Anatomy of the EU Economic Crisis ? How National-level Issues Turn Into Massive Recessions

Anatomy of the EU Economic Crisis ? How National-level Issues Turn Into Massive Recessions

Step 1: Supposethere’s a national issue – these can be anything from a change of national government to natural disasters. Everything that happens in society has some effect on how people consume goods, and the rate and manner with which people consume dictates the state of economic activity.

Step 2:, Speculators in the stock market or in the Forex scene predict the extent that this issue will affect the national economy. They do this so that they will know how to capitalize on it via playing with currency or corporate stocks.

Step 3: Because of massive speculation, changes in currency supply and demand for corporate stocks are amplified. What would have been a relatively minor economic skirmish can actually become major causative factors in slowing down the economy, as more people think twice about participating in it.

Step 4: As the economy slows down even further, the currency suffers. The currency’s value drops because less people need it, because of less trading that happens on the macroeconomic level.

Step 7: When the currency suffers, it will cost more to service foreign debt. It will take more in terms of the national currency to pay the same amount of dollar-denominated debt.

Step 8: A bigger chunk of the budget then goes to debt servicing so less money will be for public welfare. If debt servicing is not done, a country can lose its creditworthiness, which is dangerous if a full-blown crisis hits it.

Step 9: Since less budget money goes back to the local economy, the economy slows down  further. Consequently, less money is earned by the average citizen, so that national tax revenue goes down even more.

Step 10: Less tax revenue, less budget and everything goes back to Step 2. This vicious cycle continues until a major Step is taken by the authorities to fix it, or if the national economy is totally ripped to shreds.

There is one word that can sum up all of these ten points: Reality.

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Producers vs Predators in pictures

If there ever was an example of a Producer Class city, it must certainly be Detroit.  It was for many years, the global center of that most difficult of all items of human manufacture–the mass-produced automobile.  And so, it became VERY prosperous. And so it became the target of the whole range of Predators.

The big damage to Detroit was done by the usual suspects–speculators and other banksters who conspired to suck the wealth out of the city and the industry that built it.  But petty Predators played a role too.  Natives of the area claim that nothing was the same after the riots in the 1960s.  Sounds about right–Producers have a very low tolerance for people who just wreck things because they have no other ways for expressing their rage.  The Producers of Detroit looked at the fires and just walked away from the creativity and ingenuity it required to build the city in the first place.

So the Predators won.  Their job is SO much easier.  As the saying goes “Any jackass can kick down a barn but it take a carpenter to build one.”  In this series of pictures, we see the ruins of a once-proud city.  We also get some idea of just how amazing Detroit’s Producer Classes once were.

Detroit in ruins: the photographs of Yves Marchand and Romain Meffre

In downtown Detroit, the streets are lined with abandoned hotels and swimming pools, ruined movie houses and schools, all evidence of the motor city’s painful decline. The photographs of Yves Marchand and Romain Meffre capture what remains of a once-great city – and hint at the wider story of post-industrial America

Sean O’Hagan

The Observer, Sunday 2 January 2011

The ruined Spanish-Gothic interior of the United Artists Theater in Detroit. The cinema was built in 1928 by C. Howard Crane, and finally closed in 1974. Photograph: Yves Marchand and Romain Meffre

In December 2001, the old Highland Park police department in Detroit was temporarily disbanded. The building it vacated was abandoned with everything in it: furniture, uniforms, typewriters, crime files and even the countless mug-shots of criminals who had passed through there. Among the debris that photographers Yves Marchand and Romain Meffre found there in 2005 was a scattering of stiff, rotting cardboard files each bearing a woman’s name.

In total 11 women had been catalogued by the police, including Debbie Ann Friday, Vicki Truelove, Juanita Hardy, Bertha Jean Mason and Valerie Chalk. Down in the dank basement of the police station, where “human samples” were stored – and had been abandoned along with everything else – the two French photographers also uncovered the name of the man who was linked to all of the women’s deaths. Benjamin Atkins was a notorious serial killer. Between 1991 and 1992 he left the bodies of his victims in various empty buildings across the city.

A photograph simply entitled Criminal Investigation Report, Highland Park Police Station is one of the many startling images in an extraordinary book, The Ruins of Detroit, that Marchand and Meffre have made from their seven week-long visits to Detroit between 2005 and 2009. The book’s photographs suggest the countless strange and sad narratives from urban life in America in the mid-to-late 20th century. It is also a book of testimony, which not only illustrates the dramatic decline of a major American city, but of the American Dream itself. Many of the images seem post-apocalyptic, as if some sudden catastrophe has struck downtown Detroit, forcing everyone to abandon homes and workplaces and flee the city.

Cumulatively, the photographs are a powerful and disturbing testament to the glory and the destructive cost of American capitalism: the centre of a once-thriving metropolis in the most powerful nation on earth has become a ghost town of decaying buildings and streets. There is a formal beauty here too, though, reminiscent of Robert Polidori’s images of post-hurricane Katrina New Orleans. “It seems like Detroit has just been left to die,” says Marchand, “Many times we would enter huge art deco buildings with once-beautiful chandeliers, ornate columns and extraordinary frescoes, and everything was crumbling and covered in dust, and the sense that you had entered a lost world was almost overwhelming. In a very real way, Detroit is a lost world – or at least a lost city where the magnificence of its past is everywhere evident.”

This sense of loss is what Marchand and Meffre have captured in image after image, whether of vast downtown vistas where every tower block is boarded-up or ravaged interior landscapes where the baroque stonework, often made from marble imported from Europe, is slowly crumbling and collapsing. The pair have photographed once-grand hotels that were built in a carefree mix of gothic, art deco, Moorish and medieval styles, as well as countless baroque theatres, movie houses and ballrooms – the Vanity, where big band giants such as Duke Ellington and Tommy Dorsey played in the 1930s; the Eastown theatre, where pioneering hard rock groups like Iggy and the Stooges and the MC5 held court in the 1960s.

They have also captured for posterity the desolate interiors that once made up the city’s civic infrastructure: courthouses, churches, schools, dentists, police stations, jails, public libraries and swimming pools, all of which have most of their original fixtures and fittings intact. “As Europeans, we were looking with an outsider’s eye, which made downtown Detroit seem even more strange and dramatic,” says Meffre. “We are not used to seeing empty buildings left intact. In Europe, salvage companies move in immediately and take what they can sell as antiques. Here, they only take the metal piping to sell for scrap. In the Vanity ballroom alone, we saw four giant art deco chandeliers, beautiful objects, each one unique. It was almost unbelievable that they could still be there. It is as if America has no sense of its own architectural history and culture.” more

Politics & Policies of Economic Management (Part 2)

Politics & Policies of Economic Management (Part 2)

According to the Bureau of Labor Statistics, increased consumer orders, stock price increases and increased money supply are reflective of increased consumer optimism. Current positive developments of these entities in the economy do suggest a conformation to this assertion and recovery on track. However, more months of data may be needed to validate the sustainability of the gains for these leading indicators as outlined in part 1 of this article. Now let’s talk about the politics and policies encompassing the national debt.

Regarding the national debt, it is a big issue and a bone of contention as one can envisage that Uncle Sam is really in debt. The only remedy could be a cap on spending and increase in taxes. Meanwhile, should the citizens be concerned or worried over the mounting debt? The answer is a yes and a no. Yes, because the debt cannot be kept forever without repayment. The government cannot continue in the long-term to refinance its debt as raising taxes and reducing spending will definitely become a viable option. Also, mounting debt will put a downward pressure on the dollar ceteris paribus and that could retard or derail the recovery.

The U.S GDP is projected to grow from ,652 billions in 2008 to ,751 billion in 2018 a ten-year period. This is gives a growth rate of 2.659% annually for the period. However, there is a precarious problem here when this growth rate is compared with the national debt and the gross debt growth rates for the country. The national debt (debt held by the public excluding intra-governmental obligations such as Social Security Trust Fund) is expected to grow from 54.6% of GDP in 2009 to 68.5% of GDP in 2014 or better still from 64% of GDP now(2010) to 77% of GDP in 2020 suggesting a growth rate of 2.03% annually. Similarly, the gross debt (debt held by public plus intra-governmental obligations and foreign investors) is also expect to grow from 86.1% of GDP in 2009 to 99.8% of GDP in 2014 a growth rate of about 2.67% annually.  The growth rate for the national debt of 2.03% and gross debt of 2.67% annually should be of concern because these figures are almost equal to the expected growth rate of 2.66% for GDP in the next ten years. A comfortable figure should be a GDP growth rate that is excess or a multiple of the growth rates for the debt (national and gross). In fact, what the government must do is to institute policies that put “breaks” on the growth of the debt subsequently permitting its redemption in the nearer future. Next with regards to the answer of No to the question whether citizens should be worried, it must be said that the government can continue to refinance its debts in the shorter term but in the longer term this may not be feasible. Another non-viable option will be to print money to pay its debtors which of course will escalate inflation from its current figure of about 2.30%.

External debt such as debt to Chinese investors in the form of bond payments should be an issue of concern as it can lead to the transfer of economic power. The question is whether foreign investors (Chinese investors and others) are willing to accept refinancing as against making payments at maturity. Even if it is acceptable, for how long will it be? In fact, mounting debt and deficit could affect the country’s credit rating and create future financing problems. A cue can be taken from the Greece and Spain situation. It’s said that United States owes much of its debt to its citizens and that it can continue to defer payment for sometime. However, this should not be a creditable one as debt accumulation without remedial action can incapacitate a country as it has done to Greece. Greece may not be the last country to be incapacitated as there are several countries on the way to join the train. In fact, Greece debacle would continue to have a ripple effect first to Europe and then to the United States. Also, United States is not exempted from incapacitation that can result from the cumulative effect of rising debt. The country currently has a buffering capacity that has helped sustain it and lessened the negative impact of the rising debt. The economic buffers include the country’s high global competitiveness rating and efficient macro-stability policies that has kept inflation in check and promoted economic growth. However, the question that needs to be asked is the sustainability of these economic buffers in the long term.

Again, with regards to the growing deficit, borrowing to finance the deficit only adds to the accumulated national debt and so there is the need for strict adherence to the national debt “ceiling” (that is the limit on the national debt). Raising the “ceiling” may not be a viable option but rather cutting down on spending and increasing taxes is. It may be a painful action plan but the pay-off is great. Judiciously, remediation of the debt will also call for leveraging of the increasing balance of trade deficit between China and the U.S. As at now, the low value of the Chinese currency is causing some problems for U.S exports invariably affecting net export negatively, exacerbating the balance of trade deficit and dampening economic growth.

Currently, in the pipeline are series of regulations meant to promote leverage, transparency and probity in the financial sector with Wall Street being projected as the beacon of success if these regulations should work. This is a laudable step and should not be politicized if it seeks to leverage risks in derivatives and stock trading. As at now, options seem to be the only derivative with more leverage and consequently the one of choice for risk averse or low risk traders. Consequently, regulations that are pioneered towards leveraging risk in derivatives and financial sector by increasing transparency and promoting ethical transactions in this sector is commendable and should be welcomed. However, to some extent these regulations should seek to have minimal impact on financial innovation in the sector.

Unfortunately, due to the perception of some skeptics politicizing government regulations, it has culminated in an increased sensitivity of several companies business model to impending government regulations than to inflationary pressures. That is the business model of some financial companies has become more sensitive to impending regulation than to inflation. Cases in point are credit card companies’ responses to government’s propensity to regulate. There is the belief that government regulation will restrict their ability to make huge profits. So in reaction to that they keep increasing rates resulting in increased credit card cost for consumers. Though expectant inflation increase (called inflation psychosis) may be a contributing factor to rates increases from these companies yet government regulation is fast becoming the determinant for the rate increases. The bottom line is reduced regulation increases aggregate supply (through increased business investment) whilst increased regulation reduces aggregate supply. This presupposes any government regulation in the financial sector should be very “smart” regulations that promote sound attractive business environment consequently increasing aggregate supply.

 Conclusion

The statistical figures and analysis presented in part 1 and 2 of this article does present an economy technically out of recession. However, it also suggest the need for intervention and remedial measures (including regulations) to contain the situation in the longer term as inaction will seriously “crowd” the recovery and create hardships in the future. Emphasis was placed on three factors that are critical for the economy whose remediation may require government intervention and policies. They included the growing unemployment rate, rising national debt and the indeterminate consumer confidence. It was iterated that the successful recovery of the economy in the medium-long term will be determined by these three factors. Also the outlook of the economy and the ability of the country to maintain its superior power economically and military-wise will also depend on these factors. The growing debt requires policies (mostly fiscal) that put brakes on the debt growth. There is also the need to protect investors (both foreign and local) through very “smart” regulations that produce the required leverage of risks, ensures transparency and ethical transactions or remunerations in the financial sector.

 

Author: Charles Horace Ampong [MSc(Eng), MBA]

Blog: www.charliepee.blogspot.com

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