In 2009, I published a short book entitled "Global Economic Forecast 2010-2015: Recession Into Depression." At the time I made my original forecast, sovereigns across the globe were accumulating massive levels of public debt, unprecedented in economic history, with supposedly two objectives in mind: 1.) Stabilize the world's banking and financial systems, which were in danger of total collapse after the implosion of Lehman Brothers and the near extinction of other investment banks. 2.) Compensate for a fall-off in private sector demand through stimulus spending in order to halt the free-fall contraction in GDP.
The policymakers cheered their actions, which essentially transferred the bad debts of the private sector onto the public's balance sheet, and created a new modality in sovereign fiscal policy, which I named "structural mega-deficits." I did not share the optimism of the policymakers in the United States, United Kingdom and across the Eurozone. The premise of my forecast was that this massive rise in public debt to GDP ratios among the advanced economies would at best buy, at very high cost, a short period of stabilization at a level below peak economic performance. Eventually, however, the level of sovereign debt would exceed the capacity of the afflicted economies to sustain, leading to a full-fledged sovereign debt crisis towards the latter part of 2011. This would precipitate, by 2012, a global economic depression.
The current developments involving the European debt crisis, downgrading of U.S. government debt by S&P and the volatility in the equity markets are tracking to a high degree of exactitude my original forecast, dating from 2009. If these developments continue to track as I expect, my prediction of a global economic depression by 2012 is a virtual certainty.
Is it possible for my forecast to be wrong? Obviously, any prediction about the future can be incorrect, or distorted by unforeseen events. However, one important factor makes my forecast more likely to be proven correct than in error. Unlike the original global financial crisis of 2008, policymakers and central bankers across the globe have largely run out of policy bullets. They lack the fiscal integrity or capacity for further debt expansion to underwrite massive levels of new borrowing required for future bailouts of banks, financial institutions and especially larger sovereigns such as Italy and Spain, not to mention the U.S. and U.K. and possibly Japan. The recent announcement from Federal Reserve Chairman Ben Bernanke that a zero interest rate policy will be maintained for at least another two years is a clear signal that the policymakers realize that their wild gamble with fiscal and monetary policy has failed, and they are baffled as to what options remain for them to exercise. Markets are beginning to render their own assessment on the results wrought by the policymakers since the origins of the current global economic crisis.
The failure is not only on the level of fiscal and monetary policy. As strongly inferred in the downgrade of U.S. government debt by ratings agency Standard & Poor's, the democratic political system in the United States, and by extension in the U.K. and Eurozone, has been rendered dysfunctional due to general ineptitude, economic ignorance and ruinous internecine political conflict.
With a failure of both policies and leadership, I see no hope for preventing an inevitable global economic catastrophe, the likes of which has not yet been witnessed on this earth.