Global Crisis Blog

The New Crisis is Now!

By Shlomo Maital

Within the 500-word discipline of a brief blog, is it possible to explain why the global crisis, often listed as 2007-9, is in fact ongoing and about to get much worse?

Let me try.

The crisis occurred because the world became imbalanced.  America spent, consumed and printed endless quantities of dollars, scattered throughout the world, in order to import.  The period 1980-2007 was an American party that lasted a whole generation. Asia saved, invested and exported, accumulated dollars (to keep Asian currencies and goods from getting too expensive) and grew rapidly, lending America the funds to keep the party going.  Never in history have wealthy nations borrowed so much, so rapidly, from many poor ones.  In such a tilted world, with goods flowing in one direction (east to west), and money flowing in the other (west to east),   it was clear the situation could not continue (although it lasted longer than should have been possible, with the partying Americans conspiring with the nose-to-the-grindstone Asians to keep it going).

Now, it is time for rebalancing.  That means:  Americans save, invest and export.  Asians spend, consume, and import.

It has to happen.  But — it cannot happen.

To save, America must slash its government deficit. To slash the deficit, it must cut entitlements (Medicare, Social Security).  Politically, this is impossible.   Besides, in order to boost exports, you have to make something (goods, not services). But America long ago shifted its production to Asia; U.S. manufacturing is less than 10 per cent of GDP, mostly, items that do not enter into world trade.

To spend, China must boost its domestic consumption.  For this to happen, China’s corporations must stop hoarding profits and reduce their investment.  But why?  The fundamental business model built on exports has created enormous wealth.  It supports rapid growth.  China must grow, in order to employ hundreds of millions of workers migrating from the farms in the West to the factories in the East.  Why fix it, if it isn’t broken? (China, it will be recalled, continued to grow rapidly despite the global crisis).

The only chance for job creation in the U.S. is for exports to rise and imports to fall. But neither import substitution nor export growth can occur until America reinvents its manufacturing.   But President Obama recently offered the Chinese to produce Boeing aircraft in that country.  Brilliant!  An American job creation program that creates jobs in Shenzhen.   In America’s “cash for clunkers” program, widely praised, most of the clunkers were traded in for foreign fuel-efficient cars.  Korea got the jobs.

If rebalancing cannot occur, then imbalance will continue, as will the ongoing crisis.  And it will get worse.   Germany pursues a self-interest policy of boosting exports, at all costs, ignoring American pleas to import more.  European nations pursue an “every country for itself” policy, at a time when political unity is more vital than ever.   Asian leaders listen politely to American lectures on how to restructure their economies,  watch America’s economy stagnate, and  smile politely.

A recent study of global risk  by the World Economic Forum  lists some 50 risky events, together with their magnitude and probability.  Risks include social, political, technological, medical and economic.  The five top risks are all economic, including the leading candidate — a risk of “asset price collapse”, causing trillions in losses, with probability exceeding one in five.  Without rebalancing, asset prices will again collapse.

Readers, fasten your seat belts. Get out of debt, if you can.  We will all need every ounce of resilience and courage we have.