While it may a bit premature to make the judgment that the Global Economy is in an economic depression, the signs for it are all becoming more obvious as the days go by. While the issue may not be as clear for us the Asians, the impact of such scenario is far ranging and may impact almost everyone more severely than what some thought it might be. This is the problem posed by this new era of economic depression if it ever comes to be. This is the subject that I am trying to bring about in this article.
First, let us quickly look at the signs:
1. Asset prices – the prices of the real estate in major markets has tumbled more than 30% on average; the share prices has dropped more than 50% on average. The total losses on both counts globally is reaching the figures of anything between US30 trillion to US50 trillion. It is a few times of the whole world GDP. The percentages are similar to the US Great Depression of the 1930s, and the magnitudes are much bigger by few hundred times over.
2. The interest rates – the rates for most major economic government T-bills or similar instruments are already zero or negative. US 3 months T-bills rates are negative, in the same way the EU bills, and the Japanese T-bills has been negative for a while. It means flight to quality at any costs. Money supply has contracted to the level that it can’t contract anymore. Hence printing money is no longer effective. This condition has not been present since 1930s. The situation is like a car going uphill, and the gas pedal has been pushed to the floor, and yet the car is still sliding backward. It has reached the max in terms of what central banks can do.
3. Fiscal policy – all major governments, realizing that monetary policy has reached its maximum, has to perform expansive policy by increasing domestic spending by government to jump start the economy and spur the growth. Almost all countries have taken this approach with an estimated budget of at least 15% of the GDP. The only country that seems still to resist such move (which is quite strange) is Germany. The most laudable approach has been China which without any waiting announced RMB4 trillion spending. A good way to understand this is like the car example above, what the government is doing is boosting the (weak) engine, so that it can push the car forward, while at the same time pushing the gas pedal right to the floor.
4. Unemployment – the unemployment levels in developed nations will reach 10% to 15% soon. This is extremely alarming as it will cause the consumer demands to plummet, and reduce exports from many of the developing nations.
5. Inflation and commodity prices – the inflationary threat is almost in existence and the prices of commodities are falling fast as the demands started to fall. While absence of inflation is good news, the falling commodity prices means bad news for developing nations as they are the major producers of the items.
Why I called it as the “New Era of Economic Depression”? – This phenomenon, despite similarities to US Great Depression, has never occurred before. One, is that it is occurring at a very large scale at the Global level; Two, the kind of problems it face is quite different in the sense that it was started by the Global banking failures; Three, the peculiarities of many issues and problem are new and was never seen before (examples are: the real estate bubble in Dubai, US50 billion fraud by Maddoff, the linkages of the financial markets globally, etc).
Many economists are quite certain that it will take at least a full year of 2009 and may be a good part of 2010 for the downturn to take place. After that, depending on how the economy is going to respond, we may have signs of recovery or prolonged recession. For now nobody can say anything for certain. The storm is quite severe such that it will affect so many people in so many places around the world, and nobody can ever predict the extent and the final eventuality of the problems. It will test governments resolve, as well as resiliency of the private sectors. It will humble down many people as well companies, and it might break some of them. At the end, maybe we will see at the end of it, a new regime of financial system and new businesses that will emerge as successor. In the finality of it, only God knows what it will be.
This is the test from His Almighty, to humble us human beings. We can never challenged God and believing that we don’t need Him. Once human beings think that he is magnanimous, behaving callously, and driven by only greed, then we invite calamity from God. The same thing has happened to many civilizations before us: the Pharaohs of Egypt – when they challenged God and Moses; The Romans, the Persians, and so many other examples.