18-24 months global recession likely – and stagnation?

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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.

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Cameron258

Our country had been so much affected by this Economic Recession. there are lots of job cuts and company shutdowns. We are seeing some signs of economic recovery right now and we hope that it would continue.
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sabahan

Stagnation scary not so wait until the stagflation occurs than the real economy Tsunami power emerge. Already the great power consumption country like China are stocking up cheap fuel and there will be other country follow soon. This will arose the oil price speculation and this will push the oil price up again. Now it might not be obvious but once the race of speculation is on, the fuel will be rocketed high again. Some country already encountered diminishing growth rate or even negative growth. Another word, the economy is stagnant and couple with oil price rocketing inflation. There will… Read more »

MalaysianCat

well, the current finance minister mentioned that the projects for 2009 budget will go on as usual but today, the PM states that there will be review of the projects slated under the budget 2009. Too much confusion within themselves to be able to help the nation to buffer the effects of the global meltdown – economically speaking. It is time for them to do real work in researching and making the right, honest decisions in regards to buffering the economical slowdown. With the high consumable prices like food related products, we might be heading towards stagnation faster than we… Read more »

esgreat

More government spending to ‘boost’ the economy as well as the whole dirty load of Keynesian methods is what brought Japan to it’s state right now. In Japan, as in the US during the great depression, there was massive deflationary pressures on assets and goods. They reduced their interest rates and pumped massive amounts of money into the system. This left the Japanese is a perpetual slump, and where the inflationary actions resulted in the cost of living becoming very high (just ask anyone who has been to Japan). It’s vast personal savings rate was what saved the country from… Read more »

Ganesh

No need to panic lah, our PM has assured us that Malaysia won’t go into recession http://www.themalaysianinsider.com/index.php/malaysia/10441-pm-malaysia-not-going-into-a-recession PM: Malaysia not going into a recession KUALA LUMPUR, Oct 13 — Datuk Seri Abdullah Ahmad Badawi today said Malaysia can withstand the impact of the current global economic situation and he believes that it will not go into a recession. The Prime Minister said Malaysia would be able to withstand the US credit crisis as it still had strong economic fundamentals as well as political stability. “We have very strong reserves, our surplus is still strong, our domestic savings are also very… Read more »

artic turban

Yep like our banking sector, with X Bank leading the trust forward as collussess. well if X Bank faces problems, or Y Bank dumping 4 billion in singapore junk bonds from indonesia. leave it to them to come up with another future bailout waiting to happen. I wonder why our bright sparks are such ‘gluttons for punishment’, but like everything malaysian, nobody gets prosecuted for failure, in fact they get promoted.(I MEAN THE UMNOERIANS)

Eagle has landed

The exposure on the Nuri replacement is (appears to be) another blatant abuse of power… Thanks to Capt Zahar for his courage to bring up the issue and not many people in the know would want to bring this matter for public scrutiny. The truth is our Nuri helicopters are under utilize, though in term of age it is one of the oldest choppers that are still operating. The replacement for new helis, I believe is about high time basing on the need for state of the art avionics and other equipment. But has anybody question what are the real… Read more »

colimac

the denial syndrome is hatched in the parliament and will follow them to the grave.their 20 years pregnancy is not enough. is there a competetion amongst them as who is having the most wealth

ole timer

For those who are worried, the solution to the current global credit crisis lies in the various governments, especially US, Europe, and Japan working with the banks – investment and retail – and other investors, to push up the stock market as quickly as possible – if it is to avoid a depresssion (not recession mid you. recession is normal. just a normal downturn cycle unlike a precipitous drop which takes a long time to get back on even keel)

I would think it is possible to drive the stock market up real quick in early 2009. Wait and watch.

ole timer

Don’t be silly. The market – DJI & others globally – will be at its bottom by Christmas. If you are smart, you will pick up shares before Christmas. What is there to worry now? All banks and credit providers and users are now backed by the governments of each respective country. The shares can only go up. Did I not predict the oil will do down to between USD60-80 and not more than USD150 barring any attack on Iran? So far, did these not materialised as predicted? And the end is not nigh yet. Oil may still go down… Read more »

peng

I experienced the 1998 slowdown. It was scary. I was out of a job for several months. There were retrenchments in the new job I later got. Thank God I was spared. Everyday I went to work staring at the wall with nothing to do because there was no projects for the company. Months before the current global meltdown began, I have started tightening my financial belt. Like they say, once beaten, twice shy. I hope Malaysians will not take it sitting down or sleeping like our PM and the cabinet.

gck

together we can overcome the slowdown. we tide it over.

Han2

There is a bigger worry than the impending recession and that is with the denial syndrome of the government leadership. If one were to think back what the PM said few days ago, that we have ample savings, our infrastructure and fundamentals are strong, we have trade surplus etc, oh boy, we are sailing straight into serious trouble.

Unless we get out of that denial syndrome, we will not be preparing to address the problems from recession, which will be a question of ‘when’ than ‘if’ it will hit us.

aaa

sure, get on with public infrastructure works. but, this administration has a history of granting inflated contracts to their cronies. under najib, its the same story but different players. just look at the latest procurement of the helicopters to replace the dysfucntional nuris. another RM1.5 billion down the drain ( or more likely into the pockets of some cronies and politicians). how much more can the counrty take it? its gettig too burdensome and stressful for the ordianry taxpayers.