Перевод традиционного прогноза на 2009 год. Автор выражает искреннюю благодарность Ольге Мандерсон за его осуществление. Michael Khazin. Economic forecast for 2009
By tradition, our current forecast begins with the analyses of the previous forecast for the year 2008. Which, in turn, started off with the statement that the elite of the Ў®western projectЎЇ not only had fully realised the inevitability of the crisis, but has already started to talk about it openly. And although the Ў®officialЎЇ reasons behind the crisis at the time were narrowed down to the problems on the mortgage market, our forecast pinpointed at least one more, namely problems arising from credit default swaps (CDS).
These very derivatives became the key element in the unraveling of crisis in February and March of last year. The gravity of the mortgage bonds problem made it obvious to everyone that insurance companies were no longer in a position to fully cover the liabilities on the derivatives they own. Eliot Spitzer, the former NY state governor was among the first to raise the alarm on the issue. He demanded that all companies registered in the state of New York should increase their foundation capital within the period of two weeks to better secure their assets. Such frivolity cost him his position as the governor.
The reason behind this conditional response by a group of the American elite connected with the financial sector is plain obvious from economic standpoint. Large insurance companies, many of which are registered in the state of New York, have always enjoyed - and still do - the highest rating points from all large rating agencies. Of course given real financial results, these ratings and points should have been lowered a long time ago, something that was absolutely impossible to achieve in practice as this would entail downgrading of all bonds insured by these companies, including those unrelated to mortgages. More dangerous, perhaps, is the fact that many of these bonds would immediately be forbidden for purchase and holding by pensions funds, which would result in their massive sales and, consequently, significant reduction in value.
Downgraded ratings of insurance companies would almost inevitably provoke total collapse of all financial markets. Out of these two evils the financial elite has chosen what it considered Ў®the leastЎЇ; after that insisting upon alternative scenarios was downright suicidal ЁC which the former governor of the NY state of New York found out momentarily.
However, this silent conspiracy on public debate over sufficiency of insurance funds and the rules of defining their ratings, which as yet remained rather unclear, raised a totally different problem. In fact, in the spring of 2008 the world had to recognise that the independent system of financial markets assessment, that is the framework devoid of self-referential assessments of financial institutions per se, had stopped its existence! This is a major point and one of the principal outcomes of the last year, which we overlooked in the forecast.
As a result, both the US and the world as a whole have found themselves in the grip of a profound crisis of mutual dis-trust. The US was even more entangled in it since its credit multiplier is among the highest in the world. This mutual dis-trust brought about severe liquidity problems since securitization (i.e. receiving credit in exchange for securities) has traditionally been one of the main cash sources for all but some commercial entities.
By then, fattened by consecutive years of accelerated growth, the US financial markets had reached gigantic proportions. Given their size, especially compared to both commodities market and the American GDP, absence of some frame of reference for risk evaluation was tantamount to collapse of normal economic activity. Even under Ў®favourableЎЇ conditions of the 90ies and early 2000s, it was not uncommon to assess certain derivatives solely within parameters of mathematical models, because there was no real market for them. In the situation of unfolding crisis, free sales of many securities had stopped altogether, stifled by lack of demand and increased market volatility. The habitual response of the financial system to such challenges is accelerating imbalance and decline of asset value on mass scale. This process is usually accompanied by regular Ў®boom and bustЎЇ of various Ў®bubblesЎЇ on individual financial markets. Such environment makes any economic activity and/or survival extremely difficult.
In these conditions one may confidently say that as of spring 2008 the worldЎЇs financial system as we know it ceased to exist.
These events also gave rise to the onset of crisis in our country, we will discuss this in more detail in our Forecast for Russia.
The second principal point in past yearЎЇs forecast was deliberation about the relations between the US and Europe within the paradigm of Ў®Atlantic allianceЎЇ. These relations have indeed played a very important role in the year past. Especially because by the end of 2008 the US has finally succeeded in neutralising the EU endeavours to replace dollar with the euro in the world financial system. Back in the summer of 2008 when most countries, US included, were forced to reduce their interest rates to alleviate grave liquidity crisis, the ECB was doing just the opposite ЁC it was consistently raising its interest rates.
The sole motive behind such policy may have been a wish to offer the world an alternative currency ЁC first and foremost, as the currency of choice in world trade and transactions, but also, perhaps, as a reserve currency or even as a single measure of value.
In order to succeed with such ambitious undertaking the EU would have needed to accumulate sufficient resources to safely pull through the period between loss of revenues from US and other exports and inflow of income from Euro circulation as a currency of choice in international trade. Should this crisis be purely financial, this logic would be justified. But, as follows from our crisis theory developed over 10 years ago, this crisis is structural, hence one of its inherent characteristics is steep decline of gross demand, initiating in the US then spreading to the rest of the planet.
I dare suggest that financial authorities of the EU who religiously follow monetary principles of managing the economy, have failed to fully understand this point. Steep decline in European exports had serious depressive effects on the European economy, e.g., last year the European GDP in the third quarter had shrunk for the first time since the introduction of Euro. This forced the EU authorities to renegue on their ambitious plans. This Ў®surrenderЎЇ was formally confirmed in the autumn of 2008, when the ECB reduced interest rates just a few days prior to the G20 summit in Washington.
Another important consideration in the 2008 forecast was the position of China and its attempts to encourage domestic consumer spending which was supposed to partly compensate reduced exports to the US. This process played an important part in the world economy. It seems though that even the Chinese didnЎЇt expect such dramatic decline in the US domestic spending. Reduced exports delivered a serious blow to the Chinese economy.
Yet another significant point of the 2008 forecast were suggestions as to exactly how the US monetary authorities will re-distribute the risks inside the US banking system. Until recently, large Wall Street banks were deemed Ў®untouchableЎЇ. As we all remember, Paul OЎЇNeill was the only US Treasure Secretary in recent years who didnЎЇt serve as Goldman SachsЎЇ CEO prior to getting a position in the government. Paul OЎЇNeill was subsequently dismissed under the pretext of Ў®lack of consideration of the views of the financial eliteЎЇ (read: Wall Street banks). However, our 2008 forecast also mentioned that in the situation of accelerating crisis it was quite probable that the emphases in the US policy would be placed on saving small and medium size regional banks, who become absolutely crucial to maintaining stability of the US financial system.
This is exactly what happened last year. Big banks insolvencies, simultaneous with Ў®credit windowЎЇ opening for small and medium banks by the Federal Reserve and the collapse of the Wall street investment banks (also the shareholders of the Fed) became key events which unveiled utter destruction of the entire financial system created in Bretton Woods in 1944. A propos, in one of recent interviews the President-to-be Barack Obama calls for radical reassessment of the whole financial regulatory system. The US Fed, whose independence used to be a source of great pride for liberals in the 90s, is of course a prominent part of this system.
Other assumptions in our 2008 forecast were based on the premise that the acute stage of crisis wouldnЎЇt commence in 2008. The grounds for such assumption were two-fold. First, the ill-preparedness of the Bush administration which called for creation of a new, Ў®anti-crisis administrationЎЇ. More importantly, the Administration had enough resources at hand to delay the onset of the acute phase until 2009.
We also mentioned that the alternative scenario, i.e. eruption of crisis in 2008, was possible if either of two hypotheses proves true. Our first hypothesis was that the US financial authorities have absolutely no crisis framework whatsoever and the crisis unrolls uncontrollably. This means that potentially a smallest mistake, however unconscious, may lead to the collapse of the whole system. Our second hypothesis was that the US financial authorities have finally realised that the Ў®basic 1929 scenarioЎЇ used until recently as a fundamental reference point for scenario planning, is no longer adequate. That is the crisis will be a lot more complex due to its structural problems.
What follows from the above is that a much better alternative in terms of minimising negative impact on manufacturing and organisational infrastructure would be to allow the crisis to run its course as soon as preparations for it are over. This is also preferable from the political viewpoint, since rapid economic decline often acts as a springboard for subsequent growth. However, actual events have shown that the American elite does not understand the real reasons behind this crisis, nor does it have an adequate anti-crisis scenario. Why this is so is a different issue - it may be that the quality of expertise is not up to scratch or there may have been a disintegration of the elites which prevents them from finding common ground and developing possible solutions. Whatever the case, as of now an independent observer does not see any publicly acknowledged experts in the US or the rest of the western world who would be capable of stepping outside the monetary dogmas and understand the real scale of events.
Alas, early in election campaign we have seen the withdrawal of the most experienced anti-crisis manager, Rudolph Giuliani, and the debate continued between the veteran of the Ў®coldЎЇ war, elderly John McCain and the Ў®sweet democratic mixЎЇ of Barack Obama and Hilary Clinton. The nomination of Hilary Clinton was an obvious attempt at resuscitation of the Clinton administration, with its cleptocratic policies based on plundering seemingly Ў®inexhaustibleЎЇ resources of the pieces of the USSR. But Barack Obama appeared as a symbol of change, which allowed him to win the election.
The acute phase of crisis, however, started well before the election. The Pandora box of inflational break-in into consumer markets was opened in August 2007, reaching a staggering 15% inflation in industrial, and circa 10% inflation in consumer sector by September 2008. But even in these difficult circumstances and in the deepening crisis of trust, given the attempts of the Federal Reserve and the US Treasury to pump as much money as possible to mitigate liquidity crisis, growing inflation could have been tolerated for some time. But as is often the case, an unfortunate mishap occurred.
The US Treasury Secretary Henry Paulson wanted to support the republican candidate John McCain and used two instruments to achieve this. Firstly, he tried to reduce the world oil price which was steadily growing through the summer. As we know, oil price is being established on the financial market of oil futures which is largely controlled by the Goldman Sachs investment bank. (Paulson used to be its CEO). Secondly, he needed to raise US dollar exchange rate in relation to other currencies. To implement this, he went on a world tour to various countries including Russia and tried to convince foreign Central Banks to purchase US dollars. Apparently, PaulsonЎЇs arguments had some weight and before long Central Banks began to purchase large amounts of US dollars which pushed the exchange rate up. Theoretically, such combinations ought to have resulted in improved poll rating of Republicans among voters, since it reduced petrol prices and imported goods prices, primarily Chinese.
The practical effect of these machinations was quite different from the intended. Withdrawal of large sums of dollars from markets by Central Banks and violent fluctuation in price for previously growing resource (i.e. oil futures) frightened the CEOs of big investment funds who decided to freeze large amounts of cash dollars until Ў®better timesЎЇ. This caused a serious dollar liquidity crisis whose main victims were large banks and households. The latter, given inflational pressures, were forced to rapidly cut their spending. These cuts could no longer be compensated for by new credit, especially due to new stringent requirements of debt securitization. Consequently, the US crisis began to prominently demonstrate its deflational side, characterised by drastic reduction in demand followed by a slowdown in industrial output and decline in manufacturing prices.
As it is, almost all research into factors which caused the onset of the Great Depression was made within the boundaries of monetary paradigm. A common consensus seems to be that the crisis was triggered by the Federal Reserve error, who for no good reason suddenly toughened their monetary policy. In todayЎЇs situation, the Federal Reserve is formally loosening monetary policy - the interest rate is near zero - but the acute liquidity crisis administered by Paulson and intensified by the ongoing crisis of trust, has produced a consolidated effect of toughened monetary measures (by sharply reduced money supply) akin to that of the Great Depression. The onset of the ongoing crisis is much similar to what happened then.
In fact, today we can confidently say that the acute phase of crisis which entails a 1929-1933 type catastrophic decline in gross spending, has already passed the point of no return. There is one significant difference though: while the former crisis started in the spring of 1930 reaching the lowest point in second half of 1932, the latter will last longer. Firstly, the structural problems such as excessive demand accumulated for nearly 30 years in manufacturing and infrastructural enterprises, will significantly distort and delay its normal course. Secondly, the US authorities are guided by political priorities and are trying to delay it for as long as possible.
Now we can finally turn to 2009 forecast. The inherent trends of the acute crisis phase which we analysed in the previous forecast are still valid, however itЎЇs worthwhile to stress them once again. They by and large result from the problem which became obvious in the spring of 2008, namely the collapse of the evaluation system of financial risks and insurance (hedging) of financial assets. From macroeconomic point of view this essentially means that the system of re-financing corporate losses and deferred liabilities is bankrupt. Therefore, concealing losses in balance sheets by replacing them with more Ў®distant orderЎЇ (as in Ў®first orderЎЇ, Ў®second orderЎЇ and so on) derivatives will become increasingly difficult, if not outright impossible.
In this respect the year 2009 will become the year of recognition of corporate losses. This process has already started in the year 2008, but its scale and velocity will accelerate in 2009. The thing is that for decades almost the entire world economy has rested on emission-based stimulation of spending. When this factor is removed and gross demand starts to shrink, most of the world economy may become unprofitable. Certain parallels can be drawn with the early 90ies in Russia when the situation called for radical rethinking of governing and planning principles of almost all enterprises.
Because the main problem of modern corporations is accumulated debt, devaluation of debt through high and rapid inflation might have been considered as a possible solution. However, in present situation this is impossible as high inflation will simultaneously devaluate gross demand and spending. Such scenario will undoubtedly shake the foundations of not only the entire manufacturing and service infrastructure, but also the intermediary segment which is a lot larger in size and employment.
In recent time this problem has been addressed by the state which absorbed practically all losses, funding it both from either the budget purse or through emission. This process is likely to continue as there is no real alternative on the table. Therefore, the Ў®devaluation paradeЎЇ of national currencies will continue not only for the imperative to support the demand for locally manufactured products, but also for the need to fund domestic manufacturersЎЇ losses. Evidently, such scenario cannot continue indefinitely in any country, and the smaller the country and the size of its economy, the sooner it will have to declare sovereign default on its debts. In 2009 we will witness isolated defaults at first followed by numerous sovereign defaults in various geographic locations.
The US, however, embraces a different approach to handling insolvencies, the key priority of which is to sustain an enterprise as opposed to the need to secure creditorsЎЇ income. So theoretically the state may not necessarily close down enterprises through Ў®hardЎЇ bankruptcy but write it off instead via accelerated bankruptcy procedures. The problem is that this policy will be ineffective against the background of declining gross demand. Additionally, in the times of mass insolvencies in many industries it may trigger the collapse of the whole business crediting system. As recent as last year the US financial authorities actively supported business and corporate credit. The question is what is there to be done when the amount of acknowledged losses skyrockets.
Most definitely, attempts will be made to manage the process of mass bankruptcies, but they will not deliver desired results. Remember the USSR in the 80ies when its planning system collapsed despite its natural integration into economic life and congruous support by the whole range of specialised institutions. It failed primarily because of lack of strategic goals and vision. What are the chances then of the US and other western countries to succeed? Their economic planning systems are mostly corporate-led, financial indicators-driven and are oblivious to such trivialities as intersectoral balance (which by the way is statistically calculated but is ignored as something alien to the monetary mindset). Not to mention that all these tools are usable and useful only if there is some understanding of the medium-term objectives - at the very least.
What objectives can the US possibly have today? What results should it strive to achieve? Does anyone know which of existing technologies can survive and be sustainable when gross demand shrinks by 50%, and which are better off being closed down immediately because the maximum decline they can tolerate is 20%? These are the questions that are not even in the public discussion pipeline yet, not to mention that global leaders should have acted on these problems long ago!
Consequently, we may foresee two damage containment strategies from governments in 2009. First is sanation of enterprises through speedy bankruptcy procedures which may seriously undermine the financial stability of the state. Second is balancing on the edge of mass bankruptcies by providing targeted financial assistance to a limited number of enterprises in core industries, which should ease budget and national currency pressures.
Both strategies have advantages and disadvantages. The first allows to kick start the economy and will automatically support domestic manufacturers and exports through devaluated domestic currency. In addition, it will make the whole economic activity a lot more transparent thus stamping on corruption. The disadvantage of this strategy is high probability of sovereign default and fast deterioration of living standards of the population which may lead to social tension.
The second strategy allows to win time to offset potential social eruptions and support a relatively strong domestic currency. This will damage exports but will attract free capital from other markets which should help fill economic gaps in the short run. Additionally, Ў®expensiveЎЇ national currency will facilitate financial expansion of domestic companies into neighbouring markets. The disadvantage of this strategy is that it damages high tech industries, destroys institutional structure of the economy and may promote power corruption, that is, will lead to weakening of the state in the long run.
Evidently, neither of these strategies can be implemented in large economies in its Ў®pureЎЇ form. However, one can assume how emphasis will be made within various economic systems. First scenario which a propos is more suitable to the Anglo-Saxon economic model is not what Anglo-Saxon governments want at this stage. Barack Obama cannot keep the promise of change on which he got elected, because his Administration, now almost totally dominated by Clinton-style corruptees, will most likely try to delay the finale for as long as possible, as they engage in distributing budgetary funds and controlling world finances. Besides, such tactics allows to maintain a decent standard of living and potentially prevent any serious social eruptions, although I hear from some sources that the governments are making preparations for such events. Of course these measures will work only until a certain point in time, which I dare suggest will come after 2009, although some experts say that problems will exacerbate as early as the autumn 2009.
It follows therefore, that in 2009 the US government will maintain the strong dollar, develop and implement targeted financial aid programs to enterprises and industries, increase budget deficit and encourage spending through extensive social programmes and state-funded credit programmes. These actions will be accompanied by convincing rhetoric on the necessity to tighten belts Ў®temporarilyЎЇ, and the promise that economic growth will start in the last quarter of 2009 or the first quarter of 2010 Ў®at the latestЎЇ. The US Foreign policy will be largely directed at preserving the status quo insofar as free circulation of dollar is concerned in as many countries as possible.
The situation in Europe is more complex. First of, there are two different contexts: one is of the European Union as a whole and another is of the group of countries which form it. Then there is the euro zone, managed independently. Last but not least, the EU is made up of exporting countries and importing countries. In theory, export-oriented countries, such as Germany, need the weak Euro. But what may happen in reality is that Germany may support the strong Euro policy with the view of strengthening GermanyЎЇs position within the EU, because strong Euro will open doors to German banks and corporations in other Ў®weakerЎЇ EU countries whose ability to withstand a major crisis is yet unclear. In this scenario Germany will benefit from supporting at least some of the German companies to ensure their Ў®victorious marchЎЇ on the continent. So there are reasons to believe that the German government will use budget funds to bailout some of the companies and banks to further their expansion in Europe. At the same time the German position (read: EU and ECB position) vis-Ё¤-vis Ў®foreignЎЇ companies, i.e. of origin other than German and maybe French, will be extremely tough, given the hidden agenda of gaining control over them.
In 2009 the governments will play an increasingly important part in the world economy as opposed to multinational corporations and banks who used to dominate the world scene in previous decades.
As far as South East Asia is concerned, the single most influential factor here is the relations between Japan, China and South Korea. Provided these countries manage to come to a single currency arrangement, the US dollar will instantaneously lose its dominating position. Swift disintegration of the old and formation of the new world currency zones will follow. In this scenario it is quite probable that the US will declare dollar default and switch to a different currency (Ў®AmeroЎЇ), although perhaps the timing for such transformation has been long gone. If no agreement is reached in 2009 between Japan, China and South Korea, these countries will be forced to put off momentous decisions until later and will play a secondary role in the unraveling crisis.
In the end, I would like to outline some macroeconomic trends which I consider most likely to come to pass. The US annual GDP rate will most probably decline by 10-12%. Gross demand / spending will decline by similar percentage. This decline will not necessarily be linear, e.g. in the second quarter of 2009 we may even see small economic growth. This will happen if the new Administration is serious about taking measures to encourage spending. This may be accompanied by a temporarily weakened dollar, but sure enough we can expect a new Ў®crisis attackЎЇ in the autumn. It is also quite probable that by that time the US government will actively seek to provoke local conflicts in many parts of the world in order to shift public attention from problems at home.
Michael Khazin, January 1 - 11 January 2009
(written and published on 11 January 2009)