What will trig­ger next global eco­nomic disas­ter?

The Washington Times Weekly - - Commentary -

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 per­cent 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. It also does not seem likely to this ob­server that the cre­ation of a eu­robond mar­ket to ab­sorb grow­ing debt will bring about an in­spired, prob­lem-solv­ing new direc­tion in Euro­pean fis­cal and mon­e­tary pol­icy.

The U.S. — How­ever much the Obama ad­min­is­tra­tions stim­u­lus pro­gram staved off an even worse cri­sis — a point to be ar­gued by econ­o­mists un­til the end of time — it has run out its string. Pub­lic opin­ion now de­mands a curb on deficit spend­ing. But how to do so, against the pres­sures of “spe­cial in­ter­ests” (your in­ter­ests al­ways are, mine are heav­en­blessed), is a co­nun­drum tax­ing the Amer­i­can po­lit­i­cal sys­tem. It’s a time when par­lia­men­tary gov­ern­ment — with its abil­ity to bring down a gov­ern­ment’s failed strat­egy in­stan­ta­neously — is to be en­vied. In­stead, more than a year’s worth of po­lit­i­cal mud­sling­ing ap­pears only to have pro­duced near-paral­y­sis in Wash­ing­ton. And de­spite wide­spread de­nials — in­clud­ing fudg­ing the num­bers with in­ven­tions like “core in­fla­tion” — higher prices could cou­ple with stub­born un­der­em­ploy­ment/un­em­ploy­ment and the un­re­solved hous­ing bub­ble to in­crease the 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 “non­per­form­ing 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 per­cent al­ready haunt large elec­tric­ity cus­tomers and boosts ex­pen­sive fos­sil fuel im­ports. Con­sumer

More than a year’s worth of po­lit­i­cal mud­sling­ing ap­pears only to have pro­duced near-paral­y­sis in Wash­ing­ton. And de­spite wide­spread de­nials higher prices could cou­ple with stub­born un­der­em­ploy­ment/un­em­ploy­ment and the un­re­solved hous­ing bub­ble to in­crease the mis­ery.

con­fi­dence falls to record lows, omi­nous for Ja­pan’s rapidly age­ing pop­u­la­tion. Gov­ern­ment debt, al­ready the world’s high­est ra­tio at 200 per­cent of GDP, will rise as Tokyo bor­rows $100 bil­lion to re­build and GDP shrinks. Luck­ily, Tokyo bor­rows at home at floor-scrap­ing 1.5 per­cent. 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 re­sult- ing 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 per­cent of the EU GDP] if Greece [3 per­cent 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?

Sol W. San­ders writes the Fol­low the Money col­umn for The Wash­ing­ton Times.

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