12/20/2011, 00.00
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World crisis and the European and US debts

by Maurizio d'Orlando
Europe is not doing well. BRIC nations (Brazil, Russia, India and China) are hurting. However, the United States is doing worse than everyone else, after spending US$ 30 billion to save its banks. The current economic crisis represents the failure of the Keynesian cultural model and the false myth of globalisation. It is urgent to bring back into economics the concepts of “individual and collective responsibility” and “retributive justice”.
Milan (AsiaNews) – Financial markets and business-oriented media have focused for months on Europe rather than other parts of the world. Greece, followed by some of Europe’s other peripheral nations, and then Italy grabbed the attention. Now France’s credit rating has come under threat from the Moody’s and Standard and Poor's rating agencies. This week, the latter warned that the credit rating of 15 eurozone members could also be cut, an unprecedented move that could lead to the insolvency of many European banks. Germany and the European Central Bank (ECB) are also at risk. No wonder then that the Euro lost ground against other currencies, especially the dollar.


Have Moody’s and Standard and Poor's declared war on Europe and its banks? That cannot be excluded, but Europe’s constitutional fragility and the complexity of setting up the Euro cannot be concealed. It is equally clear that the resources Europe wants to harness to cope with its current problems are not enough. The European Financial Stability Facility, to be managed by the ECB, will only have US$ 500 billion, a drop in the bucket compared to the public debt of various European nations, not to mention the debt of businesses, households, banks and other financial institutions.

Doubts persist about Europe’s institutions. The ideas of identity and constitutional legitimacy are at risk, so is the freedom of the peoples of Europe, which have underpinned Europe for centuries.

Two nations have been placed under trusteeship, their peoples denied the right to express themselves in referenda or elections. An unelected official, the President of the European Council Herman van Rompuy, called for and obtained this, for example, on 11 November when he met Italian President Giorgio Napolitano. In both Italy and Greece, two men, Mario Monti and Lucas Papademos, were appointed at the helm of their respective governments. Both of them once held important posts in Goldman Sachs, one of the world’s foremost investment and securities firms.

The ECB, a consortium of central banks expressing the interests of private banks, dictated the agenda of their respective parliaments. And now the European Union is already getting ready to modify its founding treaties. A fiscal union with heavy and automatic penalties will be administered by unelected officials. Thus, in order to save the Euro, the principles of popular sovereignty and self-determination, not to mention different historical and cultural identities, will be mothballed. And despite it all, the single European currency is not likely to survive.

Great Britain

Things are not much better elsewhere. Outside the eurozone, Great Britain appears to be sailing in calmer waters, but only because people are looking away. The country depends much more on its financial industry and the country’s total (public, business, bank and private) debt is higher than the average in the eurozone, around 500 per cent of GDP, just a bit less than Japan’s, as Christian Noyer, chairman of the Bank of France and a member of the General Council of the European Central Bank[1] ungraciously pointed out. Whether the Cameron government survives until April is anyone’s guess, but AsiaNews has written about Japan’s difficulties only yesterday [2].

CHINA and BRIC nations

China, which AsiaNews has extensively covered (see yesterday [3]), shows obvious signs of difficulty because of a real estate bubble in real trouble and growing popular unrest across the country. The clearest indication of how China’s economy is hovering near the precipice comes from Prof Larry Lang[4], who said that, if you add the debt of Chinese provinces to that of state corporations, China finds itself “on the brink of bankruptcy”.

Other BRIC (Brazil, Russia, India, plus China) members are also in a critical situation. India is running a trade deficit of about US$ 10 billion[5] a month; that is about 7-8 per cent of GDP on an annualised basis at a time when offsetting capital inflow is drying up (fewer remittances from Indians working abroad because of turmoil in the Middle East, declining exports to the West due to the Old Continent’s crisis, and a drop in short-term investments). Should a currency crisis hit, its reserves would quickly evaporate.

Brazil also has a trade deficit. Its favourable exchange is due to short-term capital inflow that is likely to shift very soon. The South American giant in fact is starting to feel the effects of lower Chinese demand for its minerals and agricultural products. A currency crisis would undercut its export-driven growth and push its economy into a deep recession.

Russia has a low overall debt (but it defaulted three times last century on its sovereign debt, a still unbroken record), but its industrial sector is in decline. Only its energy industry is keeping it afloat, for now.

US abyss

One key element that is missing from this picture, falling apparently below the radar of international business news coverage, is the US elephant.

Two figures resume the difference between Europe and the United States, both related to their respective rescue plans. In Europe, an uphill battle is being fought to establish the European Financial Stability Facility, with US$ 500 billion in capital. Compared this to the few months (fall 2008-winter 2009), it took to the United States to adopt a US$ 30 trillion plan, twice the US Gross Domestic Product. Lest we forget, to this we must add the Federal Reserve’s Quantitative Easing 1, the stimulus package Obama adopted right after he took office, the Federal Reserve’s Quantitative Easing 2 (QE2) and its ‘Operation Twist’.

Despite these efforts, the official unemployment rate is still around 9 per cent (it was 5 per cent before the crisis in 2008). If we applied official criteria used until 1994, it would actually be around 22 per cent[6]. Similarly, against the official inflation is 4 per cent, more accurate methods suggest that it actually stands at 7 per cent (according to1990 criteria), or 12 per cent (if 1980 criteria are used)[7]. Finally, GDP growth is officially just under 2 per cent when in reality, it is in negative territory (- 3 per cent)[8]. All this illustrates an unprecedented failure of the measures taken so far. The failure is both in terms of costs and figures, but also more concretely in lower economic activities as evidence by the small number of housing starts in US cities. Indeed, real estate has never recovered since the peak of the crisis [9] and prices remain low.

Failure of a cultural model

It is not only a failure of political and financial leaders and central bank executives, but also the failure of a cultural model. It is a failure whose causes few in the world, let alone ordinary people, want to acknowledge because for too long it was so beautiful and persuasive. As a cultural model, it embodied contemporary modernity and enjoyed great support.

However, it is failure is that of Keynesianism, an economic model that inspired the Federal Reserve in the past 50 years, as well as other central banks and governments around the world starting in 1960, i.e. since the time when the principle of a balanced budget was thrown out.

All of its variants failed, whether that of the Fabian left (where it originated), the centrist Rhenish model and social market economy, or the right. Reagan’s ‘supply side economics’ was Keynesian (albeit rectifying the excesses inherited from the days of Roosevelt’s emergency, and its top tax rate of 75 per cent) because it was not geared towards long-term compatibility and sustainable debt. Although slightly less than in previous periods, the annual rise in government spending under Reagan was around 3 per cent.

Contrary to what is often claimed, Alan Greenspan’s reign at the Federal Reserve before Ben Bernanke was also Keynesian. The growth in debt when he ran the Fed was just another variation on the same Keynesian theme. Even monetarism (few remember this but Milton Friedman agreed with Keynes) and the “rational expectations” of the Chicago school were Keynesian.

Bernanke as well as Obama’s advisors, Paul Krugman and Joseph Stiglitz, are Keynesian (so is Italy’s new prime minister, Mario Monti, a student of James Tobin, who first suggested what came to be known as the Tobin Tax).

The poisoned fruit of globalisation

This crisis is the poisoned fruit of globalisation, the pro-free trade utopia whose pillars are Chinese mercantilism and US “marketism”. The peoples of the world lost their sovereignty in 1994 when the World Trade Organisation was set up, an institution created 50 years after the Bretton Woods agreements of 1944 gave the US dollar and the US Federal reserve the same role hitherto played by gold. This gave rise to an infernal combination. Paper money lost any real content and point of reference (in 1971-1973) and the production of goods lost any territorial or cultural distinctiveness.

Finding a solution should include a return to the concept of individual and collective responsibility and the principle of retributive justice, suum cuique tribuere [10]. To that, Christians would also add the principle of caritas, which is not reducible to charity, as Saint Paul points out [11].

Sadly, the world is too much in love with wrong economics and false theories, even when they prove to be a failure. Thus, an unprecedented collapse is upon us very soon. This has nothing to do with any Mayan Prophecy but is solely accountable to human actions.

1 - See John Irish and Pierre-Henri Allain, “ECB's Noyer says French downgrade ‘not justified’,” in Reuters US 14 December 2011.
2- See “Europe’s crisis dampens confidence in Japan,” in AsiaNews, 15 December 2011.
3- See B. Cervellera, “A Christmas of emergencies,” in AsiaNews, 15 December 2011.
4 - See “As China’s govt cheats, its economy is “on the brink of bankruptcy”, Chinese scholar says,” in AsiaNews, 30 November 2011.
5 - See James Felkerson, “,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient,” Working Paper Nº 698, Levy Economics Institute, December 2011, Retrived 16 December 2011
6 - See “Alternate Unemployment Statistics,” in Shadow Government Statistics, Retrieved 16 December 2011.
7 – See” Alternate Inflation Charts,” in Shadow Government Statistics, Retrieved 16 December 2011.
8 - See “Alternate Gross Domestic Product Chart," in Shadow Government Statistics, Retrieved 16 December 2011.”
9 - See “No. 401: Underlying Economic Reality, October Housing Starts,” in Shadow Government Statistics, Retrieved 16 December 2011.
10 - “To give to each his own” comes from the Digest, by Ulpian, a compendium of Roman Law compiled by order of Emperor Justinian I. Iuris praecepta sunt haec: honeste vivere alterum non laedere, suum cuique tribuere (The precepts of justice are, To live honourably, to harm no one, to give to each his own.)
11 - Corinthians, 1-13.
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