Monday, June 20, 2011

China or Greece: Which Is The Next Lehman Brothers?

Back in 2007, when the US Fed let the 100-year old Lehman Brothers investment bank go belly up, it was like a blasting cap that blew apart the global economy. While there was some recover last year and early into 2011, the global economy - and the economies of the developed world in particular - haven't made it back to pre-2008 levels. What's more, that recovery has receded in the second quarter of 2011 as the effects of big stimulus packages has ended and debt-straddled governments hit the panic button and turn to austerity to please international investors, speculators and ratings agencies.

That self-inflicted decline - like the self-inflicted greed bubble of 2008 - is on the precipice of leading to a much bigger economic explosion than the Lehman Brothers debacle. The two key sources of danger right now are Greece and China. Greece has been in the news in a big way lately because the riders of the banking apocalypse - the European Central Bank, the IMF and private banks and investors - are demanding a new round of austerity. Not surprisingly, the Greek population have had it with austerity and are set to explode, with Egypt-like sit-ins taking place in Greek town squares and union strikes and protests rolling through the country. The Greek PM had to, effectively, dissolve his cabinet and return to parliament for a vote of confidence tomorrow before moving forward with the next round.

With an unstable Greek government facing mass opposition in the streets and a divided parliament, and with the European Union unable to agree on a plan to bail out the country, there is a very real chance that Greece will default on its debt. A default on Greek debt will have a much more massive impact on the global economy than the Lehman Brothers collapse. And it will spread quickly to deeply indebted Italy and Belgium and beyond. Greedy bankers, gotten fat off cheap money and deregulated markets, which led to the present crisis in the first place, will howl at the thought that they have to pay for the bonuses and bad decisions of the past decade. They will use their control of money to wreak destruction to the global economy as they did in 2008 when they took their money and went home, leaving the economy to starve from a lack of credit.

In China, the world is discovering that the monolithic Chinese state and ruling class aren't so monolithic after all. While the supreme leadership under the premiership of Wen Jiabao have been trying to steer the Chinese economy away from dependence upon infrastructure investment, as well as to cool the overheated property market, an article in today's New York Times suggests that, if anything, things have been moving in the opposite direction. The Chinese economy has diversified and local and regional political leaders have their own independent power bases that can resist diktats and priorities from the centre. Those regional forces also have other levers so that when the state withdrew from lending, non-banking lenders stepped in. The result is that there could be as much as half a trillion dollars in non-performing loans. Many of those loans are in the infrastructure investments that have kept Chinese growth motoring along even as the market for Chinese exports, still a big portion of the country's GDP, has receded. Jiabao and other Chinese leaders are faced with a wave of crippling defaults or the possibility of a big collapse in demand if they try to rein in out of control credit growth and infrastructure investment.

Most commentators are focused on Greece, whose collapse seems most imminent but China's dangers are being covered up by past enthusiasm for the seemingly unstoppable juggernaut of ten percent annual growth rates. And a bursting bubble in China will be orders of magnitude bigger than a Greek default. Don't forget that America is mortgaged to the hilt, with rating agencies starting to get nervous about government debt levels. And most of the foreign-owned US debt is in Chinese vaults. If the world's second biggest economy needs to liquidate assets quick to cover big losses, what do you think that they'll be selling? If the value of US debt collapses and, thus, the cost of borrowing rises, things could get ugly.

Not to put too fine a point on it, the people who run the global economy - and have done so through the use of speculation for the past three decades - have painted the economy into a corner. They're the problem and they have no solution. The Greek working class are the only voices of sanity we're hearing and their answer is clear: let the bankers pay. It is a condemnation of a system driven by greed and chaos. It's time for democratic planning based upon human need.


China Boom Beginning to Show Cracks, Analysts Say - NYTimes.com
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