WORLD DEPRESSION!

Richard Wilson richarda at wfeca.net
Fri Dec 6 15:48:30 MST 2002


The economy is now worse than I suspected when I wrote an article back in
July. Infact, the condition of world capitalism has never been so depressed
before, not even in 1929 before the infamous Black Tuesday. The debt
continues to rise and seems to be out of control, business investment
continues to be in decline or stagnate while consumer spending which rose
7.6% in September seems to be the only factor keeping the economy afloat and
the inventory still remains to be brought down to normal size as over
production continues to be a problem in the economy. An unexpected to most
but expected to me , Federal Reserve action was to slash rates another 0.5
percent in an attempt to keep the consumers buying on credit. The current
account deficit has reached 4.7% of gross domestic product, the worst in the
industrialized world and which the International Monetary Fund stated is
simply unsustainable and damaging - though Treasury Secretary, Mess O'Neal
says the a current account deficit driven by the trade deficit is no problem
at all. Around the world, economic growth has deteriorated, Argentina
remains in depression and Brazil is close behind with even the most
optimistic of projections showing that there is no choice other than default
for the country come 2003 or 2004. It does not take a rocket scientist to
see something is wrong - though from the words of the economists on
television, you'd think it would.

The main problem now is no longer the debt, which is a long term drain and
will remain a top issue but rather the issue now is how long can consumer
spending last? Consumer spending has been the only force driving the economy
despite stagnate wages, declining corporate investment and profits and
almost 3 years of continuous contraction in manufacturing. Both housing &
automobile sales have reached record highs since the Federal Reserve Bank
began easing monetary policy in 2001 bringing rates to 40 year lows and now
the discount rate is at an 89 year low. Signs are showing that the economic
growth financed by debt will soon be coming to an end. Automobile sales in
November fell 12.7% from record high reached in October. Automotive sector
has already been harmed by an inventory buildup, caused not by consumers
spending to little (auto sales are artificially high) but by over production
by the Big Three in an attempt to grab market share. The sharp drop in sales
caused Ford to announce a 5% production cut for the first quarter of 2003,
which pushed Ford shares (Ticker: F) down by around 12%. The world wide web,
despite contracting severely through 2001 is still on the fall, with AOL
projecting a 50% decline in advertising revenue for 2003. The Economist
publication also reported in the June addition that growth would be 2.9% in
2002 and 3.5% in 2003 , now in the November 23rd addition, the forecast was
2.4% and 2.7%. Since growth has to be approximately 3.0% per year inorder to
keep unemployment steady, one can see that this will be a jobless recovery.
More job cuts are being planned as I write this article, with Hewlett
Packard slashing another 17,900 jobs by the end of fiscal year 2003.

The second problem our economy faces is debt. The national savings rate from
1997-2000 fell into negative territory, and fell as low as -6% in 2000.
Since 1961, the national savings rate has averaged 3%, and never fell below
0%, however it fell to near 0% in 1969, 1976, 1980, 1986, and 1990, notice a
trend? The trend is that within a short period of time after the national
savings rate dipped, we experienced the downside of the business cycle.
Going by this indicator alone, it would seem that we are in for far worse.
During, recessions, the national savings rate rises once again, as it did in
2001, but it is still negative, and as the national savings rate rises back
to historical levels, if it does, there will be a massive gap of $500
billion in aggregate demand between 2002-2003. As a response to this, the
Federal Reserve has cut interest rates to a 40 year low of 1.25% (the
discount rate is at an 89 year low). The entire economy however, is
struggling under mountains of debt. Household debt as % of disposable income
is around 105%, and the amount of household income going to pay interest on
that debt is on average 14%, this means 14% out of an individuals wages,
goes to paying interest on debt, this is money they can not spend and when
they loose their jobs they will have no choice but to file for bankruptcy.
Household debt was $3.55 trillion in 1990, by 2000 it had reached $6.59
trillion, and it's even higher today. Normally, household debt falls during
recessions, as consumers tend to take caution, but not in this downturn,
consumer spending is soaring, mainly fueled by the low interest rates, tax
rebates, and the demand side of the tax cut, however, this is not
sustainable. Corporate borrowing excluding finance from 1990-2000 rose from
$2.47 trillion to $4.31 trillion. So corporate and consumer debt combined
was $10.9 trillion, around 113.5% of our gross domestic product. This amount
of debt is staggering and on the surface, one might dismiss it just as
another figure, because many people have a problem grasping a number that
large, however, to put it in simpler terms, consumer & corporate debt
combined was $38,790 for every man, woman and child in the United States or
$1,758 for ever man, woman and child in the world, and 6 billion people live
in the world today. However, we have some more debt to worry about,
government debt. The government's debt is $6 trillion , bringing total debt
so far, in 2000 up to $16.9 trillion , that is $60,142 for every man, woman
and child. So every man , woman and child in the United States in 2000 was
in debt $60,142 , and this figure is surely higher now than it was than,
since the savings rate is still negative. The interest on all this debt is
tremendous. And with the government projecting a $165 billion government
deficit in 2002 (and even this estimate uses the most optimistic growth
figures) , with the trade deficit at $37.6 billion (the highest ever) and
with consumers spending like there's no tomorrow, and simply charging it to
their credit card, it does not appear that debt will be falling anytime
soon. The state governments are now projecting a deficit of over $40
billion, though, unlike the national government, state governments are
required by law through state constitutions to balance their budgets, this
means states will have to slash spending and raise taxes which can harm the
chances of recovery even more.

Another thing that must be pointed out is the global economy is unhealthy.
In the past the United States could always count on other parts of the world
doing well, resulting in investment & export growth. In the 1970s the
East-Asian economy was performing well and exports to the region during the
recessions helped keep the economy moving along smoothly, in the 80's Europe
helped out. Now , things are different, Japan is still in its decade long
recession, Europe's economy is barely moving (the European Central Bank just
cut the interest rate, again, today!), and both Germany & Portugal have
budget deficits below the 3% of GDP the European Union set as a target,
amazingly enough, it was Germany that proposed that rule. This means that
under EU rules, both countries face fines amounting to billions of Euros.
Germany is still in recession, and it being the largest economy in Europe,
makes it a drag on everyone else. Sweden is having a debt crisis, and the
Swedish Krona until recently plummeted in value. Finland is performing well
considering its neighbors are performing so poorly, but how long can it
last? In England, the economy is getting a boost from strong consumer
spending, rising housing prices (prices rose at an annual rate of 30%!), but
the stock exchange is on the fall, interest rates are still high (because
the British economy is not even close to as productive as others which
causes higher inflation that and the sterling is overvalued as it has been
in the past which could lead to financial crisis if it were to plummet in
value) , and the government is set to run a fiscal deficit this year (Messr
Brown's economic growth projections are optimistic and taxes may have to go
way up inorder to pay for his spending plans and surely as the Firefighter
situation in the country proves, there is absolutely no room for additional
spending plans). South America, is surely not a place to look for help,
Argentina made history becoming the largest country to default on its debt
in history, and Brazil is set to follow the same path, mainly due to
American economic imperialism (refer to the elections down there, and how
the S&P cut its credit rating because of what "might" happen, under a
progressive). Ecuador is on the verge of collapse. Peru is doing well, but
almost all of it is domestic demand, fueled by extremely low interest rates.
Overall, South America is a dead zone. Africa is performing remarkably well,
exclude South Africa & Zimbabwe of course. GDP in the continent rose 4.3% in
2001, and isolationism may well have done it good, considering the fact that
it is not as vulnerable to global downturns as say Asia is. Even Africa can
not go on doing good, the AIDS crisis is spreading, life expectancy is
falling and people are dieing like flies. So no where in the world, do we
see real growth.

Than, there is the problem of investment being tied up in inefficient
sectors of the economy or sectors where there is a problem of over supply
such as in computers, telecommunications, mobile phones and airlines and
internet services. During the boom of the 90's there was a bubble in the
economy, with to much investment flowing into the "new economy", despite the
deflating of prices in the markets, bubbles still exist with many "new
economy" stocks having PE ratios that are unjustifiable. Money now is
flooding into real estate as prices continue to reach the sky. The airlines
have been in trouble for quit sometime and were experiencing financial
problems before 9/11 yet the government choose to use tax money to subsidize
the airlines and most of that went to the board of directors and dividends
to shareholders while 100,000 jobs were axed. Now the United Airlines, is
asking for another $1.8 billion from the government but because their plan
failed to cut worker's wages enough (only an 18% cut) and failed to hand out
enough pink slips to workers, the government said no. Of course Messr
Federic Brace, just one higher up within the corporation, having a total
income of $401,311 in 2001 has nothing to worry about (that don't even
include stock options). Though, it's actually in the best interests of the
economy to allow UAL and other airlines to die to free up capital for the
efficient and profitable, though the workers of those companies will be left
on the streets without a job or retirement. Many sectors face falling
profits caused by oversupply and as long as the government subsidizes that,
the economy will not improve, though even if malinvestment were fixed, the
economy would still not recover because the businesses would have to default
on debt owed to banks which would leave banks with a debt and burden the
financial system like what happened in Japan.

A new era is coming, I believe and I believe that capitalism is on its death
bed. It's the job of progressives of all kinds, be they Greens, Communists,
Socialists, Homosexuals, Environmentalists, Youth, Union Workers, the Poor
or what have you to unite and establish a program and policy to (1) spread
the word to the masses ; (2) organize and attend rallies, protests and
events ; (3) write to editors of local newspapers ; (4) call into CSPAN and
TV and radio talk shows ; (5) encourage friends and families to get involved
and incorporate whatever talents you are gifted with, be it musical,
artistic, writing, public speaking, ect. to spread the word and open the
eyes of the brainwashed and misled. The problem of world capitalism today,
represents a real opportunity for all of us and we can (NOT) let this
opportunity pass us by!



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