Causes Of The 2008 Global Economic Slowdown
by J. Steve White
The Slowing Of The Wheel
Most of us have noticed that there's a lot of noise in the news about the "Global Economic Slowdown." Many of us have experienced it firsthand, via climbing gasoline prices, increasing food prices, loss of residential property values, or even foreclosure. Here in the United States we've been a little bit insulated because of our reserves and the inertia of our economy; other countries that are more liquid, with smaller economies, are feeling the impact much more severely.
We all know about the economic slowdown, but the causes are not clearly defined by the news, or by our bosses, and certainly not by the banks that are foreclosing on our notes. In part that's because there's no one cause, and no simple explanation, but the primary culprits are also in the news. We hear about them every day, but most of the time the journalists and analysts don't point out the connection between three or four interrelated events.
The first contributor involved is the looming imminence of "Peak Oil." Even Dick Cheney has acknowledged that unless something significant changes, demand for oil is going to outstrip production - and continue to do so - for the foreseeable future. This will force oil into a steadily increasing price spiral as the Western World competes in a bidding war with the Emerging World. It's this limit in production vs. demand that's contributing to the escalation in the price of crude oil, and thus gasoline. Each incremental increase in the price of gasoline or diesel fuel decreases profits or increases prices of products like food, clothing, and commodities. Those steady increases mean that everyone has a little less disposable income, and spends more money for fewer goods.
The second important contributor is the so-called "sub-prime mortgage crisis," or the increasingly common "credit crisis." It might not be immediately obvious why a crisis in the American Housing market would contribute to a global economic slowdown. The NPR show, This American Life, did an entire episode on this bit of the puzzle, called The Giant Pool of Money. There are repositories of money that represent the savings accounts of entire nations, and they are looking for safe ways to invest that money - and it's a lot of money. For many years, a favorite place to put that money was in US securities like Treasury Bonds. But with the interest rate depressed to 1% by the Federal Reserve, these investors were looking for another place to put their money, and through a fateful sequence of events, they chose the American Mortgage market. The key was the idea of lumping up bundles of mortgages - thousands - and slicing them up, creating more bundles, and selling ownership of those bundles. When the mortgage brokers ran out of qualified borrowers, there was still money left looking for investment, so they began lowering the qualifications. By the end of the "housing bubble," they were handing out loans to literally anyone, the bigger the better. When these loans began to fail, it started the backlash - these large investors stopped buying mortgages, and the banks began foreclosing on homes, so more houses were on the market each day with less money chasing them, forcing the prices down; the collapse of the mortgage market put hundreds of brokerages out of business literally overnight. And here's the part that pushes this into the global arena - those big investors recoiled and became even more risk-averse than before the bubble, making it hard for anyone to get a loan, including even countries. Several economists and business leaders claim the American Housing bubble came very close to collapsing the global economic balance.
The next driver we have to consider is inflation. Not the single digit stuff the President talks about. The real inflation - the 'weak dollar.' The dollar has steadily lost ground against most other currencies, meaning that the US can't continue the previous expansion rate in imports. The cost of nearly everything international has started to climb because of the price of oil. The American Money Machine isn't pumping out the same value it has been for all the exporters in the emerging world.
But the most important contributor to anything that can be described as a 'global' economic slowdown is an intangible that's commonly referred to as 'investor confidence.' When people are worried about their money, they are hesitant to invest it, and this starts a slow, quiet strangulation of business as their stock prices drop and their credit ratings suffer, or they're unable to acquire startup funding and never exist. Companies start scaling back their staff, laying people off, and then consumers get nervous and cut back on their spending. This further reduces the revenue of companies, and slows the wheel of commerce even more. This spills over into areas that weren't part of the problem - everything from energy to telephones, from lawn mowers to pickup trucks - and the economy slows a little more.
This cycle will continue. It's a natural feature of markets to fluctuate. What's needed is another driver that will get investors excited about their money again, something that will start the wheel accelerating again. It could be anything. A breakthrough in solar panels that reduced their cost by an order of magnitude might fuel the next cycle. Maybe another tech boom, or another industry becoming the "Darling of Wall Street" and fueling another cycle of exuberance. Let's hope it's not quite as exuberant as it was this time around, but let us also hope it's not too long in coming. The Wheel is large, and possesses massive inertia, and the longer it stalls, the harder it will be to get it rolling again.
No comments:
Post a Comment