06/10/2010, 00.00
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The world’s economic crisis, the real global warming

by Maurizio d'Orlando
There are many signs that the crisis is far from over. Europe is on the frontline, busy trying to save the euro. Things are worse in North America, but Asia too is on shaky grounds. In China, the situation is far different from that of a country with a stable growth rate as is usually said.

Milan (AsiaNews) – For decades, press and television, even entertainment shows, have bombarded us with news about global warming and its catastrophic effects. We have been told that human activity is to blame even if no one has been able to demonstrate it scientifically. Yet today, we can see a great deal of man-made global warming on earth, not of the meteorological kind but rather of the economic and socio-political. What is more, it feels like it could set the stage for something worse. In late June, the next G8 and G20 summits in Toronto will not run out of things to discuss.

Frontline Europe

Lately, Europe’s economic woes have been front-page news because of the steady decline of the euro. The danger posed by Greece’s possible insolvency is not yet over. A € 750 billion loan package may have been agreed, but no money has yet been allocated since no national government or parliament has yet to vote on the necessary budget cuts and tax measures. This raises a question: what can be done now that the contagion appears to be spreading to other countries beside Greece. In Germany, the president resigned, whilst the Merkel government, partly because of its handling of the Greek crisis, has seen it support in public opinion polls dip to 20 per cent.

For the government of French President Sarkozy, support hovers in the same range. The impact is not without consequences on the continent’s finances. Europe’s big commercial banks, ostensibly privately owned but de facto and in some cases de jure state-owned, are at risk. This is the basic misunderstanding. Europe’s big banks, even when they are nominally in private hands or a public company, are for all intents and purposes government entities, acting as a public service. They are too big to pay for their own mistakes and go bust. They are not private in the ways of a company owned by an individual or group of individuals who manage and risk their own money.

In principle, Europe’s banks have been less exposed to the derivative bubble than their American and British counterparts, and appear to be on less shaky ground. However, this has proven not to be the case and their cleverly masked weaknesses are just now coming to light, in a field in which US banks have been able to keep a low profile. Most international funding for emerging nations, especially in Eastern Europe, was provided by the main banks of continental Europe. French (for example, Société Générale) and German banks led the way, but they were not alone. Swiss, Austrian (Raffeisen) and Swedish banks (especially exposed in the Baltic States) are especially targeted. Italy’s Unicredit is especially exposed in Eastern Europe after taking over a German and an Austrian bank. For the sake of brevity, we shall not mention Italy’s Generali and Intesa.

Thus, it should come as no surprise that government debts are at risk in the cases of Portugal, Ireland and Spain. Given the rise in credit default swaps (CDSs), which measure the risk of insolvency and the differential in performance, the public debt of Italy and France are in the same boat. For the first time ever, even a sale of German government bonds was a flop. Members of Poland’s government and political elite died in an air crash before a planned and destabilising devaluation of Poland’s national currency, the złoty, so that that step was never taken. Hungary is now on the hot seat for fidgeting with the books and could be insolvent. What can be said about the Ukraine whose GDP plunged considerably.

We could go on, but it is better if we make a couple of points about a number of political developments, even if they are lost in the never-ending coverage of bad financial news. In the heart of Europe, a country is on the verge of coming apart. In Belgium, either one part will secede or a consensual agreement for break-up will be found. In the Balkans, tensions are rising in Kosovo with the whole region bound to feel their ripple effects. In the rest of Europe, we might talk about Great Britain even if economically it is more North American than European, or about Russia, which is essentially Eurasian, a continent of its own. After all is said and done, this means a weak euro, a virtual shot in the arm for the export-oriented economies of Germany, France, Italy and the Netherlands, but one that will not bring long-term relief.

A worse off North America

On several occasions, AsiaNews[1] has looked at the United States. To avoid repeating ourselves, let us just recall that if we include in the overall US debt that of quasi-state enterprises like AIG, Fannie Mae, Freddie Mac, etc, the cost of saving the banks (US$ 24 trillion according to Neil Barofsky), unfunded liabilities (US$ 108 trillion) for Medicare and Medicaid, etc, not to mentioned local and state government debt, the risk of insolvency on public debt is far greater on the other side of the Atlantic, and in its dependencies, the United Kingdom first among them, than in Europe.

This is not based on any preconceived anti-American bias. Real numbers show that the (real) ratio between total public debt and GDP, depending on how public debt is defined, stands at between 450 and 900 per cent of GDP. In other words, the US ratio is worse than that of Europe. Plus, this does not take into account personal and corporate debt or the US trade deficit. Likewise, if European banks are at pains with loans given light-heartedly to governments that falsified their books, we cannot forget the derivatives bubble, which is largely on the backs of the US financial system. According to the Bank for International Settlements (BIS), this trifle is worth US$ 600 trillion of actualised value. The nominal value is as high as an unfathomable quadrillion.

In terms of US domestic politics, the trend has not only led to the rise of a third force, the ‘Tea Party’ movement, and a rare event in US history, but has also led to two hitherto unforeseeable developments. First, we have seen a noticeable political and socio-economic differentiation of the country’s macro regions (East Coast and New England, predominantly Afro-American southern states, California and the Mexican-American border region, the Rockies and Great Plains as well as the Pacific North-West). We can therefore expect the next wave of insolvency in the real estate market and the social problems that will be associated with it to vary significantly according to macro region.

Another major problem for North America is Mexico’s growing instability, caused by its increasingly entrenched drug cartels but also by a second, often-ignored problem. Until recently in fact, Mexico has benefited from revenues generated by its oil exports. Now however, Pemex, the state-owned oil monopoly, is reaping the fruits of insufficient investments in the oil industry. Overtime, oil output has gone down whilst domestic consumption has gone up. Soon enough, Mexico will become a net importer of oil and this will negatively affect its balance of payments.

Thus, whilst tensions are also rising on America’s northern border with Canada because of anti-terrorist controls, the country finds itself increasingly forced to cope with rising instability on the border with Mexico. In addition, the BP oil spill in the Gulf of Mexico appears far from a solution—some reports even suggest that a second, bigger leak opened up some tens of miles from the first one.

A shaky situation in Asia

In Japan, the Democratic Party government has lost some coalition members only a few months into its mandate; indeed, it already finds its back against the wall. Prime Minister Hatoyama, who led the party to an historic victory just a few months ago, resigned and was replaced by his finance ministry, Naoto Kan. Just a short while ago, many had celebrated the new coalition government as the dawn of a new era after decades of Liberal Democratic rule, a turning point marked by public support that hovered in the 70 per cent average. For the Japanese, the new government meant the end of the old system, which it appeared to have deserved in the first decades after Second World War. However, like China in recent times, Japan’s renaissance after its military defeat was based on raking up huge trade surplus with the United States and the rest of the world, a form of expansionism that was not military like that of Imperial Japan, but based on neo-mercantilist policies pursued at the expense of the rest of the world. In the end, this could not last and it did not last.

In 1985, to stop Japan’s “invasion”, the United States forced Japan to sign the Plaza Accord, which called on Tokyo to develop its internal markets and stimulate domestic consumption. Scrupulous as usual, the Japanese adopted the winning ideology of the time, Keynesian orthodoxy, which led to Japan’s real estate and stock market bubbles. Two decades of stagnation and rising debt began in 1987. In Japan as elsewhere, the financial methadone of Keynesianism could not create long-term wealth or well-being. Keynes himself had been candid about it when he said that we are all dead on the long run.

Time however inexorably grinds on and the future is already upon us. On the one hand, the debt to GDP ratio in Japan is officially around 200 per cent of GDP (the real one is obviously much higher). On the other, Japanese society is in a great mess, a deep and prolonged crisis that is not only economic but also social and moral, with an impact on the family structure, a crisis that is both anthropological and demographic. It was almost inevitable that the Liberal Democratic system of government should progressively and irreversibly degenerate, turning into a regime based on corruption, essentially unyielding for lack of an alternative. The initial enthusiasm for the new coalition government was thus very much understandable.

The failure of the Hatoyama government to keep an election promise, namely moving the US military base on Okinawa, ostensibly triggered the recent crisis. However, the Okinawa issue was but the tip of the iceberg because support for the government had already plunged to less than 20 per cent. Disenchantment with the new power has deeper causes. Naoto Kan faces a formidable task that may prove nigh impossible. No credible plan has been presented, and the country has lost its bearings regarding its serious domestic crisis, one that is economic, financial, political and social, and comes on top of the world’s momentous economic crisis. This is not bruited about, not only because it is in the nature of the Japanese people, but also because the rest of the world does the same. Even though no one dare say it, everyone knows that Japan’s debt cannot be repaid; no matter who is in power, recovery and growth remain compromised. Short of some transcendental miracle, logic and human considerations suggest that real and definite solutions do not exist, and this is cause for a deep malaise.

The Korean Peninsula

On the Korean Peninsula, North Korea is literally starving, its people plagued by disease. This explains the sinking of the Cheonan, a real act of war. The Communist regime in the North does not want to acknowledge its failures nor does it want to hand power over to someone else; hence, its use of nuclear blackmail.

As long as it was possible, no one said a word for almost a month about the incident, partly because South Korea certainly did not want to see the cost of its foreign debt skyrocket in the middle of the world’s financial crisis. Eventually, it burst out into the open when Seoul could no longer ignore it without losing face. As a result of North Korea’s threats of “total” war (i.e. nuclear war), there was apparently some movement. The United States pledged it would not bring up its trade dispute with China if the latter kept the North Koreans under control, at least insofar as it was possible. However, the balance remains shaky and the abyss could open up at any time.

Afghanistan and . . .

Can more be said about the insurgency in Afghanistan or the non-peace in Iraq that has not already been said in news dispatches reported to us every day? What more can be said about the civil strife and low intensity conflict in Thailand and Kyrgyzstan? As for Tibet, Uzbekistan and other lands, need we say more? Then there is India and Pakistan, each with its own domestic problems, but also their latent dispute over Kashmir. We have already written about Israel and Iran[2] and talked about tensions in Central Asia, with Kyrgyzstan and Uzbekistan at the top of the list. In Thailand, a latent civil war was front-page news for a while; then it disappeared without going away. The same could be said about the never-ending tensions between India and Pakistan as well as the domestic problems of the two big powers of South Asia.

China’s problems

The real problem in Asia (and the world) is China. As AsiaNews has said since November 2003[3], a critical point is fast approaching. In spite of its apparent successes, China’s economic system is very inefficient in terms of resource use, both human and material. For example, for every percentile of GDP growth, energy consumption in China rose by 4 per cent per for many years. The same is true for raw materials. As for human resources, any comparison is both hard and easy to do. Not only do we have figures for the number of dead in coal mines or suicides (like those at Foxconn), but we can also point to the fact that for decades the yuan’s actual exchange rate was far below its purchasing power parity ratio (at least 40 per cent lower than what it should have been, 55 per cent lower most of the time). In short, to maintain a trade surplus China has had to subsidise its exports whilst allowing Chinese workers to be underpaid by an equal amount.

We at AsiaNews were the first to insist that China had adopted a mercantilist economic model, whereby a nation’s welfare is measured only in terms of foreign exchange reserves accumulated through growing exports made possible by an arbitrary exchange rate. Given China’s size and its 1.3 billion people, the distortions this has introduced into the world economy have put strains on almost every company, industry and country on earth, courtesy of “globalisation”. Indeed, no one remembers how this worldwide economic disorder came about, but the answer is simple: we pretended that China, governed with an iron hand by the Communist Party, was a free market economy.

Instead, it was all political make-believe, based on an agreement between elites, East and West, in favour of “soft” transition in order to avoid the harsh realities that followed the implosion of the Soviet Empire. Those on one side would stay in power; those on the other would rake huge profits needed to underpin a house of cards, another bubble, that of derivatives and self-absorbed finance. The great lie was celebrated with great pomp as if it were the dawn of a new age, with agreements that cut back customs and tariffs protection under the auspices of the World Trade Organisation.  Today, all that is left of that splendour is its debris, a crisis of unused overcapacity, a vortex of financial paper, debt and credit without underlying assets, a real estate bubble made of whole but uninhabited new towns, and a generation that sacrificed itself on the altar of modernisation and that cannot take it anymore.

Save us from Noble Prize winners

Anyone with an ounce of common sense could figure out that free trade and fixed exchange rates arbitrarily set by China’s Communist Party could not go together, except of course in the minds of renowned economic experts or newspaper and TV commentators, especially economists.

In 1998, in the middle of the Asian (1997) and Russian (1998) crises we find Long-Term Capital Management (LTCB), a hedge fund managed by two Nobel prize laureates, Myron Scholes e Robert Merton. Tagging along, we find a bunch of cohorts who resurfaced in recent times (Bear Stearns, Merrill Lynch, Goldman Sachs, AIG, Warren Buffett’s Berkshire Hathaway, Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, and Société Générale).

For the derivatives crisis, we can thank political leaders Bill Clinton, George W. Bush, Larry Summers, Tim Geithner and many others, as well as the ineffable Alan Greenspan, Ben Bernanke, Jean Trichet, Dominique Strauss-Khan, International Stability Forum president (and “Grand Master” of secularism) Mario Draghi, as well as other economists and Nobel prize winners like Modigliani, Miller, Black Scholes, Sharpe, Markowitz, and Robert Engle (2003 Nobel Prize). Milton Friedman, winner of the Nobel Prize in economics in 1976, ought to be included for his influence on Alan Greenspan.

We owe the new wave that followed Obama’s quantitative easing, whose wretched failure we can see today, to Paul Krugman, another Nobel Prize laureate in economics and top editorial writer for the New York Times (the prominent newspaper that criticised Benedict XVI over the paedophilia scandal).

Given such results, and the suffering endured by billions of people around the world, because of decisions taken by a few central bankers enthralled by the gimmicks of prestigious economists, often with a Nobel prize to their credit, we at AsiaNews address a simple request and launch sorrowful appeal to the Lutherans of the Kingdom of Sweden, our brothers in Christ through the same baptism, especially to the Swedish Central Bank, which hands out the award in economics. Please, stop handing out such junk. Today, the Nobel Prize in economics is a real badge of infamy. Above all, it is responsible for so many economic disasters.  

[1]  See Maurizio d’Orlando, “This year, US public debt could reach end game,” in AsiaNews, 3 March 2010; ibid, “As the world waits for hyperinflation and a world government, Bernanke becomes ‘Person of the Year’, in AsiaNews, 29 December 2010.

[2]  See ibid, “Winds of war and economic crisis behind the attacks on the Pope,” in AsiaNews, 14 April 2010.

[3]  Ibid, “I successi economici apparenti; la schiavitù, i fallimenti”, in AsiaNews, 18 November 2003. For other articles by Maurizio d’Orlando, see AsiaNews.

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