The Financial Crisis: The World At War

No one could have imagined that Japan, the second largest economy in the world, would contract at a rate of nearly 13% on an annualized basis or that Korea’s economic output could drop 20%. In the US, the GDP is shrinking at a rate of 6% now, but there is nothing in the economic or employment news that keeps us from believing that America will avoid a double-digit drop in GDP If the US skids at that rate, the other large economies in the world, all of which depend on the American consumer to some great degree, will have the hulls of their exports breached below the water line.

One of the reasons that the drop in economic activity has accelerated is that there is no mechanism in place to cope with a failure of this magnitude. The world in which The Great Depression played itself out predated the globalization of credit and economic interdependence. Even the worst of the large post-war recessions rarely lasted more than a year. Even at their most inventive, government policy systems are incapable of operating in an environment where the pace of negative change quickens by the week.

The largest issue between now and whenever the cataclysm ends is whether the major economic powers develop more intimate relationships or are driven to isolation in order to defend their economies through protectionism. This development would reach an epic level if nations such as China began to hold capital in their country and slow their purchase of US debt. That would begin a lethal exchange between the greatest exporting and importing nations of the world, with America blocking the inflow of Chinese goods and China flailing back by throttling its appetite for Treasuries. Without the ability to borrow money at reasonable rates any hope of continuing to stimulate the US economy would flag and China’s manufacturing machine would lose its largest market.

The most valuable treasure that will be lost is the fundamental economic transition from one generation to the next. In developed nations, the old will no longer have the means to retire, the middle aged will face joblessness and an obliteration of the standard of living to which they believed they were entitled since they were very young, and the young may have to fight for a small number of jobs most of which pay little more than a fraction of what their parents made in 2004, 2005, and 2006.

In the underdeveloped world the misery’s fallout will be incomprehensible. Whatever social services and generosity that has come from the more wealthy nations will dry up along with the financial capacity that has created a history for large scale compassion. A hoarding of natural resources, especially those that are agriculturally based, would cause the cost of humanitarian aid to become unaffordable, especially when there is so little capital for eleemosynary efforts because of ruined economies. In places like East Africa, where millions of people look into the face of starvation every year, the misery could be apocalyptic.
It is almost treasonous to paint such a dark picture of the failure of the American financial system which has carried the nation through sixty years of prosperity. That system is now fractured mid-axle. It may take a lifetime or more for historians to sort out its causes, and the federal government feels the need to sift through that sand in the name of justice.

When blame can be defined it will be too late to bring back the world we knew.

Douglas A. McIntyre