Context: G20 summits
There have been five G20 leader-summits in the space of two-years. These are signs of 1) how grave the global economic recession, financial crisis and credit squeeze have been, and 2) the high level of international coordination of efforts to bring these to a halt. Regrettably, economic recovery, the world-wide growth in jobs and livelihoods, and sustained improvement in the levels of well-being for most nations still remain distant goals. In particular, the credit crunch has not been substantially eased, and instead speculative financial waves threaten major currencies, a return to the inflation of commodity prices, and financial instability in major countries (particularly those in Europe, and to a lesser extent Japan and the United States).
While fears of a double-dip recession have somewhat receded among global investors, their general expectation is that a turnaround of the economic recession will remain slow, halting, fragile, and potentially, reversible. The credit squeeze (crunch) is also expected to continue with financial speculation rising to unprecedented levels, as speculators target different currencies, commodities and countries over time.
Although the present economic crisis is universally labelled as ‘global,’ in a recent paper presented to the 42nd Annual Conference on Monetary Studies, hosted by the Central Bank of Trinidad and Tobago, on behalf of all Caricom central banks and the Caribbean Centre for Money and Finance (November 2010), I have argued that the economic and financial data show the major effects of the crisis have been located in those economies which are classed by the IMF as the world’s “advanced economies.” In these economies, the economic crisis continues to be immensely threatening.
Fragile US recovery
Consider the following situations in the United States:
1) As revealed in last week’s column, the banking crisis there is so bad that right now over 900 banks could potentially fail! And, this estimate does not include the so-called ‘too-big-to-fail’ megabanks whose portfolios remain to this day stuffed with toxic-assets.
2) The largest portion of these toxic-assets consists of private household US mortgage-backed securities held by banks. Up to this point these have not yet been substantially removed from their portfolios or fully provisioned for, so that the crisis in financial markets remains acute.
3) Linked to the above, the US private housing market, which collapsed when the housing bubble burst a couple of years ago, has shown no sure signs of recovery and a return to normalcy.
4) Currency speculation against the US dollar continues to be rife, and given the humongous amounts of US dollars held in foreign portfolios because the US dollar is the world’s premier reserve and transactions currency, this makes for deep uncertainty in financial markets
5) In order to cope with the global economic crisis, the US authorities have embarked on wide-ranging stimulus spending activities. This has included bailouts of financial firms; loans to manufacturing enterprises (automobile industry); continued support for wars overseas; as well as expenditures by federal and state agencies on programmes and projects designed to stimulate the growth of jobs.
More recently the Federal Reserve Bank has had a second round of quantitative easing (QE2) to the tune of US$600 billion. Paradoxically, QE2 has resulted in rising bond yields (interest rates) rather than lower yields, as would normally be expected! Altogether, however, such efforts, along with the recent tax deal between the Obama administration and the Republicans in Congress, are expected to push the US federal deficit above US$1.6 trillion in 2011.
6) Undoubtedly, the most distressing policy outcome has been the failure of policy initiatives so far, to lead to a speedy recovery of employment in the US. Open unemployment and underemployment levels remain distressingly high, thereby posing serious threats not only to the economy but to social and political stability as well.
7) Finally, there are increasing numbers of analysts who now express concern over the steep rise in US sovereign indebtedness as a result of its continued overseas wars and recent stimulus spending. Many of these analysts anticipate the threat of inflation, induced by both the excess liquidity in the US economy and rising global food and other commodity prices.
Conclusion
Although not in the same detail, the threatening economic situation in the US is mirrored by similar threatening signs in the European Union. And, because these two are, by far, the largest economies in the world, this makes for very gloomy global prospects. In my judgment they indicate that the global crisis will not go away any time soon, thereby leaving the future development of the global economy very uncertain.
Next week I shall address the overall economic situation in the European Union, and subsequently briefly touch on that in China. China is the largest emerging economy, and together with the US and the EU, they are the most potent elements shaping the G20’s responses to the global economic crisis.
