With the 2008 “Credit Crisis” bursting the global housing bubble; the United States led and the world followed with the massive amounts of government spending and money-printing stimulus promoted by “Keynesian” economists. To stem the crashes in prices on stock and commodity exchanges and a run on European banks, the U.S. Federal Reserve enlisted the world’s central banks in a coordinated drenching of the earth in vast amounts of freshly printed cash.
But as the crisis waned and the “Great Recession” began, governments and their central banks continued to pour wave after wave of Keynesian deficit spending and money printing. With economic activity about to slow and austerity shrinking excess government spending, the citizens of the world are about to be rewarded for their trust in government with a steep recession coupled with high levels of inflation. Economists refer to this witch’s brew of escalating misery as stagflation.
The U.S. Federal Reserve, European Central Bank, Bank of Japan, and other central banks around the world expanded money supplies by purchasing $2.5 trillion of sovereign debt and distressed banking assets to stem the risk of a deflationary spiral; from this, resultant lower wages and higher unemployment led to a self-reinforcing decline in global consumption.
The Congressional election sweep of 2008 launched a new political consensus that catapulted 2009 to 2011 at the largest deficit spending percentage increase since the Great Depression. What started out as a Keynesian an emergency economic rescue soon morphed into a permanent higher level of government spending and central bank money printing. But in a contradiction to the theory of Keynesian economics; this bold government intervention failed to generate economic growth and instead propelled global food and basic commodity inflation.
Bazaar levels of indebtedness and unwillingness to curtail spending has recently sparked a new European sovereign debt and bank insolvency crisis focusing on Portugal, Italy, Greece, and Spain. Germany, the only country to not implement Keynesian stimulus, is being asked as lender-of last-resort to bail out these countries, who are often grouped together with the acronym PIGS. The Teutonic tough love demanded by the Germans to rescue Greece is slashing public jobs equivalent to 20% of national employment and a decade-long economic squeeze on the consumer and corporate sectors that will shrivel the nation’s standard-of-living by 1/3rd.
U.S. counter-Keynesian revolutionaries were swept into political power in January of 2011 on a mandate to banish deficit spending. The recent debt-ceiling compromise will slash $71 billion of spending this fiscal year. Add in the expiration of incentives, such as the 100% depreciation of capital purchases in 2011, plus the impact of continued fiscal tightening, and America’s GDP will wither next year by 2%, or $300 billion. Getting government out of the economy will lead to big private sector growth in the future, but the transitional slowdown and spending austerity will lead to a nasty recession in the first half of 2012.
China, who benefited enormously by pegging their exchange rate to the U.S. dollar, has continued to stimulate their export economy by subsidizing state-owned-enterprises’ commodity purchases and directing banks to loan at 2% borrowing costs. The result has been strong employment and flooding the world with products sold under their production cost. The dark side is the 15% inflation for consumer food and rent currently ravaging workers plus increasingly insolvent banks. As anger builds, China will be forced to reduce the subsidies and allow export prices to rise. To the world, this will generate a burst of inflation.
Governments have had great fun spending lots of borrowed money on their friends and allies. When recession began to cure over-leveraged consumers from speculating in houses, government used the pain of households de-leveraging as a green light to maximize spending. After three years of record expenditures, governments have become sub-prime and are now being forced to de-leverage. But the tsunami of government money is still sloshing around in the world economies and will continue to drive inflation of basic commodity prices higher.
This blend of government austerity with expiring tax incentives will soon pull the U.S. economy down, and the world’s economy will follow. With our pre-recession Misery Index of 3.9% inflation and 9% unemployment already at the highest reading since Jimmy Carter in the 1970s, stirring in a severe recession will drive unemployment higher and make this witch’s brew boil.
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