A version of this column is scheduled to be published in The Washington Times, Monday, July 11, 2011.
Follow the Money No. 74: Charlie Chaplin’s suit?
The geopolitical question of the hour: is there a tripwire that will tie together a series of regional crises bringing on another 2007-08 worldwide economic disaster?
Lehman Brothers’ collapse dramatized how enhanced interconnections can tumble through the new world economy with domino effect. But if the world finance mavim know a seminal interrelation of our several bubbling crises, they are not telling us. Meanwhile, the minitheaters percolate:
Europe –There’s growing consensus Greece’s economic collapse is leading to a restructuring of the European Union’s finances with more than 20% of the world’s gross product. Shooting the messenger – the growing attacks on rating agencies which, indeed, are feeding debilitating increases in the cost of debt – doesn’t solve the problem nor do complicated if band-aid solutions. Nor, does it seem likely to this observer, creation of a Eurobond market to absorb growing debt would automatically bring about inspired, problem-solving central European fiscal and monetary direction. [It didn’t with creation of the Euro “common currency”.]
The U.S. – However much the Obama Administration’s stimulus program staved off an even worse crisis – to be argued until the end of the economists’ time, not soon contrary to John Maynard Keynes hopeful prediction the profession would die out – it has run out its string. Public opinion demands curbing deficit spending. But how against pressures of “special interests” [yours’ always are, mine are heaven blessed] is a conundrum taxing the American political system. It‘s a time when parliamentary government – with its ability to bring down a cabinet’s failed strategy instantaneously – is envied. Instead, more than a year’s political mudslinging appears inevitably producing near paralysis. Meanwhile despite widespread denials – including fudging with inventions like “core inflation” – higher prices could couple with stubborn underdemployment/unemployment and an unresolved housing bubble for increasing misery.
China – The cracks, long seen by the few who questioned sustainability of the miracle of “the world’s factory”, are widening. Beijing central planners – despite their rationale only rapid growth could legitimate “Communism with Chinese characteristics” by providing jobs and stability -- have curbed unlimited infrastructure expansion which with now slowing exports was the engine of growth. “Creative accounting” takes on new meaning for government banks hiding “non-performing loans” in new set-aside organs now making their own bad loans. Beijing’s inability to “feed” local Party hacks leads them to “squeeze” workers and farmers in turn leading to growing violence. Inflation, especially food where most Chinese live, grows despite monetary devices borrowed from Western systems largely ineffective on what still is a Soviet skeleton.
Japan – The world’s third largest economic power drifts, mysteriously bereft of political leadership, caricatured in its inability to address the destruction of the earthquake-tsunami with characteristic “Yamato Damishi” [fortitude]. In Japan’s hot, muggy summer, only 19 of 54 reactors are operating in the face of anti-nuclear sentiment. With more to shut down, cutbacks of 15% already haunt large electricity customers and boosts expensive fossil fuel imports. Consumer confidence falls to record lows, ominous for Japan’s rapidly ageing population. Government debt, already the world's highest ratio at 200% of GDP, will rise as Tokyo borrows $100 billion to rebuild and GDP shrinks. Luckily, Tokyo borrows at home at floor-scraping 1.5%. But, Japan, too, has its echo of the American argument: Economy Minister Kaoru Yosano opposes Tokyo selling itself bonds as the Fed and Treasury have done, warning resulting higher finance charges would hit Japanese banks.
But how does it all connect? We saw how Japan’s disaster put a crimp in the manufacturing supply chain from Shanghai to Detroit. But, for example, what call have German and other European banks on their U.S. colleagues if Greece defaults? Japan, which has been lending the world $175 billion annually in investment capital, is out of that business. Nobody wants to talk about the impact on Spain [20% of the EU GDP] if Greece [3% of the EU GDP], followed by Portugal and perhaps Ireland, “goes”. What will that do to Latin America where Spanish banks have invested heavily as the Brazilian boom simultaneously now threatens to go “bust”? Australia’s roaring dollar is already feeling Chinese cutbacks as will all commodities producers, perhaps even the Mideast petrosheikhs.
In one of his serio-comic sequences, Charlie Chaplin’s little tramp starts pulling a thread from his crumpled suit. Before long, his whole miserable costume dissolves. Is there that kind of loose thread here?
sws-07-08-11
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