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Economic Time Bomb
The answer to that as yet unspoken question as to why it exists will hopefully be answered by the time this article has been brought to a close. Perhaps the best way to expose its existence is to start with the remark that all recessions, minor or major, requires an ECONOMIC ENGINE to pull ---- or start to pull some of the other major economies “out of the doldrums” of recession. A major effort by a strong economy to start the ball rolling as it were, but alas there is no such engine this time. For America has the largest economy, and the “hoped for” strong economy to do the job. But alas that economy is itself “in the doldrums” with no signs that it has the strength and the ability to do the job required of it. Not only mired in debt, the Federal Reserve has set in motion the creation of a mountain of New DEBT by the continuous lowering of interest rates in order to stimulate the consumer side of the economy. To further confound the situation, government has lowered the tax rate and the “tax take” and AT THE SAME TIME has to borrow heavily to replace not only that missing taxation, but as well to provide for additional massive deficits created by excessive new expenditures to “kick-start” the economy by hopeful new job creation. There are no discernable positive results as yet, and one would think that all of this is in the end-wasted effort during valuable “economic time.” To add to this menu or economic “pot-puree’ there is as well a massive balance – of – payments deficit unfolding at the same time. Why will this not work, and what is the malaise and its symptoms --- is that as yet rhetorical unasked question. The simple answer may be “ that you cannot spend your way out of a recession” ---- if you have not got the money to do so. Some would answer by drawing one’s attention to all that debt creation as supplying the money required to kick-start consumer spending and thus job creation. What seems to have escaped attention is that new debt is being created from an ever-diminishing supply of money. THE MONEY IN CIRCULATION!! In reality the velocity of debt circulation is in progress. The re-cycling of debt giving the impression that more money is in existence within the system, whereas in fact a shrinking or static economy is incapable of increasing the money supply. We will return to this aspect again. To confound the issue is the complete lack of major other economies with which to generate increasing trade in order to strengthen the United States economy and that of those others whose expected economies would be strengthened through increased bi-lateral trade. The second biggest economy, Japan has been in recession for 12 years and is presently in stagflation due to negative interest rates being applied. Ironically, the United States is now following the same disastrous path into negative interest rates. The next largest and “strongest” economy is that of the European Union, whose major “economic engine” ---- Germany, has serious economic problems at present. Thus Europe is in the economic doldrums as well, with little signs of pulling themselves out of recession. The final element common to all three economies is that of China with whom the United States, Japan and Europe are doing increasing trade. NOT WITH EACH OTHER ---BUT WITH A COMMON ECONOMIC ADVERSARY. This common element is the basic ingredient, the explosive element inside of that time –bomb. Instead of increasing trade with each other, they are all bent on increasing trade with that one common denominator with whom they are all incapable of competing with price-wise. China lacks the foreign capital resources to be a major economic engine in the same sense, as it has always applied to in the past with America, Japan and Germany, or as in this present case, Europe. The “trigger” to the economic bomb is the common supply of foreign capital to China by the very three economies to which the world would normally have turned to in order to drag their economies out of recession. That brings us back to our statement made that we would return to, that stated fact of a dwindling money supply within the United States economy. If China has been, and still is relying on foreign investment to grow their manufacturing component of their economy, then those funds must be coming from the other three economies we keep on mentioning. Whether it is direct investment by foreign conglomerates or through other major financial institutions that money emanates from, or other capital resources, or bonds, or other debt instruments within those three economies, it is thus denuding them of the capital resources they themselves need to strengthen their own economies. Thus their domestic debt grows while the capital emanating out of this new debt creation flows out of their economies elsewhere. Sowing their own economic demise as it were. We do not have the precise figures of trade between each of them and China, but are prepared to make the statement that they each have adverse balance – of – payments in their trading relationships to China. We recently came across the last known trade figures between the United States and China, and, while we stand to be corrected, we recollect these figures to have been that imports from China totaled $126 Billion and exports to China as being $32 Billion, giving a trade imbalance of $94 Billion. If a similar situation exists with both Europe and Japan, then that economic time bomb not only exists, but it is also already primed to explode some time in the not too distant future. If all of this really exists and is “fact”, then what are we to do about it? We have a few alternatives at this stage, but the later it is left to implement, the less those alternatives may exist or indeed may be possible to implement at all --- or in time. To us it boils down to an “either / or ” situation or --- a “both” situation. If the desire is not to tackle China “head – on” with an economic “war” then the “easy out” is for the United States to merely start to “print Money.” This bald statement does not imply that any type of debt Instrument has to be “engineered” in order to cover the issue, but that it is printed expressly to enhance the money supply. It is filtered into the economy by a debt purchase of bank debt and / or other debt instruments by either the Reserve Bank or The Treasury. How much is required is not for us to decide. Nor for how these funds should or could be utilized for the purpose of job creation. If these funds were to be left in the hands of banks and financial institutions merely to create further debt, then it would be preferable for government to control these funds, to be utilized for specific job creative purpose. A type of local “Marshall Aid” as it were. What is of importance is that it be “non-repayable” funds, which over time will be absorbed into the economy in a non-inflationary manner. Local job creation is the only way that will grow the economy. How much money may be required, is the question that should be asked. Not an easy one to reply to. However, what may be an interesting fact to contemplate is that it is estimated that ALL DEBT --- or TOTAL DEBT in the United States amounts to something in the region of $38 TRILLION!! This encompasses Federal and government debt, domestic and foreign. All company and private debt including mortgages, loans and credit card debt. All of this is upheld by no more than perhaps $465 BILLION of money IN CIRCULATION! This equates to $1304 of money per capita in circulation to uphold a per capita debt load of $133,300. That would be the first important step. The second --- and equally important step would be to determine how quickly and in what manner enhanced trade with those other two major economies could be generated. That is; trade with Japan and the European Union. Without the assistance of those two economies, the global economy will stagnate for perhaps several more years before any signs of an insignificant or minor recovery becomes apparent. A worse case scenario could see a perceptible decline into stagflation by both the United States and Europe. DOES THAT ECONOMIC TIME BOMB EXIST---THAT IS FOR YOUR DECISION.
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Unheard
and as yet unseen, a global economic time bomb is ticking away to that
inevitable time when it is set to explode and engulf the world’s major
economies. At this moment in time (the end of July 2003), we are as yet unaware
of the “set time” for this to take place. How much time we have left is as
yet unknown, but the unfolding events during the next 18 months may determine
when this shall take place. This is not to say that the explosion is imminent,
other than to express that economic events during this time-span will
hopefully warn economists of its existence.