Disaster Economics :: by Wilfred Hahn

The expression “disaster economics” has recently been popularized. We think it is an appropriate term for the times. A slow moving “economic disaster” has been working its way across the globe assuming different phases and symptoms. It has a long way to go until all the misaligned imbalances in the world are finally settled. The current trends that we are witnessing are part of an ending on a number of levels. It is most certainly true that the great halcyon era of the post-World War II period of prosperity has come to an end. Almost all the trends and developments that underpinned this era are no longer in force.

Economists are offering a wild array of causes, couching their opinions in heavily technical language. One that is more cogent than many is by Daniel Alpert, writing on Roubini.com: The “Four Factors”—summarized as follows: (1) exogenous oversupply relative to global demand, (2) classic Fisher-described debt deflation, (3) excess technological productivity relative to the availability of global labor, and (4) inter-generational demographic challenges.” Does that make sense? Most will not want to answer, at best thinking this statement somewhat foggy due to the technical terms being used.

If we were to be limited to four candidates, they would be as follows:

1. A radical change in moral values, which impacts the workings of money as much as it does any other conduct.

2. A massive slow-down in population growth, particularly so following a period of rapid acceleration (1900 to 1950 or so).

3. A continuing centralization of wealth, with its handmaiden over-indebtedness.

4. Immoral monetary policies, promoting all types of economic and financial bubbles.

Of course, a detailed list of additional factors could be mentioned, including the rapid advance of globalization, the late and sudden rise of the manufacturing and consumption capabilities of populous countries such as China and India and a host more.

In the meantime, what about Europe? Will Europe ever produce a truly unified association of countries? Will it include all current European Union (EU) nations … or a smaller subset … or several subsets … or a powerful association of the top ten? Countless theories abound.

There have been numerous skeptics and very few commentators have predicted EU success. In fact, this seems to be the case today more than ever before─given the painful economic and financial tremors that are presently pounding Europe.

Foundationally, the current economic problems stem from there being different cultures and philosophies within the membership of the Euro zone. One group allowed the size of their governments to swell, remaining unconcerned about their large trade-deficits and rising debt-levels. These debts became large and eventually unsupportable. A somewhat opposite mentality gave rise to competitive manufacturing and high exports and eventually, therefore, large exposure to the credit of the countries to which they were shipping their products. However, to allow these trends to reach irreparable extremes requires an enabler of such “fair-weather” behavior … namely, the lender. This is where countries such as Germany have fault though they may be prodigious exporters.

The bottom line is that it has required two-basic character types to cause this intractable tangle that is now the Euro zone. While European policymakers may be inclined to treat the surface lesions, these underlying differences are still being left untreated. However, Europe has already traveled a long way down the unification route. There are only a few key steps left to take─these being most disagreeable to those nations not willing to forfeit sovereign independence.

Remember that the unified Europe project was built on the strategy of the “pocket book attack.” Observing global financial markets these past decades, we have witnessed this principle at work repeatedly. Voters are inclined to vote with their pocketbook. The original architects of the European Union and the common euro-currency knew this at the start. It was well anticipated that individual countries and people would not give up their sovereignty or freedoms willingly and that only financial crisis could break through such societal inertia. Without crises, there will not be a unified Europe.

Therefore, the key question has always been this: How much crisis and blood in the streets does it require to reach common resolutions and solutions to whatever issue is eroding financial and economic confidence in Europe? The same question beckons now.

Yet, there are other realities that shed some perspective on the manageability of the problems. Were EU member countries today to agree to common fiscal controls and a common bank regulator, it would represent an economic bloc with financial underpinnings that would outshine those of the United States. Europe’s government debt would not be as large (relative to the size of its economy) and its combined budget deficit would be approximately half that of the United States. This perspective also shows that the U.S. will again have its day back in the doghouse … someday.

Turning to the world scene, quite frankly, there are so many unprecedented developments and unstoppable devolutions in the world of finance, economics and geo-politics. It is remarkable how quiet and docile most people are. Of course, there is no lack of people who promote false hopes, but the reality is that more financial collisions are unavoidable. In what order will they occur? What country will be next suffering a collapse in confidence? As of this point, countries such as Greece, Spain, Italy and France (yes, even France─the second largest nation in the Euro zone) are unavoidably succumbing to the “debt trap.” America, too, is presently heading to the same outcome … provided that it does not change course first. For the time being, it is being protected, so to speak─by the histrionic financial fireworks in Europe.