18-24 months global recession likely – and stagnation?

It looks as if we are staring at a 18-24 month global recession, at the very least – no thanks to the greed that was on display in Wall Street and among global capitalists, financial institutions and commodity speculators until recently.

The latest stock market rally on Wall Street is likely to be temporary as the underlying problems are still there. Drastic measures by central banks world-wide are needed to prevent a financial meltdown and a long period of stagnation like what happened in Japan. Already, such measures have been initiated in Europe and the US, but will they be enough to contain a further slide and an even longer stagnation?

The damage has been done, says economist Nouriel Roubini:

… major sources of future stress in the financial system remain; these include the risk of a CDS market blowout, the collapse of hundreds of hedge funds, the rising troubles of many insurance companies, the risk that other systemically important financial institutions are insolvent and in need of expensive rescue programs, the risk that some significant emerging market economies and some advanced ones too (Iceland) will experience a severe financial crisis, the ongoing process of deleveraging in illiquid financial markets that will continue the vicious circle of falling asset prices, margin calls, further deleveraging and further sales in illiquid markets that continues the cascading fall in asset prices, further downside risks to housing and to home prices.

A big problem now is that consumer spending has dropped drastically in the US and elsewhere. To solve this, greater government spending is required to benefit ordinary people, adds Roubini:

Since the private sector is not spending and since the first fiscal stimulus plan (tax rebates for households and tax incentives to firms) miserably failed as households and firms are saving rather than spending and investing it is necessary now to boost directly public consumption of goods and services via a massive spending program (a $300 bn fiscal stimulus): the federal government should have a plan to immediately spend in infrastructures and in new green technologies; also unemployment benefits should be sharply increased together with a targeted tax rebates only for lower income households at risk; and federal block grants should be given to state and local government to boost their infrastructure spending (roads, sewer systems, etc.). If the private sector does not spend and/or cannot spend old fashioned traditional Keynesian spending by the government is necessary. It is true that we are already having large and growing budget deficits; but $300 bn of public works is more effective and productive than spending $700 bn to buy toxic assets. If such fiscal stimulus plan is not rapidly implemented any improvement in the financial conditions of financial institution that the rescue plans will provide will be undermined – in a matter of six months – with an even sharper drop of aggregate demand that will make an already severe recession even more severe. So a fiscal stimulus plan is essential to restore – on a sustained basis – the viability and solvency of many impaired financial institutions. If Main Street goes bust in the next six months rescuing in the short run Wall Street will still lead Wall Street to go bust again as the real economy implodes further.

Might I add, if we spend on infrastructure, make sure it is environmentally friendly infrastructure that will really benefit the working class: public transport, government hospitals, schools in rural areas, rural bridges, ferries, sustainable/organic farming – and not white elephant or environmentally unsustainable projects.

The global economy is in a huge mess thanks to the high-flying corporate vultures and “business friendly” and “deregulation” policies, which largely benefited the elite and the wealthy. How East Asia is affected will depend very much on what kind of impact the global recession will have on China.

So far our standard traditional response in Malaysia when confronted with economic challenges has been to go scouring the globe in search of export-oriented “foreign investors” in the hope they can wave their magic wand and save us from doom and gloom.  Christopher Wood, writing in Far Eastern Economic Review, says Asian governments must react constructively:

It is important that Asian policy makers—and most particularly Beijing—respond to the shock of the slowdown in U.S. consumption in a constructive way. This means increasing efforts to move their economies away from excessive reliance on export-led growth. If they react in the opposite way, and engage in competitive devaluations as they see their foreign-exchange reserves decline, they will only succeed in delaying the long-overdue rebalancing of their export-driven economies and could spark a global trade war.

Yes, move away from excessive reliance on export-led growth. We don’t have to look far to see what happens if we are too exposed to the vagaries of the global economic order: Singapore is already in recession.

It is time to focus on reconstructing and restructuring our domestic economy so that we become self-reliant, self-sustaining and capable of weathering the gathering storm around us.