Daily Times

Where is the US economy headed? And, for that matter, where is the European Union (EU) headed? In the case of the US, we recently saw the unseemly, if not very dangerous, political row between the Republicans and the Democrats over the question of raising the US debt ceiling, which has crossed its limit of over $ 14 trillion. Finally, they reached a messy compromise to avoid formal bankruptcy. However, this did not save the global stock markets from major losses and write offs on the value of their portfolios, which, for ordinary investors and pension funds that provide millions of people around the world their old age pensions, meant an uncertain income when the retirees would need it the most. In the western world, apart from poor people, most others have their savings invested in the stock market through their brokers and/or pensions funds. And if the markets continue their downward slide, they are the ones who will suffer the most because they have the least capacity to bear big losses.

The question that arises is: will the markets recover and re-ignite the economy? Such recovery is imperative in generating employment and retail spending, and fostering the necessary confidence that underpins successful economies. Both the US and Europe are in virtual recession with sluggish growth or stagnation. The first thing to ponder about capitalist economies is that they are largely dependent on consumer demand for all sorts of products. If the demand falls or becomes sluggish, the economy might need a cash/credit injection. In other words, it would need more liquidity, as has happened with recent economic stimulation packages because, in a recessionary situation, the employers start laying off their workers, with a resultant increase in unemployment. This leads to a slump in retail spending as well as increased foreclosures on housing and other mortgages, leading to a slowdown in investment, and further contraction of the markets and so on, creating a vicious circle.

This is what happened in the US, starting late-2007 and 2008. But, despite the injection of more liquidity through stimulation packages and printing more money by the Federal Reserve, things are still not looking good. The economic contagion spread to Europe where banks had invested in dubious financial products, mostly originating in the US. At one point it looked as if the entire financial structure of the western capitalist system might crash without a government bailout of the sick banks and financial institutions.

While banks were bailed out and their debts taken over by the state, the people are paying a hefty price by way of significant losses on their present and future savings (in pension funds invested in markets) from the falls in stock markets. They have also suffered from a collapse of the housing market, in many cases losing their homes as they were unable to service their mortgages. All this has resulted in a general economic slump, with official unemployment in the US above nine percent. The wealth gap in the US between the rich and the poor is continuing to widen. For instance, 20 percent of the rich in the US reportedly own 84 percent of the country’s wealth, while 40 percent own only 0.3 percent. In other words, the US’s economic crisis is developing a serious social dimension.

Is there any hope that the US will emerge out of this situation? Frankly, the prognosis is not good. Much of the economic prosperity of western economies has been based on creating unlimited demand for consumer goods propped up by credit and funny or illusory money (money that is not backed by real goods). There was so much credit available at low interest rates without any serious questioning of the borrowers’ financial situation. At times it looked as though everyone was on a shopping spree to buy something or the other without worrying about servicing the debt because you could always borrow more.

This merry-go-round created an asset bubble. And when it burst, it soon dawned on consumers, investors, bankers and the state that the party was over. Attempts to re-start the party have not made much headway, including stimulation packages. With unemployment high and a general sense of gloom, people are not spending like they used to because:(a) many of them do not have jobs, (b) credit has become tight, (c) they are trying to pay their debts and (d) where possible, they are trying to save as people used to do in the decades before. The net result is that capitalist economies, dependent on ever-growing consumer demand for goods and services, have run out of puff.

In other words, there is a structural change and the old model of insatiable consumer demand is not working, even with more liquidity. But there is resistance to accepting the new reality. At another level, the economic model of ever-increasing growth is not sustainable. While our planet’s resources are finite, the artificially inflated demand has seemed limitless, thus creating a disconnect between the universe/nature and human society. In the process, it has contributed to climate change and global warming, putting further pressure on our planet.

While the US has been engaged in a political bullfight to pull the country out of its economic morass of growing economic debt and stagnant growth, some of the member countries of the EU are facing economic default. Besides Greece, Portugal and Ireland, already on emergency financial life-support, Spain and Italy are also increasingly vulnerable. Even France is looking unhealthy. Nothing seems to be working so far, including the recent announcement of a financial stabilisation fund for ailing economies, as well as a proposed ‘real economic government’ with a president for the EU. The basic idea is to somehow restore confidence in the markets that the euro zone is not about to ditch its common currency.

The problem, though, is that all these proposals lack an implementation mechanism and thus appear gimmicky. At the same time, the growth rate of eurozone economies, including Germany, is dismally low or non-existent. With virtually no growth or negative growth, the notion of repaying debts is increasingly becoming academic. No wonder the markets are not buying high-sounding proposals and continue to be sceptical about Europe’s economic future. Germany is the only eurozone country with economic credibility (even that is eroding slowly). Others look to it for economic redemption. Its Nordic members are credible economic entities but they are small and unlikely to take on the added burden.

Within Germany, however, there is growing popular opposition to commit to redeeming, what looks like, a hopeless situation. The issuing of euro bonds is seen as a likely solution, as imparting greater credibility to raise money at lower interest rates. Whether or not this will work is anybody’s guess. In any case, the German Chancellor, Angela Merkel, is not enthusiastic about the idea. According to her, “I neither think that Europe is at the point of needing its last resort (the euro bonds), nor do I think that we can solve these problems with what I have called a bang.”

The economic crisis in the US and Europe is quite depressing and appears intractable. And it is also depressing the economies of other countries because of the linkages in the global economy. One can only hope that things might start looking up though, as of now, it is not a very hopeful scenario.

The writer is a senior journalist and academic based in Sydney, Australia. He can be reached at sushilpseth@yahoo.com.au