- - Sunday, July 10, 2011


The geopolitical question of the hour: Is there a tripwire linking the world’s series of regional crises, ready to bring on another 2007-08 worldwide economic disaster?

Lehman Brothers collapse in September 2008 dramatized how enhanced interconnections can tumble throughout the world in a time of crisis like dominoes. But if the world’s finance mavens know of a similar interrelation of our various bubbling crises today, they are not telling us. Meanwhile, the problems in the mini-theaters continue to percolate:

Europe - Theres growing consensus that Greeces economic collapse is leading to a restructuring of the finances of the entire European Union, representing more than 20 percent of the worlds gross output. Shooting the messenger - see the growing attacks on credit rating agencies who, indeed, are feeding debilitating increases in the cost of debt - doesnt solve the problem, nor do complicated, Band-Aid solutions. It also does not seem likely to this observer that the creation of a eurobond market to absorb growing debt will bring about an inspired, problem-solving new direction in European fiscal and monetary policy.

The U.S. - However much the Obama administrations stimulus program staved off an even worse crisis - a point to be argued by economists until the end of time - it has run out its string. Public opinion now demands a curb on deficit spending. But how to do so, against the pressures of “special interests” (your interests always are, mine are heaven-blessed), is a conundrum taxing the American political system. It’s a time when parliamentary government - with its ability to bring down a governments failed strategy instantaneously - is to be envied. Instead, more than a years worth of political mudslinging appears only to have produced near-paralysis in Washington. And despite widespread denials - including fudging the numbers with inventions like “core inflation” - higher prices could couple with stubborn underemployment/unemployment and the unresolved housing bubble to increase the misery.

China - The cracks, long seen by the few who questioned the sustainability of the miracle of “the worlds factory,” are widening. Beijing’s central planners - despite their argument that only rapid growth could legitimate “communism with Chinese characteristics” - have curbed infrastructure expansion, which along with (slowing) exports had been the country’s main engines of growth. “Creative accounting” takes on new meaning for government banks that have been hiding their “non-performing loans” in new, set-aside organs that are now making their own bad loans. Beijings inability to “feed” local party hacks leads them in turn to “squeeze” workers and farmers, producing growing violence. Inflation, especially in critical food markets, grows despite monetary devices borrowed from Western systems that have proven largely ineffective.

Japan - The worlds third largest economic power drifts, bereft of political leadership, unable to address the destruction from the March earthquake-tsunami with its old “Yamato Damishi” (fortitude). In Japans hot, muggy summer, only 19 of 54 reactors are now operating in the face of anti-nuclear sentiment. With more set to shut down, cutbacks of 15 percent already haunt large electricity customers and boost expensive fossil fuel imports. Consumer confidence has fallen to record lows, an ominous development for Japans rapidly aging population. Government debt, already the world’s highest ratio at 200 percent of GDP, will rise as Tokyo borrows $100 billion to rebuild after the disaster. Luckily, Tokyo borrows at home at a floor-scraping 1.5 percent rate. But, Japan faces its own version of the argument confronting the U.S.: Economy Minister Kaoru Yosano opposes Tokyo selling itself bonds as the Fed and Treasury Department have done here, warning that the resulting higher finance charges will harm Japanese banks.

How does it all connect? We saw how Japans disaster put a crimp in the manufacturing supply chain from Shanghai to Detroit. But, for example, what call do German and other European banks have on their U.S. colleagues if Greece defaults? Japan, which has been lending the world $175 billion annually in investment capital, is out of that business. Nobody wants to talk about the impact on Spain (20 percent of the EU GDP) if Greece (3 percent of the EU GDP), followed by Portugal and perhaps Ireland, “goes.” And what will that do to Latin American economies, where Spanish banks have invested heavily, even as the Brazilian boom also now threatens to go “bust”? Australias roaring dollar is already feeling the impact of Chinese cutbacks, an impact that will affect commodities producers and perhaps even the Mideast petrosheikhs.

In one of his serio-comic sequences, Charlie Chaplins Little Tramp starts pulling a thread from his rumpled suit. Before long, his whole miserable costume dissolves. Is there that kind of loose thread here?

• Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of politics, business and economics. He can be reached at [email protected] He also blogs at https://yeoldecrabb.wordpress.com.

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