Page 1 of 4 GLOBAL POST-CRISIS ECONOMIC
OUTLOOK, Part 1 The crisis of wealth destruction
By Henry CK Liu
This is the first article in a series.
The financial crisis that broke out in the United States around the summer of
2007 and crested around the autumn of 2008 had destroyed US$34.4 trillion of
wealth globally by March 2009, when the equity markets hit their lowest points.
On October 31, 2007, the total market value of publicly traded companies around
the world reached a high of $63 trillion. A year and four months later, by
early March 2009, the value had dropped more than half to $28.6 trillion. The
lost $34.4 trillion in wealth is more than the 2008 annual gross domestic
product (GDP) of the US, the European Union and Japan combined. This
wealth deficit effect would take at least a decade to replenish even if these
advanced economies were to grow at mid-single digit rate after inflation and
only if no double-dip materialized in the markets. At an optimistic compounded
annual growth rate of 5%, it would take more than 10 years to replenish the
lost wealth in the US economy.
In the US, where the crisis originated after two decades of monetary excess
that encouraged serial debt bubbles, the NYSE Euronext (US) market
capitalization was $16.6 trillion in June 2007, more than concurrent US GDP of
$13.8 trillion. The market capitalization fell by almost half to $7.9 trillion
by March 2009. US households lost almost $8 trillion of wealth in the stock
market on top of the $6 trillion loss in the market value of their homes. The
total wealth loss of $14 trillion by US households in 2009 was equal to the
entire 2008 US GDP.
As the financial crisis broke out first in the US in July 2007, world market
capitalization took some time to feel the full impact of contagion radiating
from New York, which did not register fully globally until after October 2007.
In 2008 alone, market capitalization in EAME (Europe, Africa, Middle East)
economies lost $10 trillion and Asian shares lost around $9.6 trillion.
Bailouts, stimulus packages and jobless recovery
As a result of over $20 trillion of government bailout/stimulus
commitments/spending worldwide that began in 2008, the critically impaired
global equity markets began to show tenuous signs of stabilization only two
years later, by the end of 2009. Yet total world market capitalization was
still only $46.6 trillion by the end of January 2010, $16.4 trillion below its
peak in October 2007.
The amount of wealth lost worldwide in 2009 still exceeded 2009 US GDP of $14.2
trillion by $2.2 trillion. The NYSE Euronext (US) market capitalization was
$12.2 trillion in January 2010, recovering from its low at $7.9 trillion in
March 2009, but still $4.4 trillion below its peak at $16.6 trillion in June
2007.
US GDP in first quarter 2009 fell 6.3% annualized rate while surging 5.7% in
the fourth quarter, mostly as a result of public sector spending equaling over
60% of annual GDP. The US government bailout and stimulus package to respond to
the financial crisis added up to $9.7 trillion, enough to pay off more than 90%
of the nation’s home mortgages, calculated at $10.5 trillion by the Federal
Reserve. Yet home foreclosure rate continued to climb because only distressed
financial institutions were bailed out, not distressed homeowners. Take away
public sector spending, US GDP would fall by over 50%. This is the reason why
no exit strategy can be expected to be implemented soon.
It took $20 trillion of public funds over a period of two-and-a-half years to
lift the total world market capitalization of listed companies by $16.4
trillion. This means some $3.6 trillion, or 17.5%, had been burned up by
transmission friction. Government intervention failed to produce a
dollar-for-dollar break-even impact on battered markets, let alone generate any
multiplier effect, which in normal times could be expected to be between nine
and 11 times. In the meantime, with the exception of China’s, the real global
economy continues to slide downward, with rising unemployment and
underemployment.
The massive government injection of new money managed to stabilize world equity
markets by January 2010, but only at 73.5% of its peak value in October 2007.
It still left the credit markets around the world dangerously anemic and the
real economy operating on intensive care and life support measures from
government. This is because the bailout and stimulus money failed to land on
the demand side of the economy, which has been plagued by overcapacity fueled
by inadequate workers' income, masked by excessive debt, and by a drastic
reversal of the wealth effect on consumer demand from the bursting of the debt
bubble. The bursting of the debt bubble destroyed the wealth it buoyed, but it
left the debt that fueled the bubble standing as liability in the economy.
Much of the new government money came from adding to the national debt, which
taxpayers will have to pay back in future years. This money went to bail out
distressed banks and financial institutions, which used it to profit from
global "carry trade" speculation, as hot money that exploited interest rate
arbitrage trades between economies. The toxic debts have remained in the global
economy at face value, having only been transformed from private debts to
public debts to prevent total collapse of the private sector. The debt bubble
has been turned into a dense debt black hole of intense financial gravity the
traps all light from appearing at the end of the recovery tunnel.
Much criticism by mainstream economists in the US has been focused on the
controversial bailout of "too-big-to-fail" financial institutions that have
continued to effectively resist critically needed regulatory reform by holding
the seriously impaired economy hostage. Some critics have complained that
government stimulus packages are too small for the task at hand. Only a few
lonely voices have focused on public spending being directed at wrong targets.
Yet such massive public spending has left many economies around the world with
looming sovereign debt crises.
The critical issue of jobs The US Labor Department reported that the
economy gained 162,000 jobs in March 2010, compared with a revised reading of a
14,000 job loss in February. That makes March only the third month of gains
since the recession began. A gain of 184,000 jobs had been forecast for March.
But despite missing forecasts, the March numbers were generally not viewed as
disappointing by economists, because revisions in January and February readings
added a combined 62,000 additional jobs. This is viewed as good news overall
for an economy that has suffered a net loss of 8.2 million jobs since the start
of 2008, a month after the official start of the "Great Recession". This
sentiment shows how weak expectation is among most forecasters. The
unemployment rate remains stubbornly high, holding steady at 9.7%, matching
mainstream economist expectations.
President Barack Obama immediately trumpeted the jobs report on April 2,
asserting that the employment figures are signs that the government stimulus
package implemented a year ago has reversed the loss of about 700,000 jobs a
month that was taking place at that time. Ironically, this political spin
underscores that even the mild improvement in jobs creation may be reversed as
soon as the government's stimulus program runs out, or when the central bank
exits from its massive intervention in the market.
The president made his claim at a specially selected company in Charlotte,
North Carolina, that makes membranes for lithium batteries, symbolizing the
dependence on new green technology for economic recovery. The company received
a $50 million matching grant from the $787 billion stimulus program in 2009 to
expand one facility and to open another elsewhere in the state.
Still, the president had to admit that "government can't reverse the toll of
this recession overnight, and government on its own can't replace the 8 million
jobs that have been lost. The true engine of job growth in this country has
always been the private sector. What government can do is create the conditions
... for companies to hire again."
Obama said many Americans are still suffering from the job losses of the last
two years. But he said despite the damage done to the labor market during the
recession, the economy is poised to start adding the jobs people need. "What we
can see here, at this plant, is that the worst of the storm is over; that
brighter days are still ahead," the president said.
In response, Republican National Committee chairman Michael Steele issued a
statement saying the jobs gain in March reported by the Labor Department is not
a sign of economic health. "No matter what spin the White House puts on these
job numbers, it is unacceptable for President Obama to declare economic success
when unemployment remains at 9.7% and a large portion of the job growth came
from temporary boost in government employment," he said.
The president appeared to be putting the cart before the horse on the issue of
environmentalism and economic growth. In reality, the full implantation of a
green economy will likely increase unemployment from job losses in the old
energy-intensive economy. Environmentalism, like universal healthcare, is an
expensive movement, and can be introduced economically only with a strong
economy. It is foolhardy to expect environmentalism to revive a seriously
impaired economy.
The jobs report contained sobering readings for the depth of labor market
distress that has built up over the last two years. There are 15 million
workers counted as unemployed in March 2010, down 607,000 since the record high
of October 2009, but still the fifth-highest total on record. The average
period of unemployment now stands at eight months, a record duration that has
put many working families under severe hardship.
Almost one million more workers have become too discouraged to continue looking
for work and are no longer counted in the unemployment rate, even as the number
of discouraged job seekers fell by 200,000 since February 2010.
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