close to 7 % followed by Uruguay and Peru whose rates will approach 6 %.
This dichotomy is set in the context of a new international economic order based upon a powerful axis: China-USA. The evolution of this axis as far as politics, commerce and monetary policy are concerned will gradually determine the evolution of the world economy for many years to come and, in consequence, the rhythm and time necessary for recovery.
(*) Agricultural Engineer – University of Uruguay. Master in Agricultural Economics – Catholic Univesity of Chile. PhD in Agricultural Economics – University of California at Berkeley. Officer and consultant at OAS, UN, FAO, FIDA, IDB and World Bank. Presently serving as Chairman of Promesur Consulting Group and author of the blog www.carlosgarramon-reflexiones.blogspot.com
