WORLD TOWARDS A NEW GLOBAL ECONOMIC CRISIS

George N. Romey published on 03/20/2017 on the Writer Beat website (http://www.writerbeat.com/articles/15878-A-History-of-Crashes-and-the-Next-One-Coming) article under the title A History of Crashes and the Next One Coming. In this article Romey states that "from the end of World War II to the late 1970s, Wall Street and the stock market was a quiet place. Companies were Partners of Wall Street and the risks were low, "and that this began to change dramatically in the 1980s when the risk exploded, greed was high and this led to" irrational exuberance" and huge "crash" of the stock market in October 1987. Romey states that this crisis did not spread to the general economy, which was doing well at the time. However, the lessons were not learned and soon the financial sector again took great risks.

 

According to Romey, before the 1980s, hedge funds were small in numbers and unknown. In the 1990s, hedge funds with investment banks were gaining more leverage and greater risk. It should be noted that the Hedge Fund is an alternative, very risky, low-restrictive and highly speculative form of investment in which investors provide large sums of money to a company specializing in economics so that it can invest as it sees fit and then share the profits and losses according to the agreement between the parties. The manager of the investment fund or someone with natural talent is free to invest the money as it deems best.

 

Romey says that by the year 2000 interest rates had fallen to 1% and the government pressured banks to make mortgage loans for low-income consumers who contributed to the subprime crisis. Another factor was securitization, which allowed banks to make loans with no return. In 2008 the whole system imploded. Romey says the Bush administration and later Obama, along with the Federal Reserve, quickly worked to rescue the Fraudulent personages through direct bail outgoings, bond purchases that banks valued, cheap loans, and loan guarantees.

 

In the article, Romey states that investment banks were allowed to convert into commercial banks by providing them with a number of redemption benefits. Wall Street in six months showed little or no sign that anything serious had happened. As of 2008, the economy was booming, corporate profits including Wall Street were at record levels, unemployment was relatively low and oil prices were rising due to strong demand (and speculation).

 

Romey talks about what he calls the Great Depression 2.0, which may happen when the stock market falls, as well as real estate, asset prices and all parallel bets that continue to take place. Suddenly trillions not billions of dollars will be needed. Romey asks: Where will it come from this moment? Will the Federal Reserve be allowed to digitize a couple hundred trillion? If not, the IMF will provide counterfeit money in the form of "Special Drawing Rights, or World Currency?" Romey says: Suppose the IMF does not move fast enough to stop what will certainly be a new economic crisis in New York. Says that we have to prepare for the Great Depression coming soon, and as usual, Washington and New York will be the last to know.

 

Mackinsey Consulting confirms Romey's prognosis in the report published in February 2015 under the title Debt and, not much, deleveraging (McKinsey Global Institute. Debt and, not much, deleveraging. Available on the <http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging> website. February 2015]. McKinsey Global Institute (MGI) shows that world debt of households, governments, companies and the financial sector increased from US$ 87 trillion in the fourth quarter of 2000 to US$ 142 trillion in the fourth quarter of 2007 and to US$ 199 trillion in the second quarter of 2014. As a proportion of GDP, the total debt went from 246% in 2000 to 269% in 2007 and reached 286% in 2014.

 

For McKinsey Global Institute - MGI, this means that the world economy is being sustained by a credit bubble that has been growing exponentially, reaching almost 200 trillion dollars in the middle of 2014, or about 3 times the value of world GDP. Much of this debt is controlled by the financial system and fuels the process of financialisation of the world economy. But the sectors of creation of real wealth of the economy are not employing at the adequate rate the workers in relation to the total population. The concentration of wealth in the financial sector increases social inequality and aggravates the prospects of economic growth, since much of the wealth is based on credit, with no real basis in production.

 

Promises of future payments, for example, pensions and social security, rely on resources that do not really exist, while the wealth that exists is increasingly concentrated in the hands of a small and very rich portion of world society. The globalization process has boosted world debt and most countries are losing control over national debts. Some economists consider that this indebtedness is needed to get the world economy out of recession (or low growth since the 2008/09 crisis). The fact is that increasing world debt has been an obstacle to the return of high economic growth rates from the pre-crisis times of Lehman Brothers. There are clear signs that we are experiencing a credit bubble that has caused too much investment in some areas with uncontrolled financialization in the service of the rich.

 

Sociologist Wolfgang Streeck, a professor at the Max Planck Institute, believes that the democratic capitalist system of the postwar period is coming to an end. For him, the marriage of capitalism to democracy is practically closed, and there is a tendency of low growth, suffocation of the public sphere, advance of the financial oligarchy, corruption and international anarchy (Streeck, Wolfgang. How will capitalismo end? London, New York: Verso, 2016). The low interest rate charged by the central banks of developed countries and the policies of monetary easing to provide the market with liquidity, such as “quantitative easing”, should cause financial bubbles. This process also generates great speculation in the stock markets, which can lead to a major crash, as in 1929, 1987 and 2008. There are many signs of a coming financial crisis and a new collapse of the international economy that may have beginning in the United States.

 

We have not yet overcome the effects of the financial earthquake experienced in 2007-2008, but politicians and bankers themselves are already setting the stage for the next crisis. Mathematical studies show the dense interconnected web of global financial actors, in which the failure of one of them can trigger the collapse of all. They put us on the razor's edge, and we have good reason to be pessimistic because governments and international financial institutions show no intention to regulate banks, exposing us to the danger of having to endure a repeat of the crisis. Not only banks and bankers are too big to fail, but also to be challenged. That is why they allow themselves to do whatever they feel like doing.

 

The adoption of security devices in the financial sector has been systematically sabotaged. There was no necessary separation between commercial banks and investment banks (which would prevent depositors' money from continuing to be used to speculate). For more than sixty years, the Glass-Steagull law passed during the New Deal of the Roosevelt government separated them, protecting the American financial system. It was repealed in 1998 under President Bill Clinton - with a big push from Treasury Secretary Robert Rubin, former CEO of Goldman Sachs.

 

Daily volumes of transactions with derivatives and currencies grew 25% or 30% compared to pre-crisis levels, and add up to trillions each day. Total annual operations with derivatives add up to about 100 times the Gross World Product. The emergence of automated transactions, driven by algorithms, drives this growth. It took less than a decade to produce the devastating breakdown of Lehman Brother and of the global financial market. Politicians do not attend to reasons, but to the banking lobby. As a result, banks' (capital) reserve requirements are still too low. No new tax on financial transactions was approved.

 

* Fernando Alcoforado, member of the Bahia Academy of Education, engineer and doctor of Territorial Planning and Regional Development from the University of Barcelona, ​​a university professor and consultant in strategic planning, business planning, regional planning and planning of energy systems.

Comments

John G Added Mar 30, 2017 - 3:04am
Sociologist Wolfgang Streeck, a professor at the Max Planck Institute, believes that the democratic capitalist system of the postwar period is coming to an end.
 
LOL. He's about 40 years late. The post WW2 Keynesian demand management period of full employment polictywas overthrown by the monetarists and their bullshit in the 1970s.
John G Added Mar 30, 2017 - 3:13am
Promises of future payments, for example, pensions and social security, rely on resources that do not really exist,
 
No they don't. Currency issuers can always meet their obligations.
Robert Burk Added Mar 30, 2017 - 6:27am
Any system that permits exploitation will self destruct. Capitalism and Western democracy have both peaked and are being eaten alive by finaciers and Islamists, Charitable Exchanges are organizations with charitable status that utilize charitable receipts to create a new economic model that strips power and resources from the state and uses these to build new and existing businesses, but what is important is that it is impervious to hacking. (a small introduction has been uploaded titled How Charities Can Change The World).
 
Jeffry Gilbert Added Mar 30, 2017 - 6:43am
Better yet we put a gun in the mouth of their grandkids and shoot one by one until they "divest". Yeah, that's a good metaphor. Sick bastards will likely let several die before they do. 
Bill Kamps Added Mar 30, 2017 - 7:31am
from the end of World War II to the late 1970s, Wall Street and the stock market was a quiet place
 
It was a quiet place because most of the world was busy rebuilding from WWII, or hadnt yet industrialized.  This was indeed a quiet period in investing, and world economics because the war created a certain stability, it destroyed a lot of the world's economy.  For those lucky to be in the USA, business boomed because there was no war damage in the USA.
 
I would submit that the years 1945-1970ish were the not normal years.  People forget that many countries in Europe were rebuilding until into the late 1980s, and then when the Berlin wall came down and Germany reunified, another round of rebuilding was undertaken.
 
However during these sames years, while the US was enjoying great prosperity, much of the world was still in per-industrial poverty. 
 
We now have a landscape of much more competition.  We also have many industries that are more mature.  The planes/autos of today are not that different from the planes of 50 years ago, while the planes of 1970 were vastly different from the planes of 1920.  The 747 and 737 were flying in the 1970s and still fly today, because they are good enough. These more mature industries means the cost of being behind in technology, is not as high as it was in previous decades. 
 
Many of these things, hedge funds, exotic investments, exist because it is more challenging to make money in investing.  You cant just buy Boeing or GM stock and sit on it for 30 years like you could in 1950.  Investment horizons have shrunk to hours or minutes because companies no longer have the certain growth they had coming out of the 1940s.  How can phone manufacturers grow, when even kids in the third world have cell phones ?  Companies cant continue to grow, when everyone who wants something has it.
 
It used to be that three US car companies provided like 80% of the world's cars.  Now there cars built in dozens of countries.  This is good for those local economies, but it means that US car companies have more competition, and cant dominate the market, and cant set pricing such that they can pay  large salaries to people with high school educations.  More people in the world have a higher standard of living than ever before. 
George N Romey Added Mar 30, 2017 - 10:17am
Thanks for the tribute Fernando.  There is this infantile thinking that the US can just print its way out any jams from a trillion dollar financial system meltdown to covering our debt payments and interest expense.  This assumes the world does not lose faith in the US, its economic might, the value of its currency, and its ability to practice financial discipline.  The question is will the US use military might to exert pressure over countries like China and Russia?
John G Added Mar 30, 2017 - 12:55pm
Still waiting to hear how Japan survives George.
Jeffry Gilbert Added Mar 30, 2017 - 1:08pm
Wish in one hand shit in the other which one fills up faster? 
Fernando Alcoforado Added Mar 30, 2017 - 11:06pm
I thank you, John G. for your comments. I suggest reading the book of the sociologist Wolfgang Streeck to better evaluate their thinking.
Fernando Alcoforado Added Mar 30, 2017 - 11:16pm
I agree with your statement Robert Burk that any system that allows exploitation will be self-destruct and that capitalism and Western democracy have already peaked and are being defeated by financiers and Islamists.
 
Fernando Alcoforado Added Mar 30, 2017 - 11:21pm
I liked your metaphor dear Jeffry Gilbert that sick bastards are likely to let several die before they do.
Fernando Alcoforado Added Mar 30, 2017 - 11:38pm
Dear Bill Kamps, your comments are pertinent in seeking to show the marked differences between the postwar period and the present moment. You point out that the years 1945-1970 were not the normal years because during this period, while the US was enjoying great prosperity, much of the world was still in pre-industrial poverty and we now have a lot more competition. In addition, you correctly point out that hedge funds, exotic investments, exist because it is more difficult to make money in productive investments than in the financial arena.
Fernando Alcoforado Added Mar 30, 2017 - 11:45pm
Dear Dominic Jermano, I did not succeed in trying to open the site for you indicated.
 
Fernando Alcoforado Added Mar 31, 2017 - 12:01am
Dear George N Romey, first, I would like to congratulate you on the quality of the articles you have published in Writer Beat. I agree about your perception that there is a childish thought that the United States can come out of the crisis to cover its debt payments and interest expenses. One aspect that I consider important is that as a globalized system like the capitalist, no country will not solve its problems without a global solution. In other words, the United States will not overcome its crisis without solving the problems of the capitalist system as a whole. The solution to this problem requires the global regulation of the financial system which is primarily responsible for the gigantic contemporary economic crisis.
John G Added Mar 31, 2017 - 1:43am


Fernando Alcoforado Added Mar 30, 2017 - 11:06pm






I thank you, John G. for your comments. I suggest reading the book of the sociologist Wolfgang Streeck to better evaluate their thinking.
 
I evaluate anyone who thinks Streeck's work is worthwhile is an idiot.
Fernando Alcoforado Added Mar 31, 2017 - 6:59am
John G, when I issued my opinion about your commentary about Streek's work I did not intend to offend you. I usually keep the debate at a high level that does not seem to be your case. From now on I will not comment any further opinion from your part because you are an intolerant.
Dino Manalis Added Mar 31, 2017 - 8:18am
We need to realize that foreign policy is part of our economic policy and depends on peace and stability to benefit consumers and businesses.  Wall Street mirrors economic conditions and hopes about the future.  We need pro-growth policies; fiscal restraint; gradually turn deficits into surpluses; and pay down the federal debt before we become like Greece.
George N Romey Added Mar 31, 2017 - 10:11am
Fernando the global financial system no longer has a prime target of supporting a healthy business cycle.  Instead it has become self serving with things like derivatives (beyond was is required for commercial use) to millisecond trading.  There is also a huge level of risk associated with these activities. 
Fernando Alcoforado Added Mar 31, 2017 - 7:30pm
Dear Dino Manalis, You are quite right in part of what you wrote. You failed to explain why Wall Street mirrors economic conditions and hopes for the future.
Fernando Alcoforado Added Mar 31, 2017 - 7:35pm
I entirely agree with your point of view, George Romey. What is regrettable is that there is no immediate solution to the problems faced by the market economy. The disaster has become inevitable.