The Global Crisis Never Ends – Here’s Why

The   Global Crisis Never Ends – Here’s Why

By Shlomo Maital   

 the mimic octopus

   In Nature, there is an incredible ‘mimic’ octopus that can change its shape and its color, to imitate its surroundings.  (See above).   It does this, with only a pea-size tiny brain. 

     If you’re paying attention, dear reader, you may have noticed:   The global financial and economic crisis has not ended.  It simply keeps changing its shape – just like the mimic octopus.                                                 

    It started in 2007-8 as a subprime mortgage crisis, with banks and financial services companies requiring massive bailouts.    Next, it became a government budget deficit crisis – when governments assumed the bad debts of the banks. 

  Then it metamorphosed into a ‘euro’ crisis, because weak southern European countries (Greece, Portugal, Spain, even Italy)  skated close to defaulting, thus endangering the euro, because of the debts they subsumed.

    Now?  It’s become an emerging markets crisis.  Ironic, because last time, the Asian contagion was a financial crisis that began in Thailand (1997) and migrated quickly to the rest of the world.  Now it is an American crisis that has infected Asia.

     According to Landon Thomas Jr., in a front page Global New York Times article (Aug. 21),  “Fed policy poses risks to emerging economies.”  Why?  The American Fed printed enormous, massive amounts of dollars (quantitative easing) to stimulate the US economy. Because US interest rates were so low, a huge part of that money fled abroad, to emerging markets, fueling property bubbles in Turkey, China, India and elsewhere.  

   Now, with Fed chief Ben Bernanke hinting that it may soon be time to raise interest rates and end ‘quantitative easing’,  much of that money is fleeing emerging markets and returning home, in anticipation of higher rates.  The result:  deep drop in the exchange rate of the rupee, and the threat of disastrous bursting property bubbles in Turkey, Brazil, and South Korea.  China, too, is quietly struggling with enormous bad loans given by state-owned banks.

    U.S. Treasury Secretary John Connolly said, in March 1973, “the dollar is our currency – and your (rest of the world’s) problem.”      By focusing its monetary policy solely on American  GDP, employment and growth, America is causing collateral damage to other nations.  This is inevitable – it is the fatal flaw of the current global financial system.    

     The current global crisis will not be terminated, until the conflicted dual role of the dollar (it is the American currency and also the world currency) is resolved.   The crisis will continue – it will simply keep changing its form and center of gravity.   The world will continue to oscillate between “far too many dollars” (bubble) and “far too few dollars, or dollar flight” (bubble bursts).