If the government at federal and state levels will not be providing a growth stimulus in 2012, will the private sector be the engine of growth for the world's largest economy? The answer is modest growth will come from the private sector, but not jobs-intensive growth and given real salary reductions we will not have a robust consumer-led recovery.
Part of the problem is that only the strongest companies are healthy, and this because the government poured money to sustain them in the last three years. We have a great deal more of 'shaking out' in the private sector before we begin to see recovery, and that will not happen until we have yet another 'income-and-jobs recession' in 2012. The definition of this term is that we will have corporate growth but continued lagging of income and jobs growth for labor and the middle class in the US and on a global scale.
Between 2008 and 2010, the US government closed 322 banks at a cost to the FDIC of $76.8 billion. This does not include the several trillion dollars ($2 officially in 2008 and 2009, and much higher according to private sources) in bailout and stimulus packages. There are unofficial estimates that the AIG bailout alone has cost every American family $1400, but not incurring that cost could have entailed derailment of the entire financial system that is now suffering an immense debt-to-GDP ratio crisis; a common problem that afflicts many countries from near-bankrupt Greece, Ireland, and Portugal, to the US.
Foreclosures continue reaching record levels and beneath the top corporations medium-sized and small businesses are struggling to survive largely because banking credit has been very tight and consumer demand curbed owing to sharp salary cuts. This is a global and not just a US phenomenon, and it is likely to become worse in 2012 as consumers and small businesses will exhaust their savings. The issue is to revive the credit economy, but the way the G-20 are doing it is to continue strengthening the strongest sectors - top-down - instead of bottom up; a prescription for further wealth concentration.
In mid-April 2011, the G-20 agreed to a plan that would bring under control budgetary and balance of payments deficits that threaten to derail the global economic recovery if they go unchecked. The natural disasters in Japan are a legitimate concern for economic slowdown, as are the North Africa-Middle East uprisings that have precipitated high oil prices. At the same time, EU has a number of high-debt nations that are slowing EU growth, while China's economy is showing signs of inflation.
A tighter monetary policy intended to cool off the economy would entail slower growth globally. All the problems stated above would not be sufficient to derail the global recovery if it were not for the US facing serious public debt and balance of payments problems. The US public debt and equilibrium problems were well known seven years ago when the IMF sounded the alarm.
Addressing this issue in spring 2004, I wrote: "On 14 April 2004, IMF chief economist Raghuram Rajan issued a report on the impact of U.S. budgetary deficits on the world economy in the next 15 years. Because of increased U.S. government borrowing, owing to soaring defcits will reduce America's output by 3.7 percent and global economic output by 4.2 percent in the next 15 years. Monetarist economists blame the impending rising interest rates in the U.S. and around the world from 2005 to 2020.
Though it inherited a surplus, the Bush administration will leave a legacy of the largest deficits in U.S. history and global economic contraction. After the booming "new-internet economy" of the 1990s, and given the cyclical nature of the world economy, it was inevitable that a contraction would take place, regardless of who was in the White House. The challenge for any administration is one of prudent management of the U.S. and the world economy through the IFIs. The administration's policy of containment militarism was costly in every respect, and that I doubt it would result in a safer world, or that the cost-benefit ratio was worth this anachronistic road of the early Cold War.
Now we have the IMF confirming that the global economic contraction for the next 15 years fall on the shoulders of the U.S. Though not the only factor in the budgetary deficits, skyrocketing defense spending and supplemental spending for Iraq in the next 10-15 years is something to consider. People throughout the world will suffer lower living standards because American neo-Conservative ideologues have been pursuing a diplomacy based on fabrications and a dream of an expanding American empire that cannot possibly become a reality in this complex multipolar world".
The real issue is whether the IMF-backed scheme of 2011, which the G-20 endorsed, would in fact work to strengthen the world economy, or precipitate further contraction of consumer spending by the working class and middle class. It is true that the annual US debt-to-GDP ratio is the same as Ireland's at 10.8%, and just a notch better than Japan's that will likely rise in 2011, owing to the massive catastrophes.
With an equivalent 56% of GDP devoted to maturing debt in 2011, Japan leads the world, followed by the US with 29%, and then we have EU members - Greece, Italy, Belgium, Portugal, and France - at 20%; maturing debt that deprives the economy of absorbing capital it needs for 'income-jobs' growth economic recovery. Herein rests the problem with the global debt crisis and the ominous threat that 2012 will be worse than 2012 for labor and the middle class throughout the world.
Rising deficits will have to translate into rising yields, although it is highly unlikely that rating houses Fitch, S and P, and Moody's will take the same type of aggressive steps to downgrade US bonds as they have toward Ireland, Greece, Portugal and Spain. Ratings houses have warned about US federal debt as has the IMF, but Moody's chief economist Mark Zandi is actually critical of the Republicans pursuing budgetary cuts, arguing that GDP growth and jobs creation would suffer if fiscal tightening continues. Moody's as well as S and P support the budgetary proposals coming out of the White House and Congress to lower the deficit and public debt, and they retain a rating of Aaa with stable outlook.
Can the US economy drag down the world economy in 2012 in the manner that it did in 2008? A deflating dollar intended to stimulate exports and in effect discount debt payments is not a sustainable policy, for it will eventually lead to even higher prices of precious metals and commodities. On a number of occasions, I have written that world commodity prices will rise and with them social and political instability. It now seems clear that the G-20 that own more than 80% of the world's wealth are determined to save the global credit economy by pursuing tight fiscal and monetary policies that will further strengthen the strongest corporations and will wipe out smaller businesses and those relying heavily on credit.
The IMF prescription to which the G-20 have agreed will mean rising poverty and more rapid downward mobility in 2012. This does not mean that the credit economy should not be fixed. Helped by government policies, parasitic finance capitalism out of control to realize greater profits has seriously debilitated the credit economy. But the proposed fix will result in socioeconomic polarization and I predict in very serious social upheaval in many countries around the world. We may not see popular uprisings similar to those of North Africa and Middle East, but as the G-20 are preparing to sink the world in another JOBS-INCOME RECESSION, we will see mass social unrest that will destabilize governments.