As any reader of this blog knows, I am a fan of charts. I find they reveal truth in an instant. This chart is one of the scarier forecasters of just how severe the global economic slowdown is becoming. It is the Chinese Purchasing Managers Index of inventories to new orders. Any reading below 1.0 means that there are more orders than inventory on hand. In July the index broke above 1.0 for the first time in 10 years. That means Chinese producers already have more than enough finished goods on hand to fill their order book. Many forecasters, including myself six months ago, felt that the U.S. recession was a local matter, and that Asian growth would continue–the decoupling theory. It is now clear this has not happened.
In 2001, large American companies that disclosed foreign revenues logged about a third of their sales abroad, according to an analysis by Howard Silverblatt, senior index analyst at Standard & Poor’s. By last year, the foreign take had climbed to 46 percent. Europe made up 29 percent of the total.
So how is it that such a small piece of the world economy, like sub prime home lending in the United States, can lead to a world wide recession? My best answer comes from the chart below, which shows how bubbles are just forward indicators of larger “overvaluation problems”.
It’s obvious that much of the, faster than normal, growth of America since Reagan has been built on bubbles, but this is not a new phenomena. Look at the years of The Long Depression (1873-1896) or the Great Depression (1929 -1941), both of which we triggered by speculative bubbles. In the 1870’s the problems were the cost of war and the stability of money.
The primary cause of the depression was a shortage of available money to facilitate trade. The most immediate cause, and the date that is often used as the start of the Depression, was the collapse of the Vienna Stock Exchange on May 9, 1873. Others have argued the depression was rooted in the 1870 Franco-Prussian War that hurt the French economy and, under the Treaty of Frankfurt (1871), forced that country to make large war reparations payments to Germany. 5 milliard (billion) francs in gold, or £200 million, “financed mainly through London”. Germany went on to gold and the price of silver started to fall causing considerable losses of asset values.
The Great Depression was set off by a stock bubble that burst in the Crash of 1929 on Wall Street, which then, in an earlier version of globalization, led to a collapse of most major stock Markets in the developed world, especially England, Germany and France–the three great colonial powers.
So if both the previous Worldwide depressions were initiated by a bubble in a small part of a huge market, why did the worldwide economy fall? Because the worldwide economy is financed by a relatively small number of global financial institutions. It has been this way since the Days that the Rothschild Bank needed to sign on with the financing before many countries could go to war. Today it’s firms like Citibank, HSBC or Goldman Sachs. Put it this way, the CEO’s of these institutions could all easily fit around the large conference table at the Federal Reserve Bank of New York. And right now, these people are scared and they are not lending as much as they used to. They are trying to rebuild leaky balance sheets.
This phenomena of choking off credit to rebuild equity is called a “negative feedback loop”. Businesses unable to get financing will fire workers, who in turn lose their house, which means that Home Depot’s inventory builds up, so they stop ordering from China and China’s inventory builds up… Quite frankly, I’ve said since February that this was going to be a slow motion crash, but it’s going to be crash.
That is why I think anyone who thinks the Obama-Biden ticket can’t win is just denying the economic facts that will be present on that first Tuesday in November. Four more years of this Republican economic mismanagement is just not tolerable. The Change Message will find many of these Hillary fence sitters coming down on Barack’s side.
For myself, I’d like to develop some ideas with you about whether allowing the country to grow at a slower rate (say 2.5%), by emphasing investment and not consumer spending, would ultimately put us back on the path of sustainable development and balance that we have been talking out here for the last few weeks. I think that Fritz Schumacher really had something in his book Small is Beautiful and I think it’s time to go back to work on The New Federalism agenda. The last week the blog had the most hits in the last few months. I think we are capable of doing some policy innovation here around these issues of devolution.