Volatile situation

The world economic recession

Financial media is now highly optimistic about the prospect of the end of the recession. However for the jobless and the homeless there is no sign of the end of their nightmare. A survey among the professional economists by the ‘Wall Street Journal’ shows that most are highly pessimistic and expect the unemployment rate, which is now higher than anything the industrialised world has seen over the last 34 years will get even worse next year.

The task in front of the G20 leaders was to produce a framework to solve the world economic crisis by thinking out of the box. Instead, they want another round of ‘stimulus.’ The massive debt-driven stimulus spending plans being unveiled by the political leaders of the G20 economies may only accelerate insolvency of the central banks in most countries.

Much of these stimulus plans are empty promises or reallocation of already budgeted expenditure. IMF will get a new $250 billion worth of Special Drawing Rights or the artificial currency composed of averages of major currencies to help the countries with severe foreign exchange crisis. Otherwise, the plan calls for budget deficits of about $5,000 billion for the G20 countries.

European banks may be holding as much as $24 trillion in terms of derivatives, mortgage backed securities, options, and bonds of already bankrupt banks and major companies, commonly called as ‘toxic assets’. This is at least $6 trillion more than the combined GDP of the entire European Union. Japan is so far the primary purchaser of US government debt. Now as the American consumers purchase fewer goods from Japan, it is no position to provide loan to USA.

China has accumulated a huge surplus in her balance of payments, and this cash pool was used to loan money to the United States, its major customer. Now that consumer demand in the US is contracting, China will likely need to shift its accumulated savings to solve its own problem of at least 20 million newly unemployed workers and possible recession.

Contraction in China will be devastating to the economies on her periphery. The Gulf Arab states, another financier of USA, are also being affected by the crisis, as the reduction of oil prices has created severe budgetary constraints in the previously abundant treasuries of the OPEC countries.

The UN Economic Commission has suggested some restrictions on global trade on derivatives and future market and gradual replacement of dollar as the international reserve currency by the SDR (Special Drawing Rights), the artificial money created by the IMF back in 1978 but could not get off the ground. These solutions are not only standard but also unrealistic.

Illusion

G20 also has allocated about 250 billion US dollars to promote SDR through IMF but in reality USA does not want SDR to replace dollar, as the dollar is only a ‘fiat’ currency backed up by nothing but the reputation and power of USA. If SDR replaces dollar, value of dollar will go down to a very low level and the USA will be unable to pay for its imports and to project its power all over the world.

The problem can be solved if there is a will to solve it, but that was lacking among the leaders of the G20 those who had gathered in London. To restore normalcy, it is essential to eliminate financial derivatives, the toxic features of the world financial market.

Most speculative activity can be eliminated by banning all trading of derivatives, options, future contracts, and secondary market for shares. IMF can be turned into a massive central bank of the world, the bank of last resort for all national central banks, what Keynes had suggested in 1945. However, to solve the massive unemployment and destruction of exports of most countries of the world, public investment planning, with managed trade regime, is required.

Instead of free trade with flexible exchange rates and the resultant speculation in the foreign currency market, there is a need to have the fixed exchange rate regimes as it used to be before 1972 to create stability in the financial market. Speculation in the foreign exchange market and the market for the derivatives or forecasts of future movements of the foreign currencies are the main causes of several bank failures in recent years.

During the last depression of 1930s, at least a million people were starved to slow death in the richest country USA alone, as described by John Steinbeck in his novels. During the current depression, there will be many millions of deaths due to deprivations and starvations caused by mass unemployment all over the world.

In the USA that gave birth to the global financial crisis and credit crunch, the government’s finances have been driven to the brink of bankruptcy by vastly excessive military expenditures. The national debt of the US of nearly $10 trillion even before the onset of the global financial crisis is a reflection of that fiscal reality. There was no proposal before the G20 meeting for reductions in these wasteful American military expenditures.

Although American military might is needed to protect Asia from the expanding military power of China, if USA accepts a multi-polar world, reductions of tensions in other parts of the world would certainly provide USA more resources to contain both China and the jihadi terrorists.

(The writer is a professor in international economics, Nagasaki University, Japan)