Milan (AsiaNews) - Israel's air strikes in Syria, the attack against the US Embassy in Turkey and, before that, the killing of the US ambassador during the attack in Benghazi after he met with the Turkish ambassador to discuss supplying (smuggling?) weapons to Syrian rebels are signs of a tense world scene. If we consider other areas of tensions (China vs Japan, Israel vs Iran, North Korea and its nuclear weapons, and Western Africa), it appears that a large-scale conflict might break out. Yet, a big war could not occur without an underlying economic imbalance. Sadly, many factors point towards the possible if not imminent collapse of the existing financial and economic system.
The failures of Obama, Bernanke and Geithner
Five years after the US real estate and the subprime mortgage crises, and four years since the financial meltdown caused by the collapse in September 2008 of Lehman Brothers, it is clear that the world economy is far from recovery. The Baltic Dry Index (BDI), i.e. the price of moving dry bulk commodities, is currently at around 750, somewhat higher than the low points of mid-September (662) and late December (698) last year but still far lower what it was on 21 January (838). It is however close to the index's lowest point (since 1986) of 5 December 2008 (663), far from its high point in May 2008 (11,793). The index is important because it measures the movement of basic commodities like iron, grains (f. ex. soya) and coal, the main source of energy for China, the world's second, if not first, largest economy.
This marks the failure of Keynesian economics as implemented in the past 50 years, since Kennedy's election in 1961 that is, when it became the new economic-religious orthodoxy in Western nations. In fact, based on the advice of complacent Nobel Prize winners for economics like Krugman and Stiglitz, Obama's policies have followed the same principle: liquidity and more liquidity. Under Bernanke, a huge amount of liquidity has been injected-QE, QE2, QE more-with the help of US Treasury Secretary Tim Geithner (Stimulus I and II), and a united cabinet (Obamacare and the green economy) picked by an apparently Hawaiian-born president. To all this, we must add the wilful support of spending requests coming from the CIA and the Pentagon, in what amounts to a military form of Keynesianism (wars in Africa, the Arab spring, Libya's "liberation" and other "country outings", not to mention Afghanistan and the indirect involvement in Iraq).
If the sacred texts of the venerable Keynes are to be believed, a deluge of liquidity and deficit spending should have boosted the recovery. However, the much vaunted 'Yes, We Can!' promised and guaranteed by the propaganda of the new black Kennedy [1] did not materialise as the country's sluggish employment and growth rates show.
In January 2009, unemployment stood at 7.8 per cent of the labour force against 7.9 per cent in January 2013 (hitting 10.10 per cent and 9.8 per cent in October 2009 and 2010 respectively). Such figures are based on official statistics calculated in accordance with a method introduced in 1994 that excludes long-term unemployed workers who have become discouraged from seeking jobs. If the all the figures were put together, the real unemployment rate would be around 23 per cent. If we applied the same principle to economic growth and factored in the official inflation rate, we would find that the nominal growth rate of 2.2 per cent in 2012 was much lower. Considering that the actual rate of inflation is far higher-Ask any homemaker in the United States as elsewhere!- then that figure would have to be lower.
The current econometric methods tend in fact to underestimate price hikes. If we apply the methods used until the 1980s, we would find that inflation is much higher. US economic growth would have been negative last year, around -2 per cent [2], something already visible in the last quarter official rate, which was negative (-0.1 per cent). This is a sign that recession is probably just around the corner.
Thus, despite the greater fire power and the rise in the public debt, Obama, a hero to the dispossessed, backed by most of Hollywood's wise mummers, the ever present TV experts, the grim bureaucrats and university barons of the politically correct, has effectively failed.
Sky-high public debt
The Nobel Peace Prize winning Obama has had nevertheless some brilliant results thanks to his Keynesian consiglieri. In fact, he has built up the largest government debt-to-GDP ratio in peace time. At the end of 2008, the ratio stood at 40.2 per cent; by the end of 2012, it had reached about US$ 16.432 trillion, or 105 per cent of GDP. This does not include the spending commitments without financial cover, which future generations will pay, or government aid to the banking and financial systems, nominally under the Fed's control, which altogether represent twice the GDP.
Another brilliant result has been the rise of S&P 500 index. After dropping to 752 on 20 November 2008, its lowest point since 1997, it bounced back and now stands at 1,513, close to its high point before the crisis. In this, Obama did a good job, diligently protecting the interests of his real electoral backers, not the masses of the dispossessed, but the big Wall Street financial firms and hedge funds who funded to the tune of millions his rise to power [3].
However, those who do not want to rely on homemakers' common sense can at least look at the BDI as a measure of reality. The gap between the S&P 500, share values and the BDI is truly staggering. One of them is at its highest levels; the other is closer to its lowest. Which one fits reality best is not hard to see. According to current market reports (by Clarkson's, a leading provider of integrated shipping services), activity in dry bulk shipping is substantially low, not due to a slowdown associated with the Chinese New Year. Hence, it is makes sense to think that the S&P 500 will eventually have to adjust downward once the injections of liquidity from the Fed ends. In fact, it is hard to imagine that the Fed might continue to supply the markets with liquidity without causing inflation at a time when the price of benchmark Brent crude is at US$ 116, not far from the US$ 150 per barrel of 2008, just before Lehman Brothers went under. What is likely to happen is that as soon as the Fed starts slowing its injections of extra funds at near-zero cost, interest rates will jump and share values will plunge from their current artificially high levels.
If we use the BDI as a measure of the real economy, it is plausible that the S&P 500 could drop to its low point of November 2008, half of what it is worth now. If the index does plunge from 30 to 50 per cent, it would have a negative impact on world shares and non-energy commodities, especially ferrous and non-ferrous metals. This could trigger a new derivatives crisis, affecting interest rates, share values, financial ratios, commodity prices and currencies.
A new derivatives crisis could lead to a new deep crisis in the financial and banking systems, causing the fall of the dollar and destroying the credibility of central banks whose balance sheets are full of toxic bonds, worthless securities held by people who live up to their obligations.
[1] A black Kennedy, progressive and libertarian, who has authorised late term abortion (i.e. infanticide), and continues to fight for his gay brothers and lesbian sisters.
[2] See John Williams, "Alternate Gross Domestic Product Chart," in Shadow Government Statistics, consulted on 5 February 2013.
[3] See d'Orlando, Maurizio, "Obama, world crisis and the new world order," in AsiaNews.it, 14 November 2008, consulted on 5 February 2013.