The phenomenon of economic globalization has led to all rational elements of the economy being inter-related amongst each other due to the consolidation of oligopolies, technological convergence and tacit corporate agreements, as a result of which the eruption of the economic crisis in the global village has provoked the appearance of new challenges for governments and institutions immersed in confusion and skepticism, turning back slowly but inexorably to regressive economic cycles unknown since World War II.
Origen of the Crisis
The suicidal policy of the principal world banking entities conceding high risk credits and mortgages emerged as detonator of the subprime crisis in the US, followed by the appearance of toxic assets, an incessant drip-drip of insolvent banks, a severe contraction of bank loans and an alarming lack of monetary liquidity and confidence in financial institutions with an estimated cost of 4.5 trillion for countries like the United States, the United Kingdom and Japan, and 2.5 trillion for the EU.
And then bursts the real estate bubble which provokes the collapse of the economic house of cards in the US (Florida, California, New York) and countries on Europe’s outer ring (Ireland, Italy, Greece, Portugal and Spain) given that for the last decade their economies have been based on the well-known “Mediterranean diet” whose principal ingredients were the urban “boom”, tourism and internal consumption, which created excellent minimalist dishes, highly suggestive in appearance and priced out of sight, but empty of culinary content and with their “eat before date” already fixed (2008).
All of this has generated global economic destabilization and the stagnation or the beginnings of recession in the principal world economic powers, laying out a five-year scenario in which we could return to economic protectionism, with the consequent contraction of global trade followed by the end of economic globalization.
The risk of a new global economic recession: the debt crisis en the Eurozone and certain recent macro-economic indicators in countries like Germany, China and the US have alerted us to the risk that a contraction scenario may return to the global economy in 2013, such as warnings from the IMF and EuropaPress; the Federal Reserve (the “Fed”) has lowered its economic forecasts to the range of 1.9 – 2.4% for 2012 and has raised its prediction for the rate of unemployment for this year slightly (between 8% and 8.2%).
And further, the IMF experts estimated that a fiscal consolidation in the US of around 4% of GDP in 2013 “could reduce annual growth to much below 1%, something which would result in a contraction of the biggest economy in the world next year”, which combined with the inevitable depreciation of the Euro against the dollar due to sovereign debt problems in the Eurozone and a possible surge in the price of crude due to destabilizing geo-political factors, could give place to episodes of stagflation in the US and the Eurozone in 2013 and produce a new stock market crash.
This risk of a stock market crash
The euphoria of Wall Street in 2011 (and by extrapolation in the rest of world stock markets) following the results of the so-called “stress tests” of financial entities carried out by the US Administration and the steady drip of economic data exceeding predictions artificially lowered by the rating agencies, have helped to overweight the green sprouts of the economy (the 3% increase of GDP and notably better results for the banks and Wall Street).
Nevertheless, the uncertainty concerning the floor level for stock values could be taking its toll amongst investors, since an investor is willing to pay a price for a stock if it reports earnings in the future, through which the value of that stock is the total of expected cash flow.
And thus, the floor level (the level at which benefits and minimum multipliers converge), would be situated today in the range of 8000 to 9000 points on the Dow Jones, due to the greater virulence and depth displayed by the economic crisis and very far from the current stratospheric heights (around 13,000 points and recalling values of October 2008).
Nevertheless, the speculative process pushes more buying with the hope of substantial gains in the future, which provokes an upward spiral detached from any factual basis, with the price of stocks thus reaching stratospheric levels until the bubble ends up bursting (the crash) due to the massive sale of stocks and the absence of buyers, which provokes a sudden and abrupt drop of prices (to limits below their natural level) leaving behind a trail of debt (the stock market crash).
This explosion would have the beneficial effects of obliging companies to redefine strategies, adjust structures, restore their finances and re-establish their credit in the market (as occurred in the stock market crisis of 2000-2002) and, as collateral damage, the ruin of millions of small investors still dazzled by the light of the stratosphere, the financial starvation of companies and the consequent domino effect of declaring bankruptcies, frequent outbreaks of labor conflict and increases in the rate of unemployment to levels unknown since the time of World War II, combined with spectacular increases in public deficit and external debt and the continuation of the crisis until 2014.
Towards economic protectionism?
The implementation in the US and the EU of protectionist measures (fomenting the consumption of national products), in the form of supports for avoiding the de-localization of businesses; subsidies to the agro-food industry for establishing bio-labeling of all their manufactured products.
And further, the raising of parameters of quality required for manufactured products from outside the country and the imposition of additional sanitary measures on the products of emerging countries will oblige China and India to make costly investments to reduce their levels of pollution and improve the parameters of quality, laying out a five-year scenario in which we go on from commercial warfare to economic protectionism, with the subsequent contraction of global trade, followed by an end to economic globalization, and later, a return to separate compartments in the world economy.
First world economies
The risk of a double-dip recession, a rise in the rates of the Fed and the ECB and possible stock market collapse for 2013, which will provoke the financial starvation of companies and a brutal contraction of internal consumption will result in a domino effect of cascading business closures and an increase in the rate of unemployment to levels unknown since World War II (with estimates of unemployment rates of 8.5% for the US and 11.5% for the Eurozone by the end of 2012).
The end of the compulsive consumerism which has held sway in the past decade, provoked by galloping unemployment rates and the loss of workers’ purchasing power due to paltry wage increases, freezing or dramatic reductions of wages and generalized job insecurity with minimum wages and life-long casual status; implementation of a minimum work week of 45 hours and roll-back of retirement to 67 years, as part of the progressive deterioration of working conditions.
Frequent outbreaks of labor conflict and sharpening of the social fracture in developed countries, leaving the beneficial effects of established social measures diluted by the raw reality of the severe economic crisis and obliging broad classes of the population to depend on social subsidies, which combined with the increase in xenophobic attacks on the part of neo-nazi groups could end up unleashing violent racial disturbances.
Emerging countries (BRIC), Mexico and South Korea: stagnation of their economies with annual growth of GDP approaching 5% after a spectacular decade with double-digit growth rates. According to EFE [a Spanish news agency], the International Monetary Fund (IMF) lowered predicted growth for Brazil for 2012, for 3% to 2.5% (weighed down by its low productivity and galloping inflation which could touch 5%) and warned about the credit bulge and high interest rates that could slowdown long-term growth.
On the other hand, according to a survey distributed by the Reuters news agency the Chinese economy expanded 7.6% in the second quarter compared to the same period of 2011 (the most rickety growth rate since the financial crisis of 2008-2009), for which reason the Central Bank of China cut interest rates for the second consecutive time in a clear attempt to leverage an economy which has registered its sixth consecutive reduction in the [quarterly] rate of growth.
A brutal restriction of exports and spectacular reduction of its trade surplus due to the contraction of global consumption and the establishment of protectionist economic systems by the principal world economies (raising of standards of quality required), which will oblige countries like China and India to implement stricter labor and environmental laws. On the other hand, China holds $1.2 trillion in US Public Treasury Bonds and invests in dollars to limit the rise of its own currency, given that an accelerated increase in the exchange rate would make Chinese industry less competitive, which turns it into the biggest creditor of the US and makes it totally dollar-dependent.
Desertion of large industrial zones, generating massive migration of urban populations to rural zones obliging a great part of its population to live in the shadow of poverty, with predictable epidemics and episodes of famine, a noticeable increase in social instability and a severe set-back for the incipient democratic freedoms.
Peripheral and emerging countries of Europe: substitution of the current European Union with a constellation of satellite countries within the orbit of a Franco-German alliance, the rest of the countries not integrated in that orbit finding themselves obliged to devaluate their currencies and go back to autocratic economies after suffering massive internal migrations.
And further, they will have to proceed with the re-opening of abandoned coal mines and obsolete nuclear plants to avoid energy dependence on Russia, which, playing a clever combination of energy blackmail, dissuasive nuclear threat, surgical military intervention, and de-stabilization of unfriendly neighboring governments, will bring the majority of countries from the disbanded USSR under its orbit.
Third world countries
Runaway inflation and a spectacular increase in foreign debt, due to the pressing necessity of importing enormous quantities of foodstuffs to supply to inhabitants faced with the alarming shortage of basic agricultural products for food needs (wheat, corn, millet, sorghum and rice) combined with the strangulation of their exports, which will oblige a great part of their populations to live under the shadow of poverty.
And further, the stagnation of the price of crude in the two-year period 2008-2010 (in spite of repeated cuts to production by OPEC) due to the severe contraction of world demand and the bolting of speculative brokers, will make it impossible for producer countries to obtain competitive prices (around $90) that would permit needed investment in energy infrastructure and the search for new resources, which could lay out a scenario of strangulation of world crude production once the current global economic crisis is overcome with a horizon of 2015.
That will presumably generate a psychosis of short supply and a spectacular increase in the price of crude (around $150) that will be reflected in a savage increase of costs for transportation and agricultural fertilizers, which combined with the application of restrictions on the export of the principal world producers to assure self-supply will end up producing short supply in world markets, an increase in prices to stratospheric levels and the consequent world food crisis.
Toward a world food crisis?
The shortage of basic agricultural products for food supply (wheat, corn, rice, sorghum and millet) and the brutal price increase for those products on world markets which peaked in 2007, will presumably grow in a crescendo throughout the coming decade.
It will be provoked by the suicidal economic development of Third World countries with excessive growth of super-cities and mega-complexes for tourism and the resulting reduction of land surface dedicated to agriculture, combined with the changing patterns of consumption in emerging countries due to the spectacular growth of the middle classes and their purchasing power, the strength of the dollar and the rise in the price of crude with the resulting diversion of speculative investment to markets for raw materials (commodities).
The increased use of predatory technologies (biofuels) by countries of the first world has contributed to this process, which under the “bio” label of countries respectful of the environment, have not hesitated to exploit enormous quantities of corn originally destined for use as food in the production of biodiesel, combined with unusual droughts and floods in the principal farmlands of the world.
And thus, according to prensa.com, the threat of damage to harvests in wide regions of the United States from the heat-wave and the persistent drought is laying out an immediate effect in the rising price of cereals and soya reached on the Chicago Futures Market (CBOT) - a new record - and corn is situated at its highest price in four years (increases of around 30%), all of which will unfold on a horizon of 2016 in previously unknown levels of starvation affecting all of the Caribbean, Mexico, Central America, Colombia, Venezuela, Bolivia, Paraguay, Egypt, India, China, Bangladesh, North Korea, Mongolia and South-East Asia, with a special merciless virulence for Sub-Saharan Africa and capable of carrying the population trapped in starvation from the current 1 billion to the 2 billion forecast by analysts.
(Translated by Donald Lee for ALAI, 1 December 2012)
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