World Bank: the Incredible Shrinking Economy

If the economy is bad in America, it's even worse in the rest of the world. That's the verdict of a new World Bank report that says the global economy is shrinking for the first time since the Great Depression. World Bank president Robert Zoellick has been warning for weeks that instability could loom abroad as tens of millions abroad are thrown into poverty, not to mention Central and East European nations that embraced the idea of free trade and a global economy. Even Spain, Austria, and Ireland could require bailouts. More and more, the danger of a rerun of the 1930s, in which extremist movements profit from financial depression, looms as a real prospect.

The World Bank want to create a Vulnerability Fund to assist developing nations. But the billions needed would have to come from the United States, western Europe, and Japan. Are they going to reach into their increasingly frayed pockets to further aid other countries? The only plus is that Zoellick seems to be completely on top of the situation. The contrast with Obama administration officials such as Timothy Geithner could hardly be starker.

Zoellick, by contrast, deserves credit for focusing on the problem ahead summit of world leaders in London next week. Sure, American and other countries can turn inward. But eventually turmoil abroad will come to resemble a tsunami at home, washing away hopes of an economic recovery.
What's the likely reaction of the GOP, which has turned to a precocious 14-year-old conservative ideologue living in Florida as its new savior? It doesn't want to hear, let alone acknowledge, the confessions of shopaholics. Most likely, it will denounce any further aid as a form of foreign welfare, while continuing to call for freezing domestic spending--the prefect recipe for a decade-long economic depression that President Obama is desperately trying to avert.

Comments

[jsarets]

It turns out that the large part of global GDP allocated to debt service has an extremely low multiplier. The upper echelons of the bond market is basically a monetary black hole. Very few of the dollars sucked into the vortex are ever recycled back into the economy as spending. The result is massive accumulations of investment capital chasing diminishing purchasing power.

We have to stop the outrageous compensation of bondholders who reinvest the large majority of their income in more bonds. We can't purchase our productive capacity when too much income is lent rather than spent. This is a major part of why production is idling, workers are unemployed, and unsold inventory is piling up.

The global economy is shutting down in spite of the fact that labor productivity had never been higher leading up to the global debt crisis. The supply side of the economy was firing on all cylinders. Just when it seemed like the Dow really could go to 35,000, the American consumer simply collapsed, financially broken and socially exhausted by the futile struggle to consume the overwhelming abundance of productive output.

In its quest to perfect the allocation of production, capitalism has manifestly failed to promote the efficient allocation of consumption. A tiny leisure class is allocated vastly more purchasing power than they could possibly spend, while billions of people, many of them engaged in the most grueling forms of subsistence labor, suffer from poverty, hunger, disease, and civil unrest.