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Thursday, June 14, 2012

Brace for grim economic times


Special to The Japan Times

HONG KONG — The global economy goes from bad to worse. Wretched jobless figures from the United States and renewed uncertainty from China mean that the world's economy is spluttering on all major cylinders, with the U.S., Europe, China, Japan and, for good measure, India and Brazil, all with too much grit in the system.

You think it can't get worse: Worry about politics. Politics could wreak cataclysmic catalytic damage, turning economic distress to catastrophe, recession to depression and sparking dangers of beggar-thy-neighbor policies with a nasty nationalistic edge.

The seeds of conflict have already been sown and shoots can be seen: the stubborn refusal of Germany and Germans to pay for any more profligacy of (as they see them) lazy southern Europeans; the jostling among European leaders to evade responsibity for the euro crash or paying for it; the blame game of the U.S. presidential election; trigger-happy Washington in launching trade accusations against China and Beijing's tricky footwork not to get caught; Japan's experiment with economic freefall by imposing tax increases without compensating reforms.

Financial markets are spooked. Asian, European and U.S. equity markets declined by 8 percent, 7 percent and 6 percent respectively in May. Japan's Nikkei is at 21 percent of its peak value of late 1989. Brent crude fell below $100. Probably the best indicator of nervous investors is the sovereign bond market. Yields on U.K. gilts fell to record lows not seen in 300 years of history. Yields on U.S. treasuries and other government bonds seen as safe also fell to all-time lows, just 1.45 percent on benchmark U.S. 10-year bonds.

The euro currency area is so far from being a single market that Spain is paying an unaffordable rate of almost 7 percent on 10-year bonds, and Italy pays more than 6 percent, while German rates have fallen to record lows of a mere 1.13 percent.

Yields on the Schatz, Germany's two-year note, fell to minus 0.005 percent, a negative yield, meaning that people were paying Germany for the privilege of parking their money there.

This is a growing expectation that soon there may be not only a new drachma as Greece leaves the euro, but a revived deutsch mark as the whole euro-experiment collapses. European leaders do nothing to dispel these ideas as they continue to bicker and fail to get to grips with reality. Italy's Prime Minister Mario Monti spoke of his confidence of common eurozone bonds becoming a reality for the 17-nation eurozone — while German officials retorted that eurozone bonds would happen over the dead body of chancellor Angela Merkel.

Berlin steadfastly adheres to the seven "neins": no eurozone bonds; no deviation from austerity, including for Germany itself; no increase in the €500 billion fund available for the European Stability Mechanism; no common backing for the banking system; no relaxation of eurozone monetary policy; no monetary financing of governments; and no credit boom in Germany.

This is a dangerous game, even if Berlin has decided that it is no longer prepared to pay the euro price. Martin Wolf in the Financial Times concluded that "The eurozone is now on a journey toward breakup that Germany shows little will to alter." But Berlin would do well to consider the damage that Germany risks to itself. As Wolf noted, just 5 percent of German exports go to China, whereas 42 percent go to the eurozone. How much will survive a meltdown?

In a BBC Newsnight program, Nobel economics laureate Paul Krugman saw the euro in terms of the two impossibles: "Something impossible is going to happen. One is that the euro will be allowed to collapse, which is impossible, that's unthinkable," Krugman said. "The other is that the Germans will accept lots of debt relief plus inflation, plus temporarily large open-ended lending, which is impossible — except one of those two impossible things is going to happen.

So it's an awesome choice and they are not going to have years to dither over it. They have months to dither over it, it's really moving very fast." But dither they do.

Unfortunately for everyone on planet Earth, the growing global economic maelstrom is no longer confined to Greece or the eurozone, even though that's bad enough since the European Union accounts for almost 30 percent of global gross domestic product.

U.S. unemployment figures for May also make for grim reading. Economists were expecting 150,000 new jobs, and steady creation of 100,000 jobs a month is needed. But a mere 69,000 jobs were added, and the figures for March and April were revised down by 50,000, making the average gain for the past few months a poor 96,000 jobs. The unemployment rate nudged up to 8.2 percent.

There are disputes about how employment and unemployment are counted in the U.S. The labor force last month surged by 642,000, largely because of more people looking for jobs as they come to the end of the period of unemployment benefits. Even so, there are more than 80 million Americans not counted in the workforce because they are not actively looking for jobs.

Most economists say that the true unemployment rate is at least 10 percent, and possibly higher than 12 percent.

The implications reach wider than a spluttering economy and into politics, with growing speculation that Barack Obama may be a one-term president. Polls indicate a tight race and high unemployment does not testify to Obama's good management of the economy.

There is little prospect of a constructive American international approach to global problems, and a strong likelihood that political debate in the U.S. will deteriorate into slanging and mudslinging and a blame-game.

Republican contender Mitt Romney claims that Obama has taken the U.S. too close to European-style "socialism" and he will try to shrink the state that (in his view) imposes taxes on freedom and threatens enterprise. He also has little sympathy for an international view.

Romney's hawkishness on China's trade and currency practices have pushed Obama to take a tough line against China's support for solar panels.

Economists disagree over whether China is heading for a soft or hard landing and Beijing has given mixed signals as to whether it will actually try a soft stimulus to prop up its growth, which would be risky. It is certainly clear that China cannot rescue the world with another 4 trillion renminbi package as in 2008. Caixin magazine is right to argue that "It is no good calling for another round of stimulus; we can't drink poison to quench our thirst." China cannot afford to postpone economic reforms without damaging its future.

If European implosion drags down the global economy and Romney pushes U.S. austerity, the chances are that the world is in for a grim time because if everyone resorts to cost-cutting and austerity, it will lead to more debts, fewer jobs, shrinking demand, in a vicious cycle that could turn recession into global depression, from which few countries would escape.

Politics makes the poor economic story potentially volcanically explosive. If push comes to shove, there are too many economic nationalists in the wings, in every country in the world, not least in China. Flare-ups over small islands in the vast ocean have recently illustrated the potential for misunderstanding that could turn disputes into disaster, and push the Earth into the volcano.

Kevin Rafferty is editor in chief of PlainWords Media.


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