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The 2020 perspective: New equilibrium or breaking point?

NewsThe 2020 perspective: New equilibrium or breaking point?

The global economy looks like a Titanic steaming at full speed towards some looming iceberg.

In the aftermath of US President Donald Trump’s visit to India, it is time to reflect, beyond the atmospherics of the bilateral US-India relations, on the larger canvas of a world beset by a number of acute and intensifying crises of which in a way the American head of state may be seen as an image and a bellwether.
We witness not only a decoupling or at least a forceful attempt at decoupling the United States from China, but also a parting of ways between the American and European states and even a relative distancing between the US and long-standing allies and subordinates in East Asia and the Persian/Arab Gulf: Japan, South Korea, the Philippines, Malaysia on one side and Saudi Arabia, Qatar, Turkey and Pakistan on the other. This estrangement is partly a consequence of the geopolitical and economic ongoing shift and partly an effect of the Trump’s administration aggressive “me-first” transactional unilateralism apparent in the open weaponisation of all American assets, such as the US dollar, media power and legislative instruments in order to secure its interests and obtain gains from other nations.
The US President’s habitual crowing about the stunning prosperity of the American economy under his watch must be seen as part of a re-election strategy and not a factual account, as was obvious in his recent speech at Davos, in which he ignored almost all global issues evoked in that forum to concentrate on his allegedly stellar achievements. Economic numbers from bodies such as the IMF, the Bank for International Settlements and the Financial Stability Board paint a darker picture. Since the global crisis of 2008 the world’s aggregate debt has risen from 177 to 260 trillion USD, with 60% of the total being incurred by the US and China.
Excluding the banking and financial sector, global debt now amounts to 250% of the world’s GDP (it was only 200% in 2008). Since 2007 the public debt has more than doubled, but in the US which now bears 35% of the total, it has trebled and continues to rise rapidly despite Trump’s claims that he is taking care of it. The US trade deficit alone exceeds a trillion a year. Nowadays, 18 out of the 24 major economies primarily involved in the last great recession are diagnosed to be deteriorating steadily from their pre-crisis levels.
Some economists such as the Italian EURISPES expert Dr Paolo Raimondi, in a recent paper, point out that the record levels of corporate debt, which amounts to more than 90% of global GDP, is perhaps the main threat to the world’s financial stability. It has risen by $27 trillion since 2009 and the US Federal Reserve’s near zero interest rate policy has led developing countries to become perilously over-indebted. In major “developed” economies it is estimated that as much as $19 trillions of that debt would be defaulted on if and when the next crisis happens, which would entail the bankruptcy of about 20% of all US big corporations as a result of an interest rate rise. Through the same process the volume of corporate bonds in circulation has increased by 75% since 2008.
Another dark cloud lies in the $400 trillion of financial assets afloat in the global markets, representing five times the world’s GDP. Out of that, $182 trillion are managed by non-banking institutions which are qualified by international supervisory agencies as shadow banking players. Furthermore a considerable and growing part of the shadow banking sector (more than $50 trillion, out of which $5 trillion from the shadowy Cayman Islands) is invested in “narrow measure” operations which are high risk, highly leveraged ones. In the US alone, shadow banking has risen from $28 trillion in 2010 to $45 trillion ten years later and much of it (almost $15 trillion) is in the hands of three huge so-called exchange trade funds, the largest of which is Black Rock.
If you add to the previously enumerated factors, the fact that the “Over the Counter” securities exceed $650 trillion in notional value (of which the grievously ailing Deutsche Bank alone holds no less than $44 trillion) you can conclude that there are major reasons to worry about a global economy where stock markets are the most overvalued in history, at least in the US.
The US administration rejoices about what the President regards as his proudest personal achievement, but the astronomical bubble in money-flooded Wall Street has scarcely benefited most Americans, whereas the minuscule interest rates have devastated savings and pension accounts, forcing investment managers to look for returns in more hazardous sectors such as corporate bonds which are now, according to some economists, as toxic as the real estate loan debt proved to be in 2008. Indeed about $17 trillion in public and private bonds effectively yield negative returns and on that scale the situation is unsustainable.
The global economy looks like a Titanic steaming at full speed towards some looming iceberg. The US dollar, pillar of the system, looks unassailable so far, but in the last few years, several countries, mainly Russia, China, Japan, Arab Gulf countries and EU member states have steadily reduced the share of their reserves in US T-bonds and bills, increased their holdings in gold and canvassed for alternative arrangements such as a basket of currency regime in spite of dogged American opposition.
Predictably, Washington has trained its guns on the most dangerous challengers, China, Russia and Iran (in view of the latter’s energy reserves and geographic location) by using many of the weapons available in its panoply: its judicial and financial systems. international regulatory mechanisms, military intimidation and ‘black ops’, media campaigns and the currency itself which the Federal Reserve and the Treasury are using to hamper and block economic transactions and operations involving the aforesaid countries. The United States has declared a resolve to stop by all means at its disposal China’s rise to global preponderance and put mounting pressure on the weak points of the People’s Republic polity: Xinjiang, Hong Kong, Taiwan, the regional and global trading network through taxes and denial of components, the Belt and Road project, high technology companies and even the current ‘Corona virus’ epidemic which has been built up into an avatar of the age old ‘yellow peril’ scare by mainstream media.
Against Russia and Iran, an array of sanctions, military threats, non-conventional covert attacks and charges based on the human rights doctrine is in full display.
However, it may be late for the US, under Trump or anyone else to put those genies back in their bottles. Most technology experts tend to regard China’s breakthroughs in certain cutting-edge areas of R&D as irreversible. The American and Chinese economies are so deeply interconnected and interdependent that a real decoupling will be very painful and destructive to both nations. At best, what can be achieved is a more balanced trade relation, given that the US now exports more raw materials and imports mainly finished goods from the Far Eastern giant, a relationship characteristic of neo-colonial equations not in favour of the “last superpower”.
The US shale oil and gas boom was seen as a miracle cure for the American trade deficit with Beijing but, as F. William Engdahl details in an article published in New Eastern Outlook on 11 February 2020, the decline in global (and especially Chinese) growth and the increasing role of renewable and alternative energy sources has hit the fossil fuel sector hard. About 25% of the US drilling rigs have closed since last year and more and more producers are going broke, along with many road and rail transport companies. Farm bankruptcies in 2019 were 25% higher than in the previous year despite the US President’s promise to bring lasting relief to the agricultural sector.
The fall in all those critical indicators began at the end of 2018 and belies Trump’s boisterous claims of unprecedented economic success.
The US holds some trump cards (no pun intended) in the guise of technological breakthroughs, achieved mostly under the aegis of the secretive and mighty military industrial complex and of the “new economy” giants (the so-called GAFA and others) which could be harnessed to restore the nation’s dominance in certain critical areas but the 40-year old transition into a comprador-financial economy will be very difficult to reverse and the crushing budgetary burden of the “defence and security” apparatus, designed to sustain a global military empire is too deep seated to be lightened any time soon.
It is not easy to foresee which of the two, the US or China will emerge on top out of the current confrontation and many other countries will suffer the consequences of the intercontinental rivalry, but India is the major nation perhaps best placed to rise as a winner out of the turmoil as it has placed its eggs in several baskets by staying mostly out of the fray. Of course there is still a distance between the cup and the lips.

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