http://news.xinhuanet.com/english/2008-12/17/content_10517447.htm
BEIJING, Dec. 17 -- Recently productivity in the United States rose
more than forecast, while labor costs increased less than anticipated.
Usually, that is a good sign. But these are no ordinary times. More
than 1.5 million jobs have already been lost this year, and there is
worse to come.
In the next few weeks, aggregate demand will decline significantly
in relation to supply. Companies are reducing capacity feverishly in
housing markets, durables, the car industry, and in others. As the
U.S. negative demand shock spreads internationally, it will reinforce
the worldwide downturn.
The writing is on the wall. Historically, world trade has been
driven by the decline of transportation costs and tariffs. However,
the Doha Round collapsed this summer, while the Baltic Dry Index
(BDI), a barometer of global trade, has fallen 93 percent. Even the
price of oil has plunged from 150 U.S. dollars to less than $50. In
the past, cheap oil was a blessing; today, it reflects the decline of
world trade - for the first time in 30 years.
The U.S. economy entered a recession in December last year.
Although the official confirmation came recently, the facts have been
known since summer last year. After the housing bubble and the credit
squeeze, Dow Jones has declined by 40-45 percent from its peak.
In the 1970s, the energy crisis pushed the world economy into
stagflation; in other words, slow growth plus inflation. Today, U.S.
recession is pushing the world economy toward redeflation, or
recession plus deflation.
The severity of this crisis is now comparable to the explosive
threats - the mix of recessionary forces and deflationary pressures -
that were seen last right before the Great Depression in the 1930s.
How did we get here?
The global financial crisis does not originate just from the US
subprime mortgage crisis. It stems from the 1980s, when deregulation
of financial markets contributed eventually to the savings and loan
debacle, and the 1990s, which provided a powerful catalyst to US
productivity and growth but also gave rise to low interest rates and
the explosive growth of the unregulated derivatives - or the
"financial weapons of mass destruction", as the investor Warren
Buffett called them.
After the collapse of the tech bubble in the early 21st century,
the economy needed a stimulus. However, the Bush administration's tax
cuts did not benefit the U.S.
As fiscal policy stepped aside, monetary policy had to step in.
The Federal Reserve (Fed) responded by flooding the economy with
liquidity. In the past, that might have contributed to the growth.
After the burst of the Internet bubble, however, excess funds were not
put to productive use, but flew into the next big bubble - the housing
market.
The original objective of the subprime market seemed well-founded
- to ensure that home ownership was not just the privilege of the few,
but the promise of the many. Similarly, securitization was hardly
something negative; it made markets more efficient and contributed to
consumer welfare. And so it was with the Internet, which facilitated
and globalized these efficiencies.
Still, in the early 21st century, deregulation, securitization and
Internet-driven transactions led to massive distortions, while giving
rise to an unregulated and shadowy world of finance.
Low interest rates and easy access to funds encouraged reckless
lending, which led to the subprime mortgages that allowed home buyers
to be afforded mortgage for a house they were never qualified for and
would never be able to pay off. Behind the facade, bankers were
talking cynically about Ninja-loans (no income, no jobs, no assets).
Initially, the subprime mortgage crisis was a US problem. In a
less globalized world, it might have remained so. However, it was
disguised into derivatives that were misunderstood as "safe", as
investment banks sliced and packaged the risks worldwide, which then
spread - like a pandemic.
Soon thereafter the multi-billion dollar write-offs ensued as some
of the world's largest investment banks, from Bear Stearns to Lehman
Brothers, had to acknowledge that the derivatives they were holding
proved almost worthless.
The subprime mortgage crisis morphed into a credit squeeze as
these assets then forced the banks to deleverage quickly. Soon the
crisis finally affected inter-bank lending worldwide and morphed into
a global financial crisis. By mid-October, the world financial system
was - as the International Monetary Fund chief Dominique Strauss-Kahn,
noted - "on the brink of a meltdown".
Through decisive, coordinated and international action, the
meltdown was averted after the world's industrial leaders convened in
Washington. Although these G7 nations still govern the world economy,
growth is primarily now in the large emerging economies and oil
producing nations.
The initiative thus shifted to these G20 nations, while French
President Nicolas Sarkozy outlined the need for Bretton Woods II. But
much has changed since 1944, when the international financial
architecture was created for the postwar era.
After World War II, the Bretton Woods conference was prepared for
months and led by the U.S., which, at the time, accounted for half of
the world GDP and was the world's greatest creditor. Ironically, last
month, the G20 conference in Washington lasted two days and was hosted
by the U.S., which now accounts for only 23 percent of the world GDP
and is the world's largest debtor.
The participants agreed to cooperate, and formulated lofty
objectives and will meet again in April next year. However, the
markets live in real time and will not wait. Despite multiple massive
bailouts worldwide, policymakers have failed to get credit flowing and
to prop up spending.
In Washington, Obama is putting together a large stimulus plan,
which is rumored to amount to 4-5 percent of the U.S. GDP, or 600-700
billion dollars. The capital provision is perceived as necessary to
restore the ability of banks to lend and unfreeze the credit markets.
The goal is to stimulate consumption, which accounts for more than 70
percent of the U.S. GDP.
Indeed, rising consumer demand for goods and services has been a
key element of U.S. economic growth. But its current level is
unsustainable.
Between the 1960s and 1990s, personal spending, adjusted for
inflation, tracked the overall growth of the economy. During the past
decade, that pattern has changed.
Before the onset of recession in December last year, the 10-year
growth rate for consumption was 3.6 percent, versus GDP growth of 2.9
percent for the same period. This difference represents an enormous
gap. Between 2001 and last year, the extra spending amounted to about
3 trillion dollars. Much of that money was spent in the housing
market.
Global growth has been driven by the U.S. consumers who have been
living beyond their means, and by banks that are now falling apart.
The past level of U.S. consumption is no longer sustainable.
Typically, the impact has been felt first on imports, which is now
exporting the U.S. redeflation worldwide - while causing the demise of
export-driven growth.
The ongoing worldwide recession is not the result of cyclical
fluctuations. It reflects the structural transition of the world
economy - from global growth driven by U.S. consumption to a new kind
of growth driven by multipolar economies.
In the past, global growth had been too dependent on one nation;
in the future, it will be more diversified and less risky. But the
transition is wrought with peril.
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