Avoiding Another Global Depression(Part 1)
Overrating the Importance of the Balance Sheet - A Dangerous Trap

The world is being threatened with another great depression. The reason behind this situation is that banks, financial authorities, and governments are increasingly reluctant to give out loans and financial aid. They are trying to keep their own heads above water, which is causing the global flow of money to stagnate. How can we prevent the world from entering into a global recession?

 

2013 – A Dangerous Year for Japan, the U.S., and Europe

The Balance Sheet

The balance sheet is a tool used to keep track of the financial situation of a business, a household, or any other economic entity. It reveals the extent of the entity’s funds and the way they have been invested. It is divided into two columns, the debit column on the left for assets, and the credit column on the right for liabilities, which includes debts and investment money. The name “balance sheet” refers to the balance between the left and the right column. An economically unsuccessful period, during which debt repayments have accumulated, is called a “balance sheet adjustment”. For individual businesses and households, it is logical to reduce debts at such times, but if the entire economy does this, the flow of money stagnates, which makes the economy deteriorate even further (known as a fallacy of composition).

 

A Global Depression Is Approaching

People are standing in long lines, waiting for free food. Men in suits, who have lost their jobs, are protesting in the streets, holding up signs that say: “Give Us Work!” Others are storming the banks, and are in a hurry to withdraw their money.

These scenes, which actually did occur during the Great Depression of 1929, are not random pictures taken from distant history. They could soon become a reality again. The world economy is moving towards a depression, and the situation is getting worse.

In financially troubled Greece, unemployment has exceeded 25%, and the police have been intervening as their fellow countrymen have been flooding the streets in protest of tax hikes and government job cuts. Forecasts say that if 4 Southern European countries go bankrupt like Greece, it would cost the global economy 17.16 trillion Euros by 2020 (Note 1). The world is heading towards another Great Depression.

Greece is not the only place from which the crisis is spreading. At nearly 8%, the U.S. has also reached a high level of unemployment, and the beginning of the year – also called the “fiscal cliff” – could bring further economic deterioration due to spending cuts and tax hikes. 20% of Americans already rely on food stamps. If the U.S. economy continues to go downhill, then even more people will go hungry.

In Japan, the situation is no less serious. If the consumption tax goes up, forecasts predict that more than 3,000 companies will falter, and the number of people that need public assistance will increase by 1 million (Note 2). In 1997, when the consumption tax went up 2%, the suicide rate increased by 30%, and it hit the 30,000 mark for the first time. If the consumption tax were to double, Japan would not come out of it as lightly as it did in 1997.

The three leading global economic powers, Japan, the U.S., and Europe, are simultaneously plunging into a recession. The result is a crisis that will involve depression, bankruptcy, unemployment, suicide, political chaos, and conflict. As things now stand, this is the fate that awaits us.

Note 1 – Bertelsmann’s calculation
Note 2 – Impact calculated by economist Seiji Ono based on a 10% consumption tax across a 5-year period (“Shukan Post”, July 7th 2012 Issue)

 

Saving the Balance Sheet Alone Is Bearing Down on the Global Economy

But why is the world economy in such a disastrous state? The reason is that banks, financial authorities, and governments have jointly gone down a selfish miser’s path, and they are trying to protect their own wallets.

Since the recession started, banks have been giving out fewer loans in an attempt not to accumulate bad debt. Financial authorities have introduced rules to make the banks’ balance sheets look better. Governments have implemented budget cuts not to dig further into their countries’ wallets. A certain degree of austerity may be appropriate in order to protect oneself, but if everybody goes down the same miser’s path, the money will stop moving, and the economy will stagnate. This is what appears to be happening on a global scale today.

To help the world out of this economic crisis, we need to think of ways to make the money flow again. This is absolutely indispensable for the sound development of a global society whose population is heading towards the 10 billion mark.

The following paragraphs give a brief introduction to the economic situation in those countries that should be considered the biggest, global, economic powers of today.

 

The Global Economy Is on the Verge of Another Great Depression

The United States

Economic Growth Rate (Note 1)

2012 2013 2014
2.2% 2.0% 2.8%

 
While the US economy showed signs of recovery as the unemployment rate dropped to 7.7 % in February, the state of the economy is now still fragile. The jobless rate could be around 15% if we were to include the numbers of underemployed and discouraged workers. In addition, the sequestration that took place since March might cost 750,000 jobs according to the Congressional Budget Office. Further drastic spending cuts could negatively affect its recovery.

 

Japan

Economic Growth Rate (Note 1)

2012 2013 2014
1.6% 0.7% 0.8%

 
Regardless of the continuing deflation and recession rattling their country, politicians in Japan have decided to raise the consumption tax in 2014. When the tax hikes are introduced, consumption is going to drop further. Japan’s economy will experience yet another setback. If the tax is raised to 10%, estimates predict that Japan’s GDP will drop by 2.5%, and more than 1 million people will lose their jobs (Note 2).

 

Euro Zone

Economic Growth Rate (Note 1)

2012 2013 2014
-0.4% -0.1% 1.3%

 
Due to austerity measures introduced during the recession, the European economy is further deteriorating. Afraid to see the balance sheets go bad, banks are unwilling to give out loans, which in turn harms businesses, and this fear is pushing the economy farther downhill. Europe’s economy is stuck in a vicious circle. According to PMI, business confidence in the Euro zone has been in a continuous decline over the past 16 months.

 

China

Economic Growth Rate (Note 1)

2012 2013 2014
7.5% 8.5% 8.9%

 
On the surface, China’s economic growth looks stable, but local government debt and banks’ bad loans have become a serious issue. After the financial crisis, China introduced economic recovery measures that forced banks to loan money to the local governments. As a result, China’s GDP was artificially pushed up, a real estate bubble formed, and a large number of ghost towns were built. As a result of these enormous loans, local government debt now comprises nearly 50% of the country’s GDP (Note 3), and some estimates say that the bad debt in China’s banks has soared up to 200 trillion yen (Note 4).

 

Note 1 – Real GDP Growth Rate; annual predictions by OECD’s Economic Outlook (November 27th 2012)
Note 2 – Estimates by the Confederation of Labor researchers
Note 3 – From Asia-Pacific’s current affairs magazine “The Diplomat” (September 10th 2012)
Note 4 – Forecasted by Masahiro Miyazaki, a China Specialist, from the News Site “Zakzak” (October 11th, 2012)


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Avoiding Another Global Depression(Part 1)
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