Tuesday, October 25, 2011

Burning Issues: Economy / Stock Market / Poverty

See also Club of Amsterdam Journal, November 2011, Issue 143, Special Edition

Hardy F. Schloer, President and Managing Director, Schloer Consulting Group

Hardy is a strong team builder, entrepreneur, accomplished scientist and visionary theoretical thinker with extensive people and public relation skills.

Club of Amsterdam: Does the 2008-2009 crisis, by its consequences, need to be considered as the main economic challenge we now face; or was this crisis a painful highlight of the economic and financial defaults of our globalized economy?

Hardy F. Schloer
: The short answer is: Both. Nevertheless, a longer and more careful view at this subject, looking perhaps into the next 2 decades, reveals a much more complex picture. The current global economic and geopolitical situation, as it will develop between 2010 and 2030, expectations are not comforting, including the prognosis of conflict and deeper economic adversity. Nevertheless, an informed understanding of these current and future trends could contribute to innovative solutions to manage these events, at least on a case-to-case basis.

The world continues in a fast transforming and unstable global framework of complex problems and multi-dimensional influences. A cluster of different types of crisis has now matured into a "perfect storm" that will transform the entire planet very extensively. These crises are systemic problems, and are therefore very difficult to manage.

The crisis of 2008-2009 was not the real and pivotal global crisis, though it felt so to many; it was simply a mild and early marker of what is yet to come on a much larger, more sustained scale and of what will have greater consequence. Over the past decades, Western societies have committed serious errors in their economic planning and fiscal policies. The results are dependency on accelerated deficit spending and an enormous accumulation of external debt.

The conflicts of the future will be conflicts of social unrest. We are seeing this not just across the Arab world, in Syria, Libya, Egypt, but also across England and Israel during August 2011. We believe that this wave of social unrest will continue to spread throughout the world in the years to come. This social unrest comes exactly as I predicted in 2010 and even before. The world is not just economically but moreover socially in a state of redefinition that will bring in a period of extensive chaos and be accompanied by global anxiety.

Trends in the United States

The United States government is bankrupt; its finances are beyond the point of no return. The reoccurring debate over the debt ceiling only serves to obscure this painful fact. The downgrade earlier in 2011 of American debt by Standard & Poor's to AA+ is the first sign of this fact seeping into general consciousness, the facts about an intractable budgetary predicament. The only plausible future scenario is default by the U.S. government, or significant devaluation of the dollar - which is basically the same thing in monetary terms; this will happen regardless of further modifications to the debt ceiling.

In the midst of the debt crisis, the U.S. will undergo the greatest strain to its cohesion as a single country since the civil war, more then 130 years ago. It will not only lose its global status and leadership in governance and lifestyle, it will internationally become more and more economically and politically ignored. Social tensions will again test the breaking point of the American Union. Although this may be speculative from today's perspective, the trends are clear and the likely outcomes of these social tensions have a number of possible consequences that include international isolationism similar to the pre-World War I era, and a potential break up into 3 or 4 separate geographical and cultural units.

We project China will overtake the U.S. economy in 2016 or latest 2017. A good share of the U.S. economy has become devoted to a high level of military spending and maintaining the country's government debt. In contrast, China has relatively little debt, relatively low military spending in comparison (2.2% of GDP versus 4.7% in the USA) and is investing in the country's prosperity. This disparity will accelerate the eventual passing of power between these two countries.

Unlike Europe, the U.S. will be faced with the added transition of an ethnic and consequently cultural shift towards a Hispanic society. Hispanics traditionally tend to prefer working in smaller companies and groups, as opposed to big corporations, and prefer working in small manufacturing and trade as opposed to finance and banking. The dominance of the U.S. in international banking was largely due to the dominance of certain European groups, British and German for example, in the U.S. mainstream after 1900. In the future, the U.S. will start acting like a Hispanic society, and will have stronger ties with Latin America than with the East or West. America's new friends are increasingly found in the south - not overseas.

Trends in Europe

The end of the Western financial model extends from New York to Frankfurt. Europe also suffers from U.S. fractional reserve-style banking and insurmountably high debt levels in nearly all states, with Greece, Spain, Ireland, Italy and France being some of the most prominent examples In the U.S., national bankruptcy is being driven by the debt and refusal to deal with the debt. In the Euro zone, it is driven by the discrepancy between currency management and the political integration that has been a hallmark of the European project in the last few decades. The French and German answer to the currency problems is that all Europeans should become like Germans, but other nations strongly resist this. Although there is a single currency for this geographical area, debt is issued by governments, not by the European Union. Without any politically effective means to resolve these tensions, the crisis will continue to spiral downward. Europe further suffers from the costs of a demographic transition towards a substantially higher average age, and a fast diminishing population in several key countries.

The repercussions of this crisis will create a substantial power shift from a Western and Caucasian dominated world to an Eastern and Asian dominated world, with South America gaining influence on its northern neighbours. The West will begin a very long economic and social decline well into 2025 to 2030 while concurrently losing influence in the world.

The waves of social unrest that will continue to sweep the world in waves of climactic events will also affect China to some degree, but in a way that is a bit disconnected from their economic process. The currently more police-controlled state will very slowly give away to a much milder form of governance, as we have seen happen in Shanghai, and bring a more balanced form of existence to Chinese citizens all across the nation. The government is extremely active in staying on top and is well engaged in political and social developments in the world. But in order not lose their migration to a position of global power; Chinese leaders must focus on maintaining stability and relative peacefulness in the country. The Chinese government will however not hesitate in the future to make a point of power, if deemed necessary.

China's internal political weakness is exacerbated by fast shifts to a male dominated society (males outnumber females in increasing numbers due to frequent abortions of female fetuses). This partially results from forced family planning, and partially from the traditional preference for male children. But, in an era when more boy children survive than previously, it also means more internal conflict amount young males. This fact may move China into a more conflict willing society and may cause external conflicts in the 2020s or 2030s and beyond. A corrective measure here would seem to be a priority.

From 2025-2030 onwards, the world in general will be sobered by deep crisis, and ready for a renaissance. Just as Europe built out of the ashes of the world wars a period of unprecedented peace, so Asia and the rest of the world will be ready to experience a new age of enlightenment. The meaning of globalization will have gone from being, what can everyone steal from himself throughout this planet, to discovering how we can live together, on a global scale.

How can the westernized countries best manage their downfall in power facing the rise of the new superpowers such as China, India or Brazil?

Hardy F. Schloer: They cannot. However, the West must do two things to soften the landing and to position for a better future later.

Firstly, the West must seek economic investment from the East. An increasingly self sufficient China that migrates from a export society to a self consumption society is less interested in such investments in the future, therefore such investments must be thought after now, not later. Secondly, the West must focus on producing products that are increasingly important to the East. The gold of the future is agricultural commodities and clean drinking water. Especially Eastern Europe has here a very large and unused capacity that could bring very advantages trends to a region that has been economically challenged for a long time. Thirdly, Europe must change its immigration policies in the nearest term to attract young people from abroad to relocate into Europe and to make up for the loss of a young working population in that region due to a fast accelerating demographic shift. Developed Western countries are aging dramatically; the average age is over fifty, compared to for example Turkey, Malaysia or the Middle East where average ages are between 19 and 23 years of age.

The majority of experts, professionals and the public opinion now all agree governments provided wrong answers and policies to various economic challenges in the last decades: what should be the measures taken for the future? Do politics still have a strong role to play in an ever more globalised economy?

Hardy F. Schloer
: First of all, governments do not run the world. Goldman Sachs, Citibank or global multinational corporations with interconnected networks run the world; not in a way of conspiracy, but simple in the way they seek through maximization of profits also maximum leverage of their global influences. Today, governments can be bought, and they are bought through political donations, lawyers, lobbyists, and economic threats by powerful economic interests. When a government is bought, it becomes irrelevant.

Secondly, no one can deny that the benefits of globalization are manifold. A global financial perspective has facilitated the standardization of products, as well as the rapid movement of goods, people, capital, technologies, and information around the world. The rapid adoption of information and communications technology makes it easier to fragment the production of goods and services, and to outsource certain tasks to other countries. This has extended the reach of globalization to domestic activities where workers were previously sheltered from direct international competition. And yet, despite some of the advantageous aspects of the trend towards global knowledge and product sharing, the current global economic crisis shows us that the financial system governing this interaction is obsolete and inadequate.

What is needed here is a vision that is radically different from the economic and financial model of today - a model, that I, and many others have argued, is inherently unstable, unfair and repressive. The current model gives monetary speculation and financial derivatives a central role in defining the character and dynamics of not only the way in which people accumulate wealth, but also the way in which some people impoverish others. Quite simply, the current instruments used in the financial industry have made much of the world poorer. Following the statistics of the World Bank and the IMF demonstrate most clearly, that the existence of these institutions did not prevent poverty, but make it worse over the last 50 years by substantial margins.

According to various distinguished sources including the Bank for International Settlements (BIS) in Switzerland, the amount of outstanding derivatives worldwide, as of 2008 reached USD 1.144 Quadrillion, (i.e. USD 1,144 Trillion), a number that equates to a shocking 190,000 USD per person on the planet. The term "quadrillion" is a number usually reserved for use in complex super computing processes or astronomical measurements, not for economists and bankers.

Certainly, the human mind boggles when contemplating these enormous amounts of "paper promises" holding no intrinsic value, created by the current system's need for an ever expanding economic value that is not based on actual goods and services. Yet, these so called financial instruments have been used to negotiate products and services of true value in every day's business, in spite of such instruments' total lack of value. In other words, such empty paper promises being used to negotiate "true value." Nevertheless, this near fraudulent transaction is called in modern business school language "maximizing profits" or simply good or innovative business.

What is more, under the complex guise of financial exactitude and an evolving spiral of inter instrument dependency, financial derivatives have instrumentalized risk in a way that forces ownership and property to take a new form. History shows us that the limited liability and "absentee ownership" in the second half of the nineteenth century marked the beginning of a transformational shift in the way the human collective responded to trading goods for services. With this transformation towards unchecked liability, true ownership was less tangible, and less based on any underlining reality. It was, in fact, a relationship between a complex, underlying, loose process, and the powers that be.

The event of derivatives only added another layer of obstruction to the system and loosened the ties to reality even further, as they act as financial instruments with absolutely no direct tie to any particular commodity or asset. It is also important to mention that from the perspective of personal responsibility and stewardship, derivatives are based on the "disengagement and financialization proceeds via the construction of indifference to the exigencies of 'real' economic competition." (Wigan, Duncan, 2009).

In the context of the current financial and economic crisis, some economists argue that the current speculative system cannot go on, unchecked, forever. A collective, financial "reality check" will soon be needed. What humanity must do soon, East or West, is to evaluate some of the most basic systems. We must ask tough questions, such as: do we need money at all to manage a functional and creative global society? Or if we chose to use money or a money like system, would one single currency, that serves the whole planet, be a good step towards an economic more equal world?


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