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If the US economy crumbles, it will drag most countries with it - and the world still awaits the fatal sting of the crisis

4th April 08 - Michel Morkos, Dar Al Hayat

Since 1971, the world has witnessed 24 economic crises, at a rate of a crisis every one and a half year. They were all different in intensity and impact on global economy. Some were limited to their country of origin, others expanded within a multinational economic sector, such as banks or IT. A third category had more comprehensive global dimensions. Banks and financial services markets registered the highest number of crises between 1971 and 2008, in addition to crises related to them.

Financial crises dwarfed all other crises, as happened in some Asian countries, in Brazil and Russia in 1998, then in Turkey and Argentina in 2001, followed by Brazil in 2002. The subprime mortgage crisis and the losses incurred by the world stock markets between 2007 and 2008 portend the worst global economic crisis in eight decades. So far, the world seems unable to contain its effects and repercussions. Its ripples are reaching other countries and overtaking the US Administration's $154-billion economic stimulus plan and the Fed's decision to lower short-term benchmark interest rate and pump liquidity into banks, thus providing them with a money supply needed to satisfy demand and face financial tightness in the US, the EU and Japan.

The US is a major economic pole in the world. As it lies at the heart of this multi-facet and multi-interest economic system, it will drag with it most countries if it crumbles. Americans spend around $10 trillion a year on their own consumption, a fact that is enough to make the world realize the Superpower's need for a multi-national "factory" and for the production of mining and agriculture's many sources of raw material. China and India combined do not consume more than $2 trillion a year. They are even unable to compensate for the shrinking purchasing power of the Americans by an increase in domestic consumption. No matter how much money the US Administration will spend to increase the purchasing power of the US households, the latter has lost a strong financial support with the collapse of the real estate sector, economic recession and widespread unemployment. "The rise of oil prices above $100 per barrel is putting pressure on consumers, while unemployment rates are still on the rise. With the collapse of the real estate market, empty-pocketed Americans are no longer capable of using their houses as a source to fund their shopping obsession. The US economy is no longer facing a passing crisis; it is now in the preliminary stages of a long and painful period." (Foreign Policy)

The US is an important trading partner of most advanced, oil-producing or emerging countries. It imports 26% of the world's overall imported oil; it attracts around 41% of Asian exports, including Turkey and the Middle East, and around 19% of the EU's exports. 24% of Bangladesh's exports, 23% of Japan's, 22% of China's, 21% of India's and Vietnam's, 20% of Malaysia's and Cambodia's, 16% of Philippines', Hong Kong's and Thailand's, and around 15% of South Korea's reach the US markets. Almost every country in the world has an important trade relation with this superpower. The depreciating dollar is causing these countries to panic more and more. A bad indicator per se, the falling dollar makes their goods and products expensive against a reverse trade movement for the US goods and products.

According to economists, lowering interest rates now will not entail a magical economic recovery, as was the case in 2001 when the Federal Reserve lowered the interest rates from 6.5 to 1; the European Central Bank lowered them from 4 to 2, while the Bank of Japan slashed them to zero. Central Banks currently have a tight margin of maneuver amid the spiraling inflation rates. Any drop in the interest rate - coupled with a depreciating dollar - could ruin foreign investment and reduce US debts funding.

The US runs up a debt of more than $9 trillion, at a rate that grows 4 times faster than the production rate. In other words, for every indebted dollar, the US does not make more than 25 new cents of real wealth.

Against the obstacles to activate the country's economy, the US Administration is striving to put the Federal Reserve in a position that enables it to be the key body in charge of organizing market stability. The plan will expand the Fed's capabilities to monitor commercial banks and financial services institution, with an emphasis on the current commercial banks system. Under this new plan, the Federal Reserve will become the only governmental tool that keeps the market in check, maintains its stability and stays updated about its situation.

In parallel to such measures that reassure world markets, the developing countries - in fear of negative repercussions - aim at easing inflationary pressures. China, expecting this year a one-point decrease compared with its record growth rate of 10.7%, knows quite well that this decrease is due to the shrinking exports to the US. China knows quite well that it must control inflation rates to maintain a domestic consumption power that offsets the external losses and maintains a reasonable production cost competitive in destination markets. However, markets that are less linked to the trade exchange with the US are less likely to be shaken. Russia, which revalued its growth rate for this year, improved its expectations in spite of the inflation creeping into its markets.

In the approach between the US measures and the global economic situation lies a truth: The purchasing power in developing countries, as well as in oil-producing and oil-exporting countries, increased much compared with a decade ago. These countries are indeed capable of compensating a part of the fall in their exports of goods and services to the US. Yet, the problem remains among the non-oil producing countries - even if they were advanced. They all await the fatal sting of the crisis!

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