World Crisis scenarios for the 21st century - Worldwide economic depression - (update 18)

World Crisis scenarios for the 21st century - Worldwide economic depression - (update 18)

Can the global economy avoid a 2nd great depression? As the G20 meeting fades along with it's politically motivated rhetoric, you only have to look at what occurred prior to the G20 meeting. Governments around the world (for short term political point scoring) have poured billions into their separate economies, from stimulus handouts to the taxpayer, to huge infrastructure money pledges, to bailouts of their car industries, through to bank rescues. All utilizing public monies to guarantee and remove liabilities from the private sector and allow the tax payer or consumer to then hold onto deprecating assets. In other words the governments of the world are desperately trying to support asset prices. The theory is a simple one, 1. To restore confidence with the consumer. 2. to free up credit markets and have credit flow back to the consumer, so we can spend again.

Of course the reality is that none of those measures that government's have embarked on will work. Despite recent gains in oversold equity markets and a slight bounce in consumer sentiment (US). Some economists are now already calling a bottom to the markets and now are also indicating that a U shaped recovery is occurring. Which will take us into 2010 with tentative recovery in growth towards the end of 2010. Unfortunately economists especially with the current Keynesian modeling do not factor sociological, cultural and even anthropological factors into their equation; they believe that money pumped back into economy will re inflate decayed markets and rebuild confidence in shattered markets.

The key is rebuilding confidence that as mentioned has been 'shattered'. As humans beings with thousands of years of cultural significance ingrained into our psyche, we demand justice as a way of seeing a suitable punishment take place. Which means for our community, or society to feel comfortable contributing, purchasing and trading in a market based economy i.e confidence. Instead, our policy leaders bailed out the crooks, the liars, supported their businesses with our money. The excuses? Systemic risk, the fear of the whole economic system collapsing. Which essentially doesn't mean anything to someone who has already lost their job and their house. AIG and Citigroup should have gone bankrupt, the US goverment should have allowed a slew of failures, instead they allowed one investment bank to fail Lehman Brothers.

Once failed, incompetent business were bailed out by the US goverment, the idea is then too regulate the pay of upper management, then slowly remove the money 'drip'. These companies are not only zombies, but they are drug addicted zombies; for taxpayer capital. So a slow repair of corporate decayed industries (as superficial as it is) is not enough to restore confidence with the consumer. Punishment didn't occur completely for companies that have acted irresponsibly and reckless in a criminal type manner - suitable punishment would have been to have them go bust and shame the upper management. All these companies should have failed. Adding insult to injury not only were they bailed out by the taxpayer they were still payed retention bonuses (albeit reduced). So in summary the central banks and governments of the world, particularly the Federal Reserve and the US government will be unable to restore confidence back into the market. It's a pipe dream. But do they care? They should, they need the consumer to start spending. He/she is likely to horde as there has been such a betrayal of tax payers, that consumer confidence may take years to recover. Hence prolonging a recession

No country in history has been able to underpin or support assets, especially when the free market of market place is then replaced by a economic model that supports falling asset prices. A form of socialism, albeit supporting the rich; that will not let the market collapse naturally in a boom/ bust cycle. Instead replacing falling asset prices with taxpayer money, in turn the country tries to recapitalize as it enters a protectionist policy. By supporting and printing it's own currency and then pumping money back into it's ailing economy. It then needs to self capitalize, in the case of the US and it's central bank it then buys it's own debt. This in it's self causes huge liabilities and pressure on the governments balance sheet. Eventually the economic system collapses under a weight of it's own worthless currency (inflation) and unprofitable industries. History shows examples of governments that support falling assets, or governments relying heavily on devalued currency these are former communist countries such as Russia, Poland and the former eastern bloc, current examples are Cuba and Nth Korea. Banana Republic countries of South America. High inflation money printing countries (to support a collapsed economy) such as Zimbabwe and Iran. Once a country exhausts it's economic resources, debases it's currency it will eventually impoverish it's people with high taxes and inflated prices.

Governments supporting assets prices is a doomed policy.

In a economic sense globally we are now at a L shaped junction, the US and the world will bump along for years with slow and negligible growth, the US possibly will technically go in and out of recession every year ad infinitum. with no real sustained growth ever occurring. The world may just scrape along on a flat line of economic growth. Until a major shock occurs, a pump prime; which could be a major environmental, social threat or an inter continent conflict. Which forces society to begin preparing industries to cope with a dramatic change.