February 26th, 2009

I figure it would be a good thing to have a look at the world economy to put the economic worries in some perspective and perhaps to try and see where and when the economic downturn might end. First off, the US is about 30% of the world economy, the EU is also about 30%; this makes these two regions of the world very important, and if you throw Japan in there, you're almost up to 75% of world GDP. The world economy of today is a very integrated one, thanks to globalism. This means that if 30% or 60% of the world economy is contracting, then so must invevitably the rest - obviously the ones with big exports will be hit harder.

I guess just looking at these charts says a lot, and the situation for the EU is about the same as for the US, only differences are that consumer debt levels vary greatly in the EU and generally are lower than in the US; corporate debt (non-financial) is about $11 trillion in the EU whereas the US only has about half of that. The financial debt levels? Well, nobody seems to know what those might be (there are estimates out there, but they look very unreliable), perhaps the derivatives market is some kind of guide. The situation today is much worse than the one the world faced in 1929-30, debt levels and imbalances of trade are much higher. (note: derviatives market has grown to almost 700 trillion, chart is alittle out-dated)

What we've had is a credit-driven expansion of the world economy and now that people don't want to or are unable to keep expanding the aggregate debt, then government steps in to keep things "growing". When an economy is expanded by credit it simply means that you buy something before you're able to buy it, which means that you will not be able to buy the same thing later. So, when government spends your money by borrowing (which is what they have to do) they are making sure that whatever you might have wanted to buy in the future will instead be purchased in an economy that is over-priced. This over-pricing came from the fake demand created by credit, and now the markets are saying that prices need to go down to reasonable levels so that business can carry on as normal. Government prolongs the agony of a bloated economy and is rewarding incompetitive businesses by keeping them alive, when in fact, the only good thing to come from recessions are that bad companies go into bankruptcy and the stronger ones survive to make the recuperation easier.

From this very sad background of government intervention the economic crisis might last for many years, when it might only have lasted for a year or two if things would have run their natural course. If the natural crash would have been allowed, you could see business resumed pretty much as usual (at a lower level) and young people just entering the economy could do so with very bright prospects, with very low prices and more job opportunities than under intervention, while those still in debt would be working to pay it off, and maybe in a couple of years they could have paid off the debt to a reasonable level where their personal economy can grow again. Now we're going deeper into debt, wasting money that needs to be saved for the recovery. If the past is any guide then I'd say that we might have to endure a depression-type economic environment for the coming ten years. What might make it different is the possibility of hyper-inflation, which would simply erode away the debt and possibly give us the natural crash in a kind of detour-way (that is, with lots of more suffering). Governments look pretty desperate and they might get carried away with the spending, so I'm slightly favouring this out-come... The world economy is in trouble!