10 April 2009

Thirteen questions and answers about the future developments of the global systemic crisis ~ Leap 2020

Thirteen questions and answers about the future developments of the global systemic crisis (1st episode)

- Excerpt GEAB N°30 (December 16, 2008) -

If you were a subscriber to the GEAB, you would have read what follows as early as December 16, 2008.

As the crisis is getting out of its phase of impact and entering its decanting phase, and as the first consequences are starting to burst out in all kinds of sectors and regions, LEAP/E2020 has decided for this GEAB N°30 to resort to a Q&A method to help their readers assess better the future steps of the crisis. 2009 will be the first year of the process of reorganization of the global system inherited from 1945, 1971 and 1989. One should therefore expect major upheavals and changes compared to which 2008 was only a rehearsal. Gathered from questions coming from our readers or from the growing number of journalists interviewing us worldwide, we tried to make this section as user-friendly as possible.

1. Is this crisis different from the previous crises which affected capitalism?
LEAP/E2020: From February 15th 2006 on, when we coined the expression “global systemic crisis” in the second issue of the GEAB, we defined this concept as a general breakdown of world governance as we knew it in the past decades (essentially since WW II). Indeed since 1945, and in particular since 1989, the pillar of the “world order” has been the US, mostly relying on a mixture of military and financial supremacy. This leadership was relayed by a certain number of Allied countries, mostly within NATO (in particular UK) in addition with Japan. This is the “world order” which is collapsing in this global systemic crisis and which is being progressively replaced by a new architecture of global governance, involving several new players and redefining the very tools of global management. Among other things, as we have been anticipating since 2006, it means the end of a world financial system organized in a pyramidal way, with Wall Street on top seconded by The City. On the monetary front, it may be summarized by the expression “the collapse of the Dollar Wall”, to make an analogy with the collapse of the Berlin Wall which marked in 1989 the end of the other dominant player of the post-WWII world, the USSR.
In our opinion, this crisis has nothing to do with the end of capitalism or even with a crisis of capitalism. It has on the contrary everything to do with the end of a political era which saw the overall global supremacy of one country, the USA; and which has been marked, since the 1970s and Bretton Woods II, by an increasing number of aberrations and excesses in the financial and monetary spheres, due to the diminishing ability of the USA to fulfill their role of global pillar. Atlas is exhausted and his world is falling apart.
The systemic nature therefore highlights a major point: the crisis is affecting the very basis of the existing global organization in the fields of finance, currency, economy & politics,... It comes from long-term problems which were not addressed in due time (as illustrated above) and therefore neither short-term solutions nor 'more of the same' actions will be able to curb the crisis development.
One trend though seems to emerge already very clearly from the phase of impact of the crisis: the balance between public and private interests is being sustainably shifted towards a kind of European or Asian model, with a return of states/public authorities not only into the regulation sphere but also into the public services sector. Privatization of public services, private management of collective goods or services are now as obsolete ideas as collective control of production means became after the collapse of the Iron Curtain. The “Western” trained elites’ main mantras of the past two decades are already things of the past. 2008 gave the first hints about that trend. 2009 will definitely nail their intellectual coffins.

Evolution of the US money base and indications of related major US crisis periods (1910 – 2008) - Source: Federal Reserve Bank of Saint Louis / Mish’s Global Economic Analysis
2. Is this crisis different from the 1930s crisis?
LEAP/E2020: As the previous answer suggests, the roots of this crisis are indeed fundamentally different from the roots of the 1930s crisis.
In 2007, we called the starting crisis in the USA a 'Very Great US Depression' in order to illustrate the fact that the upcoming crisis is essentially a crisis of the US and of its position in the world. By using the word ‘Depression’ and not ‘Recession’, we wanted to indicate that it was going to be a socio-political crisis as well as a financial and economic one. And by adding “Very”, we were underlining that it would be a crisis of much stronger magnitude than the ‘Great Depression’. There are at least three major differences:
Firstly, today’s world is far more integrated than in the 1930s so this crisis is definitely the first truly 'global crisis' ever. The 1930s one was essentially limited to the USA and Europe.
Secondly, our societies depend much more on the financial sphere than 80 years ago. Credit (especially consumer credit) has been the key tool for our GDP growth in the past decades; so the impact of the financial meltdown is going to affect more deeply and more durably our societies than it did 70 years ago.
Thirdly, the USA, which is the epicenter of the current global crisis, was an ascendant world power in the 1930s when now it is decaying one. So the impact of the crisis will reinforce the downward trends affecting the USA today when, in the 1930s, the crisis impact was strongly diminished by the upward trend affecting the USA at that time.
All in all for almost three years now, LEAP/E2020 has been repeatedly insisting on the fact that this crisis will be much stronger and last much longer than in the 1930s, especially in the case of the USA which are its epicenter, but also for countries heavily integrated within the US economic and strategic sphere. The current collapse of UK finance and economy, symbolized by the fall of the British Pound, is a perfect illustration of that trend.

Forecast for 2009 Eurozone governments bond issuance - Source: Financial Times / Barclays Capital / Thomson Reuters / Dealogic – 10/28/2008
3. Is the crisis as serious in Europe or Asia as in the USA?
LEAP/E2020: The major difference is going to be between, on the one hand, the USA (and its directly related countries such as UK, Canada, Mexico, Israel,…) and, on the other hand, the Eurozone and the core of Asia’s economic powerhouses (China, Japan, South Korea).
EU member states outside the Eurozone will be affected more severely than Eurozone ones, as already explained in previous GEABs. And some of them, more integrated to the US economic and strategic sphere such as UK for instance (or Switzerland, regarding the financial sphere), will be at least as affected as the USA, if not more. Within the Eurozone we will see a 'normal' recession or more probably stagnation or small magnitude stagflation with growth comprised between minus 1 and plus 1 percent until 2011; while in the USA we are talking of a long-term depression (about a decade, as we described in GEAB N°23), with negative growth of an average of minus 2% for the coming 2/3 years, therefore involving social unrest, loss of global clout, and so on and so forth. UK will follow a similar pattern.
To put it simply: within the Eurozone, on average and contrary to the US (and UK), we do not foresee a decade-long loss of manufacturing capacities, a huge housing bubble, a collapse of top financial institutions, a general bailout of an increasing number of major companies in all kinds of sectors (banks, insurances, manufacturers,...), a deficit situation at every level (local authorities, federal authorities, households, trade, payments,...), etc... Therefore the consequences of the crisis are of a ‘manageable nature’ even by mediocre leaders such as those we have (of course, it would be better if there was great leadership). While in the USA or in the UK, unless leaders from historic proportion emerge in the coming 6 months, the course of the crisis is doomed to be a tragic one.
In Asia, or more precisely in the powerhouse triangle China-Japan-Korea, the situation is somehow intermediary between to the USA and the Eurozone. In 2009, this region will certainly experiment a major slowdown, equivalent to a strong recession due to its growth needs (even if growth figures keep being positive, they will be too small to answer the region’s needs in employment for instance). At LEAP/E2020, we tend to consider those three countries as a common entity because we anticipate that, due to the crisis, in 2009/2010, they will rapidly move closer to one another in order to stimulate their own rescue. After a strong shock in 2009, they will rapidly move forward to resume a region-centric growth. This of course will come at the expense of the links of each of these three countries with the USA.

4. Are the current actions undertaken by public authorities worldwide sufficient to curb the crisis?
LEAP/E2020: When the authorities take action to prevent major banks to collapse by injecting public funds within their capital and by taking the required share of power in their board, we think that it is an efficient emergency solution. But on the contrary, when they buy out distressed assets and/or do not take a share of power in the banks’ board (when public capital is injected), we believe that they are inefficient measures. The distressed assets buyout is only pushing towards the state (and ultimately the taxpayer) the cost of getting out of the mess, without providing any serious stimulus to the economy. It is just rescuing those who made mistakes at the taxpayer’s expense.
Not entering the bank's board, so deciding not to have a direct say in the bank’s decision, is only making more probable that in a few months, because they are not delivering the promised loan increase to the economy, the very same banks will have to be fully nationalized. As we explained in another part of this issue of GEAB, we think that major banks are facing full scale nationalization by Spring if they are not able to fulfill their lending roles.
In Europe, governments are rapidly taking the lion’s share of new bonds issuance as seen in the chart below. At one point, governments will decide to go further and therefore substitute to the banks if they don’t react fast enough.

Forecast for 2009 Eurozone governments bond issuance - Source: Financial Times / Barclays Capital / Thomson Reuters / Dealogic – 10/28/2008
All in all for LEAP/E2020, in order to efficiently reduce the crisis’ consequences and duration, there are three priorities in the coming 2/3 months, to address in this very precise order:
. preparing social systems to a major wave of unemployment in 2009/2010 so that they can face both an increase in the number of unemployed people and an increase in the duration of unemployment periods
. preventing the bankruptcy of local authorities and/or any significant reduction of their investments/services/payrolls
. initiating major infrastructure investment plans which in a year time will start creating lots of new jobs and adapt our infrastructures to tomorrow's world.
In addition to our answer about the comparative consequences of the crisis in the USA, Europe or Asia, we would like to underline the fact that the existence of a developed social protection system in Europe is a very important asset compared to other continents which do not have such a system. The year 2009 will indeed bring a crucial choice to the other continents: having to build such social protection systems (essentially large unemployment benefits and healthcare systems) almost from scratch, or facing social unrest on a large scale.

Leap 2020 charts


SPECTRE of Dflation said...

They are soft peddling the EU problems, and magnifying the US problems as per usual with their views. To think that America can blow up without the rest of the world following suit is insane. You can't have the kind of world integration which they describe without having a worldwide crash and probably war which resets everything. Love their writing in general, but they have blinders on concerning the EU and Asia. They are every bit as screwed as America if not worse.

kevin said...

Completely dissagree. Europe has energy efficiency and a positive trade balance and a polity that can stand depression without flying apart. The US is in dire straights in comparision.