Global Economic Crisis – The Crises of Debt

The summer of 2011 was the 4th anniversary of the global financial crisis. However 2011 may go down in the history books for something very different. On the 5th August 2011 the communists of China gave the Capitalist world a dressing down. It was the day the communists told the capitalists in the west how to run their economies as America’s lost its triple A credit rating. This time last year the global economy was struggling to grow, the multilateral approach that had characterized the early response to the financial crisis was beginning to unravel as more and more nations were turning to economic nationalism and the currency war between the US and China was reaching fever pitch.

Since the global financial crisis began in 2008 the end to the crisis appears as distant as ever and in 2011 further cracks have appeared.To remind us of how we have got here – growth in Western economies in the last decade was driven by the real estate bubble which stimulated the remainder of the economies of the West.The bubble reached colossal proportions because banks were able to create various financial products from debt which were then sold to other banks based upon the assumption that the housing bubble will continue to expand.The subsequent collapse in housing prices exposed gaping holes in lending practices of the worlds largest banks, many banks were forced to write off billions in debt, as they on mass were being defaulted upon. As banks collect customer deposits and lend to new businesses and projects all of this came to a grinding halt and due to this a crisis that was inherently financial, shifted to the real economy, hence production fell, many companies collapsed and unemployment soared.

The response of Western economies was to either nationalise failing banks, provide bailouts to others, and a new invention – quantitative Easing (QE) a new electronic way of creating money. The cost of this was huge and as a result this eventually led to a period of austerity – government cuts across the Western world to repay the money used to bailout the bankers.These measures were all meant to kick start economic growth and end the economic crisis, however the US debt ceiling debacle and the sovereign debt crisis in Europe show that the global economic crisis is far from over.


The debacle that took place in the US between the Republicans and Democrats was over increasing the debt ceiling – the amount the government can borrow. The US government needs the permission of Congress to raise the ceiling re the amount of money it can borrow. If Congress didn’t grant an increase then Obama’s regime would have hit the debt ceiling limit and would have had difficulties in meeting its repayments. Ironically the US borrows to repay previous debts.This is not the first time the US has been forced to increase its debt ceiling. In February 2010 a similar fanfare took place.This rather flexible “ceiling” has been raised 33 times since it first was raised over the $1 trillion level in September 1981. Noble Laureate Paul Krugman outlined the fanfare:“The facts of the crisis over the debt ceiling aren’t complicated. Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation.And Democrats – who would have been justified in rejecting this extortion altogether – have, in fact, gone a long way toward meeting those Republican demands.”And, oh yes, the President had some big skin in the game.”

The debt impasse in reality concealed America’s bankruptcy.America’s fundamental problem is that it is content/uploads/2011/08/top-ten- holders-of-US-Debt.jpgdrowning in a sea of debt.The US economy generates around $14 trillion annually, however the national debt – the money the central and federal government owes to the US public and the world through the bonds (or IOU’s) they have issued – stands at $14.3 trillion. Interest payments on this debt alone was $414 billion in 2010. Those who are expecting to be repaid by the US one day include governments such as China, companies and banks.This debt emanates from US citizenry’s huge appetite for imports and credit cards and as a result consumer debt stands at $2.4 trillion.The desire by American’s to own their own homes has resulted in mortgage debts of $13.2 trillion.The debts of US companies amount to $20.8 trillion.This makes the US indebted to the tune of $50.7 trillion – more than the combined economies of Japan, China Britain, Germany, France, Brazil, Canada and Italy twice over.The US trade deficit also continues to balloon, the amount the US imports compared to the amount it exports – in essence the money the US owes to the world – stands at $500 billion.And these figures exclude the future – so far unfunded – obligations of the American people including pensions, medicare/Medicaid and so on which amount to many trillions more.

With the US economy faltering and struggling to create sustainable growth, questions are being asked about the ability of the US to repay its debts. China who holds most of America’s debt should duly be concerned as the credit rating of the US is being downgraded. Due to the size of America’s economy, if it’s not growing then this will also drag the global economy down, as the US is its largest constituent. China and other creditors are also highly worried by the constant devaluation of the dollar represented by the constant increase in gold prices and other precious commodities – caused by growing indebtedness and QE.


The European Union now has a growing list of states that are considered the sick men of Europe. European attempts at defence against a deep recession has now created a new crisis of unsustainable and un-serviceable sovereign debt. Much of this can be attributed to stimulus packages passed by European governments in order to blunt the effects of the economic crisis, especially in preventing massive employment layoffs. Europe’s heavyweights spent massively on stimulation packages.This led to debt levels skyrocketing across the Eurozone, but especially in the PIIGS countries.

At the centre of the crisis is the fractional reserve banking system where a small amount of physical money in notes and coins can be used to create debts many folds over.The Greek debt crisis is a good example. Greece has debts of €300 billion, with an economy of only €240 billion and a government budget of only €91 billion.The Greek economy is in no better position today after 3 bailouts and massive public sector layoffs.

The Euro was hailed as the replacement to the dollar. However the financial crisis has brought a damning fact to the surface, whilst countries such as France and Germany will be able to service their debts, nearly all of the other eurozone nations have pitiful financial situations where they have spent well beyond their means and now when it has come to repay this debt the feasibility of meeting the regular monthly repayments is looking impossible.The issue the Euro has faced from its inception is the fact that all the eurozone nations have very divergent economies and hence the strength of the euro is in the strength of the Eurozone economies and only as strong as the weakest link.

When the economic problems were confined to small countries such as Greece and Ireland, it was assumed that any fallout could be contained. Now however the crisis has threatened to engulf nearly all of Europe. Italy which is the eurozone’s third-largest economy and the world’s fourth-biggest debtor is also reaching breaking point


The crisis that engulfed the world in 2008 is clearly not over, this is why Western economies are being forced into austerity to balance books before economic growth can eventuate.The world’s largest economies attempted to kick start economic growth via stimulus plans, however any stimulus was always a high-octane boost and a temporary measure.They are designed to kick-start stalled economies, not to fuel sustained economic growth.The growth that was achieved in late 2009 until now is really the inflated results of stimulus measures achieving their intended effect to be temporary.

With Western economies dominated by the service sector, and with the driving engine being the financial industries it is difficult to see where economic growth will come from. Printing more money and bailing out the banks has not kick started growth, whilst the stimulus packages have had limited impact and failed to jump start economic growth.


With the crisis of debt now firmly engulfing Europe and the US a double dip recession is being viewed as a certainty.Analysts have begun to cut their outlooks for growth, which were originally based on the premise that the worst of the economic crisis was over. The leg up’s provided by the Capitalist world in no way dealt with the underlying economic problems of unsustainable growth, debt driven spending, casino finance and bubble economies.What such stimulus packages have done is kept Capitalist economies artificially afloat.Whilst the global economy has seen some growth for the last 18 months once all the temporary initiatives have worked their way through the economies of the West we will be back in the original position of how to create sustainable growth.With the core failure of a number of interventions is it not time that more radical alternatives be considered? Particularly with the unhealthy fractional reserve banking system and defence of banking interests coming before the needs of the common man.