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The coming depression blog | May 27, 2018

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Global economy: Worse than 2008

It is terribly familiar. Finance ministers and central bank governors meet in Washington for the annual meeting of the International Monetary Fund in an environment of slowing growth and falling financial markets.

Three years after the collapse of Lehman Brothers, the air is filled with memories of a time when the world was  48 hours away from ATM’s running out of money.

Both the IMF and World Bank are issuing warnings by the bucket loads on the need to resolve the crisis as the crisis is imminent – and with good reason. This could be the fall of 2008, once again, only worse this time.

Christine Lagarde, director of the IMF, has identified two reasons that might be so.

Firstly, politicians have spent almost all their ammunition. Interest rates are already at historically low levels, and countries that once had a cushion of sound public finances are now running large budget deficits.

Secondly, there is unanimity about what should be done in 2011 and the political will to stimulate demand and to recapitalize the banks faltering. Lagarde looked back with nostalgia in London yesterday the G-20 meet in April 2009 the time when all the leaders met, noting: “I hope that will happen again.”

The fact that only six members of the G20 to sign upto David Cameron’s round-robin letter had urged Europe to find the debt crisis of the state speaks volumes about how divided the leaders are about what must be done. Churchill’s words for  today’s politicians – who are “determined to be irresolute, adamant for drift, solid, smooth and powerful for impotence”.

The list of problems is long and growing. In Europe, questions are spooking markets with the threat of a Greek default and the solvency of banks, especially those in France. Investors are losing patience with the statements of the wind on the desire to safeguard the integrity of the single currency. They see the fatigue and tiredness of austerity in the rescue of Greece in Germany. On the other side of the Atlantic the obstacle to recovery is that the housing market bombed. The housing bubble has left deep scars: debt, negative equity, high unemployment. Sharp drop on Wall Street this week reflected the concern of investors that growth is slowing and policy makers are increasingly powerless.

Fiscal stimulus – tax cuts or increased spending – is more difficult, because it brought new impetus from the White House, although it has faced strong opposition from Republicans who think the government is already spending and taxing too much.

In the rest of the world problems exist as well. China is to dampen the result of an overheating economy, and the developing world is vulnerable to the slowdown in the west. Lagarde said that the repair of the world economy since the Great Depression was to be represented by two balancing acts – the transition to a request from the public to the private sector, and stronger domestic demand in surplus areas in countries like Germany and China, for a deficit of nations like the United States to export more. Neither will happen.

What happens now? As Gerard Lyons, chief economist at Standard Chartered Bank said that the poor economic fundamentals in the West and confidence are shot to pieces. It is probably too late to avoid a double dip recession, even though the makers agreed this weekend to support European banks to take the necessary measures to prevent the collapse of the single currency, and by some miracle, they evoke a credible plan for growth and ‘employment. The real concern is that three years after the Lehmann of the problems of the global economy have proved so difficult. It is not only a hard winter ahead, the politicians have to worry about.


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