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A looming global recession All recent economic
indicators point almost unambiguously to a new global recession, one
which threatens to be more severe and prolonged than the 2007 crisis.
While the epicentre of this developing crisis is located in the metropolitan
countries, specifically the EU and the FOR a world locked in a crisis, August 2011 was a particularly bad month. Economic indicators relating to different locations in its more developed regions suggested that close to four years after the onset of the global recession in December 2007, the world economy that had not fully recovered was set to sink again. Two developments - one in the financial realm and the other relating to the real economy - were particularly ominous. To start with, for the first time in history, a rating agency (Standard & Poor's) had downgraded US Treasury bonds from their hitherto unassailable AAA (or risk-free) status and even placed them on watch for further downgrade. Official analysts and some independent observers were quick to rubbish the assessment from S&P, an agency with a poor record of predicting fragility. The assessment was even shown to be based on wrong numbers. But the fact that the debt of the world's most powerful country that was home to its reserve currency was even considered to be of suspect quality was telling. The other disconcerting
development was the release of evidence that the strongest economy in
the rich nation's club - Even before the news
from Europe had been officially declared, the nasty standoff involving
the Republicans and Democrats over the debt ceiling in the Slowdown Underlying this panic
were four factors of particular significance. The first was the evidence
reported above that the still-feeble recovery from the crisis across
the developed world was slowing. This was adversely affecting growth
in the more buoyant export-dependent developed countries such as The second problem,
at least from the point of view of financial investors, was that this
long-drawn effort to bail out a financial system that had speculated
its way to crisis had resulted in a substantial increase in global debt.
According to a calculation made by the McKinsey Global Institute, as
a result of a combination of financial sector bailouts and stimulus
spending, the total amount of debt incurred by governments across the
world rose by a staggering $25 trillion to $41.1 trillion over the decade
ending 2010. What seemed comforting was that on average it amounted
to just 69% of the global GDP. But in individual countries, such as
In some instances when slowing growth reduced revenues, concerns about the ability of these countries to service debt emerged. As long as there was confidence that the stronger countries in the eurozone would back these economies with funding in the event of any financial difficulties, banks and financial investors ignored these concerns. But when it became clear that such backing had its limits, bond prices fell, interest rates rose and the willingness of financial agents to roll over past debt waned. That made it even more difficult for these countries to meet their commitments. This was when the threat of sovereign default in the developed world seemed real. Consider, for example,
the problem in What is alarming is
that the problem in In fact the problem
has now afflicted Backlash against public debt This has led to the
third of the difficulties confronting the global economy. This is that
government bonds are now not an automatic safe haven to which investors
can retreat without blinking. An ideological backlash against public
debt had sent out (wrong) signals that made investors in sovereign bonds
of countries with even reasonable public-debt-to-GDP ratios jittery.
Consider, for example, government bonds issued by the There is no real fear
of Spending cuts Finally, because of
the propaganda behind this blind fiscal conservatism, there is political
opposition to increased public debt across the developed world, leading
to a withdrawal of stimulus measures and a turn to expenditure reduction
rather than expansion. The result was not just slower growth. It was
also the erosion of an instrument that since the Great Depression was
seen as the main remedy for recession: enhanced public expenditure.
Governments voluntarily gave up their right to resort to fiscal means
to reverse the deceleration in growth, even in countries that were not
recording large fiscal deficits and faced no threat of a public debt
crisis. This not only directly affected growth in individual countries
and across the globe. It also meant that countries that were dependent
on exports to global markets to sustain much of their dynamism, whether
it be Governments now respond
only when finance (not the real economy) is under threat. As happened
in 2008, they are intervening today because of the threat to the banking
system, which is quite heavily exposed to public debt, especially in
In sum, while the reliance on monetary easing may stave off a banking crisis for some time, the evidence increasingly shows it is likely to do little to stall the downturn in growth and trigger a recovery. If the downturn persists, confidence is likely to erode, including confidence in government bonds. Recession threat There seem to be two messages coming out of the global economy right now. The first is that a second 'dip' or recession, potentially steeper than the first, is upon us and is likely to be of longer duration than the first. The danger this time around is greater because, for ideological and other reasons, the fiscal weapon that governments had deployed in the first recession is now being abjured by them. On the other hand, there is no evidence of the emergence of alternatives that can serve as effective substitutes. The second message is that after a long time the crisis that capitalism faces is centred on its metropolitan core and not the less developed periphery. Mere talk of decoupling cannot prevent this crisis from spreading to the export-dependent economies in the successful periphery. The crisis, it appears, is bound to be global. Economically speaking, capitalism is under siege. Its strength is that politically the attack on it is largely spontaneous, sporadic and fragmented. Till that consolidates and gains political momentum, chaos and anarchy seem to be the promise. CP Chandrasekhar
is a Professor at the Centre for Economic Studies and Planning, Jawaharlal
Nehru University, *Third World Resurgence No. 253, September 2011, pp 4-6 |
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