6/13/2011 10:30 AM ET|
The coming global financial crisis
Politicians in the US, China and Europe are all postponing tough financial decisions until after next year's elections. But in 2013, we'll have to face the (bigger) problems.
Politics virtually guarantee that the global economy won't go into crisis in 2011. Politics make it extremely unlikely that the global economy will slow down as much as the market seems to fear. Politics, in fact, put a safety net under the global economy this year.
And politics also virtually guarantee another, deeper crisis in 2012 or 2013. I'd bet 2013.
How come? You see, just about every politician in the world is trying to kick an economic problem down the road into 2012 or 2013. I think they'll succeed in postponing the day of reckoning in 2011 using a combination of funny accounting, additional spending and subsidies. But the price for that postponement will be that problems will be bigger and harder to truly solve in 2012 or 2013 than they are now. And that will raise the odds that the global economy will face another serious crisis -- just five years or so after the last one.
This kick-it-down-the-road effort is most obvious in the eurozone, where the effort to put together a new rescue package for Greece really comes down to putting off a Greek default from 2012 to 2013 or 2014.
But the effect is also visible in the United States, where I think the most likely result of negotiations in the U.S. to raise the debt ceiling will be to kick the problem into the 2012 election campaign, with a "solution" postponed to 2013. You can also see it in China, where the leadership that takes over in 2012 and 2013 from President Hu Jintao will be extremely reluctant to rock the boat until it's firmly in power.
Altogether, this politics of delay means that in 2011 the global economy will get enough stimulus to keep growth at the relatively high levels that politicians need to keep voters reasonably happy. Politicians won't even think about making the tough choices that might inhibit growth until well into 2012.
Greece example is clear
You should be familiar with the politics of procrastination from my posts on the Greek debt crisis. The original rescue plan for Greece, cobbled together last year with funding from the European Union, the European Central Bank and the International Monetary Fund, turned out to be an all-too-hopeful effort to push the problem down the road into 2012. The thinking last year, when the rescue program was put together, was that if Greece could get enough cash from a European Union rescue program to get to 2012, the country would have enough time to get its house in order so it could start to finance its debt from private investors again.
That turns out to have been exceedingly optimistic (I'd call it just plain wrong). Greece has failed to quickly reform its dysfunctional system of tax collection; instead, the country has continued to collect less tax than it is owed (and less than it promised its rescuers it would collect). Meantime, budget cutting and asset sales -- while painful enough to elicit widespread protests in Greece -- haven't lived up to projections, either. Add in the effects of the all-too-predictable slowdown in the economy as a result of these measures, and Greece clearly won't be embraced by financial markets in 2012 and maybe not in 2013.
Efforts at a new package are held up now by fighting between the German government and the European Central Bank about whether bondholders should be required to extend the maturity of Greek bonds as part of any deal. But the real focus of the talks is on getting enough money from the European Union, the European Central Bank and the International Monetary Fund to support Greece until 2013 or 2014 when -- hope springs eternal -- Greece will be able to sell debt in the financial markets again.
The political imperatives driving this thinking are clear. The only alternative to this deal -- if it can be sold to voters in Germany and other northern European countries and assuming that it works -- is a painful re-examination and restructuring of the entire euro project. In the current political climate it's unlikely that voters in the northern or southern eurozone would approve a restructuring that actually dealt with the problems of running a single currency for economies as different as those of Germany and Greece. Kick the problem down the road and hope seems like a pretty good alternative to European politicians.
US and the debt-ceiling debate
The situation is totally different in the United States, but the result is remarkably similar. In the U.S., the presidential election looms in 2012, and the anemic recovery is the issue where the Obama administration is most vulnerable to Republican attack. The Republican opposition certainly doesn't want to strike any deal over the debt ceiling -- the U.S. will run out of room to borrow in August, according to the U.S. Treasury. That would remove the shocking state of U.S. finances from the minds of voters.
On the other hand, pragmatic Republicans don't want to force the United States into even a technical default on its debt in August and risk creating a crisis a year too early or getting blamed for any crisis. Democrats, for their part, would like a deal this year that doesn't preclude the chance that the economy will pick up speed and look better in June 2012 than it does now.
That's why, in my opinion, the most likely outcome isn't a crisis this year but some patchwork compromise that gives both sides potential ammunition for 2012 and pushes off the hard work on reducing the U.S. deficit into 2012 or into the post-election period.
That would mean odds are relatively low that negotiations in Washington will produce budget cuts large enough to make a difference in the deficit or turn the current anemic slowdown into a double-dip recession. It's more likely that U.S. fiscal policy will remain muddled, with the Federal Reserve able to hold growth at 2% -- or perhaps even better if the first-quarter slowdown was a result of temporary factors stemming from the Japanese earthquake and tsunami.
By 2013, no matter how the election goes, the Federal Reserve will be under almost unbearable pressure to reduce its balance sheet and raise interest rates. That's when global bond markets will really pressure the United States to come up with a plan -- at the least -- for reducing its budget deficit over the long term.
VIDEO ON MSN MONEY
Jack Welch also has stated that the economy is doing just fine. I am sure it is for him. In one of his books he said that a company should put manufacturing on a boat and move it around the world to find the cheapest labor. He should know, he and other CEO's like him have gutted the US of jobs. He also stated on how well Brazil and China are doing and that the US should follow their lead. We all know that those countries have good environmental and human rights laws, and pay livable wages, right? Jack Welch would work his mother and grandmother side by side in a sweat shop for 10 cents a hour if it would make him a buck! If he thinks Brazil and China are so great, why doesn't he move his **** there and live!
Jim everything you say is very true but what you don’t say is even more true. It really doesn’t matter if trouble brews in the US, China, Greece or Andorra. It doesn’t matter if the right is in power, or the left, whether the regime is capitalistic or communist, a board of angels or a cabal of devils.
What matters is the distance between the rulers and the common man. The larger the distance the bigger the excesses. The bigger the excesses the more painful the consequences. The pattern is always the same: the rulers stretch the distance between them and the common man. Corruption and excesses follow and life becomes unbearably painful.
I agree with cc50 on the fact that politicians have been buying our votes with the treasury and that we've become so spoiled by this that no one is willing to make the needed changes to fix our financial house.
America is at the point whether we must either tax everyone enough to pay for the size of government or we must cut government back to the size we are willing to pay for. This government has gotten so big now that soaking the rich will not even cover the trillion-dollar-plus deficit much less the $14 trillion debt and the over $60 trillion in unfunded commitments the government has made. Like I often say the richest man in the world is worth just north of $60 billion dollars. You would have to take all of his assets nearly 17 times over to have a trillion dollars in your hand. Perhaps this will help some folks paint a picture as to just how deep in the hole we really are.
Our government has borrowed money for so long that the average American has no concept of just how much their government is costing them. We have all been sheltered from the cost because we simply borrow what the taxes don't cover. I am sure if we halted all borrowing, reformed out tax system to collect taxes effectively and then taxed every American adequately to pay for the size of this government it would be an eye-opener. Another revelation would be that the rich can't pay for it all like some seem to think.
X Marcus: I believe in the power of the consumer, but most under the age of 40 are distracted from what is happening by their i-phones and facebook. Ask several younger people about current affairs and you will see what I mean. Ever watch Jaywalking on The Tonight Show?
I agree with you in that both parties are to blame for this mess and none of our politicians are working for us, but are beholden to special interests
Your list covering only the last 31/2 years is quite sobering. It represents the sudden impatience of the elite to consolidate their power and wealth motivated by the lack of fear for consequence or of collateral damage. The agenda itself has been in been place for 200 years, but never so brazenly obvious or as pro-active as in the past 10 years.
Corporate America and the Elite banking families, with the paid-for assistance of the government, are now well insulated against any legal backlash from the common population. They see no need to hide their agenda, especially since the electoral process makes no difference.
I suspect the continued inequitable disparity of wealth between the elite and the commoner will lead the commoner only two options; surrender to a life of sub-servience or revolt. Neither of which is something to look forward to. And It is only natural to cling to hope for change in these times. As a realist, I personally see none forthcoming.
The US and Greece are both handout nations where the Gov't borrows money not for something that would have an economic return, like a new highway - but instead to pay people for not working.
Only 1 in 3 Americans work full time. Over 1 in 4 Americans are fully supported by Gov't spending.
We used the welfare state playbook for all of the last 40 years (not a single year did the Gov't break even). And all we have to show for it is massive debt.
So we spend 2/3 of every Federal Dollar on Entitlements. But we borrow 40% of those dollars.
When these misguided liberal ideas finally bankrupt the US, there will be no one to bail us out like Greece.
the only reason we are where we are is because of greed!! guys living of 100 million a year wants more( oil ceo's) leaders who want to really rule the world!! god i miss the 80's. when a bottle of pop was 50 cents. a mid size car was 10,000 dollars,and we had plenty of jobs to choose from.getting a raise used to mean something,but now getting a raise means someone is going to be losing their job; programs will be shut down.hospitals won't help those without ins.anymore( how many need to die over money!!) it's sad.we all could live a happier life,if the greedy weren't so greedy.
Keynesian economics teaching was the "stimulus", TARP, trough feeding at its worst.
That's because it's not Keynesian today.
Of the 2 stimulus packages, TARP and ARRA, how much actually went into building things? Almost none of it.
A) The lion's share was spent to shore up banks, who in turn didn't lend out anymore even when they were given cash to do so.
B) The second largest part was tax-refunds, that's nothing but consumption stimulation, that's not Keynesian either.
The reason WWII worked was easy. The government spent massive amounts of dollars employing people and building things. When you compare the debt situations, physically, it's not even close.
We spent the tune of 4 trillion dollars over 5 years of sustained spending on WWII. It wasn't spent in banks to lend money, it wasn't given in tax rebates. It was spent on businesses building things, it was spent on employing people in *new* jobs.
Most of the money floating around the world is tied up in "investment" but it's mainly paper investment, it's not capital expenditure on building things, on new jobs. Investors buying 100 trillion in mortgage investments doesn't put 100 trillion into the global economy.
I am certain that Mr. Jubak is correct in stating that the politicians will "attempt" to kick the can down the road. However, I think he is too confident of their success. Some countries are going to bear the brunt of this economic downturn/recession/depression disproportionately, and increasingly those countries, their governments and their citizens, are not going to want to play along. These extend and pretend policies are all built on a wink and a nod. I'll ignore your astronomical debts and fuzzy accounting if you'll ignore mine.
It will only take a few dissenting voices to throw everything into turmoil.
So, I hope this is not lost on all of my idealistic brothers and sisters of both right and left leaning tendancies. It is not about the condition of our economy or whether we will be invaded by communists, jihadists, or the taliban. It is not about our healthcare system or our military. It is not about educating our children, or providing them with a stable future. It is not about how you will retire.
It is about how I will get elected, or reelected or how will I control the process. It is not about patriotism. In the past 50 years we have sacrificed thousands of our countries finest young men for no good reason. And then failed to honor the most basic rules regarding our flag, like not walking on it, or using it for clothing.
To my idealistic brothers and sisters: recognise that it is all about the money, always has been, always will be. Maybe it is a good thing, maybe not, but try to not be misled. We are going to be OK.
really that's just what we need is more putting our head in the sand wishing the problem to go away.
Name me something they have fixed? I dare anyone. Name something that either side has fixed since this all started?
Has freddy Fannie changed there policy? anything? has anything been fixed? Or has a crapton of money been pumped into the market to prop it up taking that money out of the private sector in the form of loans to the federal gov to prop up failing businesses in order to kick the can down the road.
If the mes**** the fan again exactly where are they going to get the money to bail things out again? We are broke...well the fed is company's aren't but the fed is broke meaning there will be no more pumping of the system again without hyper inflation.
So again I dare anyone to explain to me if you think things are getting better exactly what was fixed.
"Altogether, this politics of delay means that in 2011 the global economy will get enough stimulus to keep growth at the relatively high levels that politicians need to keep voters reasonably happy. Politicians won't even think about making the tough choices that might inhibit growth until well into 2012."
I think that the writer and more significantly politicians seem blind to the fact that the meager growth in the economy is only benefiting corporations and the wealthiest 1%. Unfortunately that is the same one percent that decides who we the voters get to chose from. Obama had an agenda when he came into office, he's accomplished that and now he is clueless as to what to do to fix the economy (and even more clueless as to te fact that his healthcare reform actually has stunted the economic recovery) The republicans aren't vetting anyone who makes me feel all warm and fuzzy. And Sarah Plain? Really?? Things are going to get really bad for a lot of people in this country in the not to distant future.
About 1 in about 4 or 5 homes Nationally "underwater".
Americans LOSING home vaues and retirement.
No Job security whatsoever? Folks are LOSING ground.
How many folks are on SNAP food stamps?
How many folks are on HUD Section 8 Housing?
How many folks are in Bankruptcy?
How many folks have given up?
Are there any positives to look forward to?
I cant see much and my Vision is about 20-20.
Copyright © 2014 Microsoft. All rights reserved.
[BRIEFING.COM] S&P futures vs fair value: -1.30. Nasdaq futures vs fair value: -2.50. U.S. equity futures hover near their pre-market lows amid cautious action overseas. The S&P 500 futures trade one point below fair value.
Reviewing overnight developments:
- Asian markets ended on a mixed note. Japan's Nikkei +1.1%, China's Shanghai Composite -0.3%, and Hong Kong's Hang Seng -1.0%.
- In economic data:
- China's HSBC Manufacturing PMI ticked up ... More
- In economic data:
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'