As the bad news about the global economy continues, it looks increasingly more like 2008 revisited.
The world is edging dangerously toward another financial crisis. None of the problems that caused the last crisis have been fixed, economists say. The world financial system is more vulnerable today than it has ever been since the end of World War II. If the world’s economy does tail off into another crisis as some analysts predict, Botswana’s economy could be on rocky ground, as in the aftermath of 2008.
Flash back to December 2008. The swirling global crisis had begun to magnify, tearing into Botswana’s mineral exports, in particular diamonds. Export sales of the gems had started to dip alarmingly a month earlier. This had a knock-on effect on Botswana’s output as the crisis hit the mineral sector, which accounts for the bulk of export earnings.
Crucially, the credit crunch had forced the postponement of Botswana’s capital expenditure programmes, worsening the decline in demand, hitting employment. As the crisis bit, the late Baledzi Gaolathe, then Minister of Finance, gave parliament the bleak news. “The lack of available credit and long-term investment funds has slowed down growth in consumer spending, reduced employment and incomes, as well as causing capital losses on personal savings and other assets,” he said.
The drop in diamond sales was accompanied by a sharp decline in commodity prices for other minerals like copper, nickel and gold in the previous three months.
“As a result of these developments, there will be a slowdown in economic growth and decline in government revenues, in particular mineral revenue which forms the bulk of government’s total revenues, from the end of 2008/09 until 2010/11,” Gaolathe said.
In the event, real GDP contracted by 6 percent following a revised growth rate of 3.1 percent in 2008. Mining, as the sector most directly affected, was in fact the conduit through which the global recession transfered to Botswana. By March 2009, employment in mining and quarrying had declined by 9.3 percent. In keeping with the nature of economic crises, the severest impact was on the welfare of poor and vulnerable people in Botswana as the effects fanned out across the economy.
Three years on, the news from the international financial markets is again depressing. As the signs grow that the financial world is about to experience a nervous breakdown, massive amounts of money are being pulled out of the stock market. The European debt crisis continues to grow even worse, and investors are pulling a huge amount of money out of stocks. Investors have pulled more money from United States equity funds since the end of April than in the five months after the collapse of Lehman Brothers Holdings Inc., adding to the $2.1 trillion rout in American stocks. About $75 billion was withdrawn from funds that focus on shares during the past four months, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group, and EPFR Global, a research firm in Cambridge, Massachusetts. Outflows totaled $72.8 billion from October 2008 through February 2009, following Lehman’s bankruptcy, the data show.
Meanwhile, Siemens has pulled more than half a million euros out of two major French banks and has moved that money to the European Central Bank. These are just some of the signs of impending mayhem, say analysts. Do these financial players who are making weird financial moves know something or are they just getting nervous? This question has done the rounds as analysts try to get a handle on the problems that have beset Europe’s and America’s economies.
Alarmingly, some even forecast that the world is on the verge of a “Black October”.
Recalling what happened in 1929, 1987 and 2008, the conclusion is that major crises normally happen in spring ÔÇô round about now. That is why analysts are pointing to all sorts of signs that the financial world is about to hit the big red panic button. Wave after wave of bad economic news has come out of the United States and Europe is embroiled in an absolutely unprecedented debt crisis. At this point there is a very real possibility that the euro may not even survive.
So what is causing all of this? Analysts say over the last couple of decades a gigantic debt bubble has fueled a tremendous amount of “fake prosperity” in the western world. But for a debt bubble to keep going, the total amount of debt has to keep expanding at an ever increasing pace.
Unfortunately for the global economy, sources of credit are starting to dry up. That is why terms like “credit crisis” and “credit crunch” are being bandied about so much these days.
Lending conditions have been severely tightened, with financial institutions reluctant to lend money to each other or to anyone else. This “credit crunch” is going to slow down the economy. Recalling what happened back in 2008, analysts say when easy credit stops flowing, the dominoes can start falling very quickly.
Sadly, this is a cycle that can feed into itself.
When credit is tight, the economy slows down and more businesses fail. That causes financial institutions to want to tighten up things even more in order to avoid the “bad credit risks”. Less economic activity means less tax revenue for governments. Less tax revenue means larger budget deficits and increased borrowing by governments. But when government debt gets really high that can cause huge economic problems such as in Greece.
Meantime, American billionaire investor George Soros and prominent economist Nouriel Roubini say the US is already in double dip recession. A few weeks ago, Roubini put a 60 percent probability of a US double dip in 2012. “The US is already in a recession although it will not admit,” Roubini told Business Day. He says the rest of the world would not be insulated from the effects of another global meltdown. Regarding Greece and Euro Zone, Roubini thinks Greece would do best to default on its debt and leave the euro zone, and that Europe needs to step up austerity measures.
Eerily, George Soros also said almost exactly the same in a CNBC interview. He Soros believes the US is already in a double dip recession, and that “a number of smaller euro zone nations could default and leave the single currency area.” Soros also sees Europe could be “more dangerous” to the global financial system than the Lehman Brothers in 2008, due to “Euro zone policymakers repeatedly following the wrong policy shifts.”
Some economists believe Europe now holds the key as there’s a distinct risk that the US could be pushed over the edge by the Euro Zone debt crisis due to the interlinkage of the global financial system. They say the current euro zone debt crisis is quite similar to the debt ceiling fiasco in the US a while back. The bloc has an inherent structural weakness ÔÇô a central currency without a central political governing body.
If the worst happens and economic crisis recurs, small economies like Botswana, only just recovering from the effects of the nightmare of 2008, will take a hit. However, other economists say there will be a resolution to the problems in Europe, be there a Greek default and departure from the currency union, or a super-roid-charged bailout package. The stakes are too high for a Euro collapse. The US economy, could be facing a tough patch in the next two years or so, but the odds are still in favor that backed by its tremendous natural and human resources, the country could pull through and resume growth.
