Will Everyone Grab a Bucket? This Thing is Sinking

Last year we worried about homes below water; now it is the economy itself that is sinking. Warren Buffett says the US economy has "fallen off a cliff." And, as bad as the US is, the rest of the world is worse. Germany's exports have collapsed; Japan is in free fall; much of Eastern Europe may join Iceland in bankruptcy. The Asian Development Bank estimates the loss to financial assets worldwide at $50 trillion dollars - the equivalent of a full year of annual global output. It's not for nothing that National Intelligence Director Dennis Blair announced that the economic collapse trumps terrorism and catastrophic climate change as the greatest threat to US security.

After slogging through the stimulus, the banking mess and the foreclosure crisis, our besieged president now must turn his attention to organizing global cooperation to lift the world economy. Finance ministers of the group of 20 countries (G-20) meet near London this week; the heads of state gather on April 2. The agenda: whether to expand national stimulus plans, how to forestall a banking collapse, and help for the weaker countries that can't help themselves. Rhetoric won't cut it; real commitments have to be made. As the anti-Bush, Obama has been celebrated by much of the world as if he walks on water. Now, we'll see if they will follow the savior rather than crucify him.

We need every major economy - particularly those like Germany, Japan and China in the best position to do so - to help boost the global economy with bold national, deficit financed, recovery plans. We can't do this alone. Our own stimulus - about 2% of GDP in 2009 - is too small even to lift this economy. Everyone has to grab a bucket and start bailing.

Moreover, gaining this consensus will help put the world on notice that the old ways are gone. We're not going back to an economy in which the US borrows $2 billion a day from abroad, while serving as the world's consumer of last resort. The Chinese, Japanese, Germans and other nations have to move away from export-led growth. The unsustainable trade imbalances - with the US absorbing 70% of the world's savings - provided the flood of cheap capital that eventually capsized the global economy.

That world is over. US consumers are already tightening their belts. Exports have collapsed. If we ever begin a recovery, the US should seek more balanced trade. That means we will have to sell stuff beyond toxic financial paper to the rest of the world. Obama anticipates this with his drive for new energy, an industrial policy that may allow the US to gain an edge in the green markets of the future.

At the same time, China, Germany, Japan and the mercantilist nations will have to stop relying on exports for their growth. For Germany, the world's largest exporter, exports made up an estimated 41% of GDP last year. That can't go on. The first step is for the countries to stimulate internal demand to help get the global economy going once more, and thereby begin the wrenching journey they will have to make to more balanced growth.

Here as elsewhere in this economic debacle, the leaders remain behind the curve. On Monday, the European finance ministers announced that they had no plans to add to recent stimulus plans, dismissing US pleas for expansion as, in the words of the European Chair, "not to our liking."

The Chinese initially trumpeted a large internal public works stimulus, much of which turned out to already be in the five year plan. Now Chen Deming, the commerce minister, declares China plans to subsidize exporters and lower export taxes, saying that we "should increase our share of the global market. We must transform ourselves from a big export nation to a strong export nation." Nightmare.

G-20 conferences have generally been for show. The stakes are real this time - and the odds going in are against the president in gaining the bold action needed. And once more he'll be out there virtually on his own, taking on the real deal in stark contrast with his opposition here at home. The conservative claque is ranting about socialism. Blue dog Democrats like Sen. Kent Conrad are mobilizing to defend agribusiness subsidies, while the Republican leaders simply don't get it. Rep. John Boehner, the perpetually tanned House minority leader, last week called for a freeze on all spending over the next year, something like putting a pillow over the mouth of someone suffocating to death. And Sen. John McCain, the party's nominee, woke to deliver one of his dyspeptic lectures against earmarks; the patient is hemorrhaging blood, but the Senator is worried about the pimples on his face.

The Europeans want to wait and see. The Chinese are subsidizing exporters. The Republicans are railing about earmarks and socialism. Obama's call for a new responsibility hasn't exactly taken hold.

Comments

[unitron]

If you think it's fun now, wait until later this year when the *commercial* real estate market starts having the same kind of mortgage problems and general bubble bursting currently plaguing the *residential* real estate market.

[KillTheMessenger]

Yawn. You guys can't even make your secondary school system work.

[eilish]

I wonder that after the past 40 years we think Repubs should be powerless in this mess. The likes of Limbaugh are just a front for what goes on behind the scenes. Tightening our belts? Oh, right, if the average unemployed American still owns a belt.

[uoiltl]

Why more than ten of treasure department’s appointees are blocked by lawmakers? GOP led by Limbaugh implicitly wants the president to fail. Is this the sneakiest, but effective, way, to make Obama administration to fail by paralysing his economic team? Let’s find out who are particularly responsible for this obstructionism, and publicize the facts as widely as possible. The only way to counter them is to get them out from the shadow and to make the public know about their sneaky behaviour.

[Gripen]

"At the same time, China, Germany, Japan and the mercantilist nations will have to stop relying on exports for their growth. For Germany, the world's largest exporter, exports made up an estimated 41% of GDP last year."

Is this guy for real the only way an economy can grow is by export. We learned that from Soviet, their market got stagnant and died and was part of the crash.

For an economy to grow you need resources and income of money from the outside. Countries that grow need a higher export then import. If not they either loose wealth or become stagnant in growth. USA has cut its own throat and part of its problem is that they more or less has outsourced most manufacturing jobs. Import a hell alot more then they export.

Yes some countries will allways be loosers in a healthy economic system. Of course we can all create self sufficient countries with zero market, but it sound as a communistic utopian dream, wich prob will fall because the human flaw of greed.

[Carolab]

"It's not for nothing that National Intelligence Director Dennis Blair announced that the economic collapse trumps terrorism and catastrophic climate change as the greatest threat to US security."

The wizards of Wall Street are economic terr-orists.

[Nonpariel]

its just money. paper. fiat. an instrument of a game.

get over it.

we've drifted away from solid-tangibles a long, long, long time ago; precisely for the reasoning that failures do indeed occur - even massive systemic ones - just like that which has occurred. again.

Now get over it, please.
life always has its gambles. Its never been entirely rational.
some just lose.

Luckily, thinking people devise other chances for them selves when it really is just a game.
Bankruptcy is an Honorable and Sociable way to keep the game going and going much, much longer for all of us.
Its a fair opportunity restart for those of us who have learned lessons about the game along the way - it's nothing more than merely Time. Time for the opportunity to think and re-structure lively-hoods; something smart people (homo sapiens) can and routinely do.

Collectively, the United States of America, many of her companies, several million of her citizens, as well as many numerous other countries and denizens around the globe have just gone bankrupt. Few were at "fault"; most were simply rational actors operating within an irrationally flawed system.

Time to fix those irrational flaws. we can do that. we're smart.

[lynettema]

"The Europeans want to wait and see. The Chinese are subsidizing exporters. The Republicans are railing about earmarks and socialism. Obama's call for a new responsibility hasn't exactly taken hold."

This article is about as well written as any. This whole mess is so convoluted that even attempting to understand it all makes your head spin.

[rnadna]

Ever do Fractals. Very Very Simple mathematical rules. Very complicated results.

Genetic Material. Only Four molecules. And Billions of complicated life forms.

Economics. Unchecked Greed. And Very, very complicated economic disaster.

All start out simple - all end up complicated. But the last one could of been avoided just by checking the greed and regulating the excesses.

[elan4444]

Self-sufficiency. Sustainability. We were in such a rush to get that new car every year and move up in the housing market that we forgot that borrowing our way to these things might be bad. Yes, let's start making shoes in this country again like we used to, and put the furniture companies in Georgia back in business again. Personally, I'd like my prescription to be constructed right here in the US under conditions of rigorous inspection. We used to make all of these things ourselves, and they were quality products. Remember when they held the conferences on globalization and crowds would protest? Then, they moved the conferences to remote areas that protesters couldn't access. Then, they went ahead and globalized. Companies like AIG, which has a portfolio that exceeds the GNP of the US, have been overseen by the Office of Thrift. The Office of Thrift! Which means, they basically haven't been overseen at all. Dig in folks, it's going to be a long haul, but I hope it results in new goals that do not rely on excessive consumerism. Chin up, we might all enjoy a walk in the woods again.

[uniplmr]

Banks raise capital by lending money at interest to people and institutions so the money we lent them they'll lend back to us at interest and then with the money they make off the money that they collect from us as interest, they'll pay us back with that money....you follow.... and after we pay them back they can pay us back. I like this deal. Makes me feel.....safe. Next years budget should be a doozieee...can't wait over at my house.

[uniplmr]

Let me see, everyone I know owes money to the "bank".....who do the "banks" owe money to? Wait....it's coming to me now...must be each other. So we gave the "banks" one and a half trillion dollars to cut up between them, yeah? So they'll have to raise capital to pay us back by how? And when? Whats the vig? Can I get some of that....wait....I guess I DO have some of it! Jeez.....I'm getting a little dizzy....and sick.

[dsws]

Banks owe money to anyone who buys a bond from them. Bonds tend to be owned by people or institutions that want to maximize income and minimize risk, such as retirees.

[unitron]

Banks owe money to anyone who has any money on deposit with them, checking or savings or the fancier-sounding stuff.

[jobsinusa27]

Excellent commentary. I invite readers to also read this commentary as it's along the same lines but with more detail: Selling Out the U.S. Auto Industry: How U.S. Manufacturing and the Big Three Automakers Are Sacrificed by U.S. Government Foreign Policy and Incompetent Trade and Economic Policy
Link to commentary: http://barrysacks5.com/usautoindustry.htm

[MilwaukeeDan]

Little off topic, but does anyone know how much AIG is paying Manchester United Football Club for its sponsorship? Have you seen their jersies, huge AIG on the front. I was watching a soccer game between Man U and some international team for a few minutes today, all their fans have them on, AIG in bold letters. Must be like driving a Yugo in the 21st century and being real proud of it(at least the Yugo didn't soke the taxpayers for hundreds of billions).

[FilipinoW]

I saw something on BBC which mentioned something like 55 million, do not know if pounds or US dollars over four years (must be pounds since it is the BBC). Somebody else from Man U during an interview on Bloomberg Asia, said that AIG would be in breach of contract if they would end it now abruptly. At which the interviewer jokingly said that they might want to change AIG to American Insurance so people might not notice.

[Ljeff79]

When will we all give it up and admit that money, in it's very nature, is no more than a social construct

A figment of our imaginations.

It doesn't really exist!

Then we could all get on with our lives.

[RaderBarbarian]

You, my friend, are making far too much sense for anyone to take seriously. We are, after all, a nation of Capitalists who owe our souls to bankers and credit card companies. Of course, money is nothing more than a social construct, but there is no reason for anyone to believe ANYBODY ANYWHERE has ANY intention of addressing that FACT! That is why we are going through - not just an economic depression - but a total collapse of civilization as it is known these days. Someone smarter than me said that what is happening is more profound to human history than the collapse of Communism and the Soviet Union. I would suggest that the collapse of Communism and the Soviet Union is really very small potatoes compared to the collapse of Capitalism and not just the United States, but the entire world. Start getting used to it. Begin by getting rid of your automobile and learning how to walk again and how to plant a garden.

[rnadna]

A point you miss is that when Communist Russia saw its demise it turned to some sort of Capitilism. When China saw its communist ideology wasn't working all that good, it went to some sort of capitism.

My question is - if capitilism ever fails who does everyone turn to then?
Be that as it may, Capitism does work, and if regulated properly, it can bring much good and prosperity in the world. It most certainly is BETTER than any of the leading contenders. But like all good things, it can be abused and it can be very destructive.

Aristotle was right and still is right - moderation in all things is the best of all possiblities.

[dsws]

Money is a social construct, no more real than people's intentions. It still has huge effects in the real sector, and the real sector can't function without it. At least not if it has to support billions of people in a high-tech society.

[twofish]

It's sounding like 1) wages are going to have to go up so workers can produce what they make in each country; 2) tariffs are going to have to rise so cheaply-produced goods from low-wage countries can't undercut local manufacturing; 3) a lot of savings will be energy savings from not shipping raw materials, finished goods and recycling all over the planet.

If Chinese shoes are really superior shoes, they will sell even with a tariff-added premium. If we could produce the same stuff here, then they won't. Things like style and quality will be more important than utter cheapness. Although they're pretty good at fakes and knock-offs, too.

It's pretty clear that laws and enforcement will have to figure in the new equations, too. We can either ease our way out of this quicksand together, or all drown trying to climb over the other guy.

[Marcus-Ian]

Tariffs are just the thing that turn a recession into a depression. One only has to look at what happened in 1930 with the passage of the Smoot-Hawley Act. Trade is the lifeblood of the world economy, the exchange of tangible goods. Protected markets are inferior, retarded markets, incapable of competing with other nations. If you truly wish to bolster your nation's economy, then you buy your own nation's goods. Look at the label that states the country of origin. Walmart used to trumpet about how they sold so many American goods and were preserving American jobs. Haven't heard that in a long time. World trade has forced us to step up our game. If not for the voodoo economics that got it's start thirty years ago, we would still be the world's greatest creditor nation rather than the greatest debtor nation. The eviscerating of financial regulations necessary to service the government debt is what brought us to this turn, not trade.