Gary Dorsch
Editor Global Money Trends magazine
Posted Feb 5, 2009
"If you want to continue to be the slaves of bankers, and pay the cost of your own slavery, then let bankers continue to create money and control credit," warned Sir Josiah Stamp, former chief of the Bank of England in 1927. Indeed, the world economy is now held hostage by an elite banking cartel, whose reckless pursuit of speculation and bloated profits, has precipitated a breakdown of the global financial system, and is plunging the world towards a "Great Depression."
The global economy will grind to a halt this year, the IMF predicts, after $ 30-trillion in market capitalization was erased from world stock markets since October 2007, in the wake of the worst banking crisis since the Great Depression of the 1930's. What began with the bursting of the US house price bubble, has so far, resulted in $1.2-trillion of losses and write-downs from toxic assets held by banks worldwide.
"Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth," the IMF warned, predicting that bank losses could eventually peak at $2.2-trillion, and hobble the world economy in the year ahead. "Downside risks continue to dominate, as the scale and scope of the current financial crisis has taken the global economy into uncharted waters, triggered by the collapse of bank credit and stock markets." the IMF said on January 28th.
Global trade collapsed by 45% in the fourth quarter from a year earlier, exposing the staggering depth of the global financial crisis. Speaking at Davos, Switzerland last week, Australian trade minister Simon Crean warned that falling global trade would compound the economic downturn. "If global trade is a multiplier in growth, it also has the potential to be a multiplier in reverse," he warned on Jan 31st.
The Baltic Cape-Size Index, which measures the cost of shipping coal, iron ore, and steel across the high-seas, is still languishing 90% below its record high of 19,200-points set in May 2007. Global bankers suspended issuing "letters of credit" that importers and exporters rely upon to finance overseas trade. Of the $14.5-trillion of cargo that is shipped across the high-seas each year, roughly 90% is financed with "letters of credit," issued by bankers, guaranteeing payment to the shipper, once shipments are delivered to the buyer. With banks cutting-off "letters of credit," the wheels of global shipping have ground to a halt.
Global growth this year will come to a "virtual standstill," warned Olivier Blanchard, the IMF's chief economist,on January 28th. "We need stronger policy on the financial front," he said. Leading the Group of Seven nations into contraction will be the UK-economy, projected to slide 2.8%, Japan's economy will shrink 2.6% and the Euro-zone will lose 2%, followed by the US-economy, which will contract 1.6 percent. China's economy will slow to 6.7% growth, after peaking at 12.7% in Q'2, 2007.
There are indications that US President Obama is heeding the IMF's message, and is ready to exert pressure on the largest US-banks, and over time, could exercise more day-to-day control and scrutiny over their lending practices. Obama will require American bankers receiving cash from the Treasury's bail out fund, to commit to minimum levels of lending and place caps on executive pay and bonuses.
Shifting the focus from paying bonuses to Wall Street bankers, to reviving the US housing market and consumer spending, is the first step for escaping the economic death spiral. Citigroup, under government pressure to increase its lending, says it will use $36.5-billion to issue mortgages, make credit card loans, and buy distressed assets in the tight credit markets in the coming months.
A reeling US-economy has also translated into severe pain for overseas markets.South Korea, the world's 13th largest economy, is among the most vulnerable to the global financial crisis. Although China is now Korea's largest trading partner, much of what China imports from Korea is re-exported to the global markets in the form of finished goods. Korea's exports to China plunged to $4.75-billion in December, or 35.4% lower from a year ago, despite a sharply weaker Korean-won. The last double-digit drop of exports was in 2002, amid the bursting of the dot.com bubble.
Korea's economy is a key bellwether of the global economy, since exports are equivalent to 52% of its gross domestic product. Preliminary reports indicate that exports continued to plunge in January, with shipments to the US declining 21.5%, exports to Europe plunging 47%, and sales to Latin America 36% lower than a year ago. Not surprisingly, Korea's GDP shrank 5.6% in the fourth quarter from the previous three months, the biggest drop since 1998.
Korea's industrial output plunged 9.6% in December, slipping for a sixth consecutive month, as Hyundai Motor, Hynix Semiconductor, and steelmaker Posco reduced output in January, to cope with sagging demand. Samsung Electronics, the world's largest maker of memory chips, liquid-crystal displays and televisions, reported its first ever quarterly loss. Exports of semiconductors plunged 47% in January from a year earlier, and automobiles declined 55-percent.
China's vast manufacturing sector, which employs tens of millions of workers and has functioned as the cheap labor workshop of the globe, also slowed dramatically as demand for its exports collapses in its major North American and European markets. About 20 million migrant workers, moving from villages to cities and factories have returned to the countryside, after losing their jobs because of the economic downturn. Beijing is warning that rising unemployment could fuel social unrest.
After growing at more than 10% a year for the past five-years, the Chinese economy's growth rate has fallen in every quarter since reaching an all-time high point of 12.7% in Q'2 of 2007. Growth rate slumped to 6.8% in Q'4 2008, which isn't fast enough to create jobs for this year's 7-million new entrants into the rural labor market, and would leave China with about 25-million jobless workers.
Still, China has internal resources - roughly $2-trillion in foreign currency reserves, to prevent a hard-landing for its economy, and has vowed to spend 4-trillion yuan on various infrastructure and social programs, over the next two-years, equal to 15% of its total economic output. Chinese premier, Wen Jiabao, said the goal of 8% growth this year, is "an attainable target through hard work. The harsh winter will be gone and spring is around the corner," he said.
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