Jobs in America will take another severe hit if further bungling in the US and Europe causes a slowdown in growth of the major emerging economies, including China, Russia, India and Brazil. There are many threats to their growth but the worst come from failure to handle US public debt and potential government bankruptcies in Europe.
European finance ministers will meet in Brussels on Thursday but the impasse over how to refinance debt may not be overcome. After the 2008 financial crises, China and India helped to cushion impacts in America and Europe by providing buoyant demand and continuing to invest their savings in US Treasuries. But things are different now. There is political warfare in Washington over making even a start to dealing with its monumental debt and several European countries are near insolvency while their governments bicker over solutions.
Policy makers in the US and Europe are used to seeing themselves as several rungs superior to those of emerging economies. This may have been true in the past. Now it is a misconception leading to a curious blindness to the serious perils stalking their own domestic economies.
Worse, it is causing dangerous insensitivity to the negative impacts on the emerging economies. This is a serious misjudgment because many experts and Western government leaders believe that the vast and dynamic markets of China and India will provide the medium-to-long term demand necessary to prevent severe deflation or stagflation in the US and Europe. It would be nice if that happened, as in the 2008 aftermath. But there is very little chance if further Western confusion throws the emerging economies off-course.
America’s National Commission on Fiscal Responsibility and Reform has warned that by 2035 debt held by the public will outstrip the entire American economy, growing to as much as 185 per cent of GDP. Imagine what will happen to US banks if a swathe of people cannot repay, as in 2008.
Its report said revenue would be able to finance only interest payments on US medical and social security programs by 2025. Every other government activity, including national defense, homeland security, transportation and energy will have to be paid with borrowed money. Interest on debt could rise to one trillion dollars by 2020 and “these mandatory payments, which buy absolutely no goods or services, will squeeze out funding for all other priorities.”
In Europe, every country is struggling with high unemployment levels that refuse to subside. National debt burdens are far above the three per cent ceiling agreed under a treaty and inflation rates are above the agreed two per cent ceiling. Credit is so tight that some major economies are in dire trouble, particularly Greece, Ireland, Portugal, Spain and Italy. Governments have already poured over $400 billion to save those countries but markets remain jittery. If the jitters are not quelled, widespread bank crises might make even Germany and France shudder causing huge negative impacts on global markets. Even European giants like Deutsche Bank and Société Générale may be shaken because of their heavy exposure in the troubled countries.
If the worst scenarios unfold, the Lehman Brothers collapse will look like a walk on roses. Private investors on bond and stock markets may not be of much help because fear and uncertainty will make them risk averse. Currently, differences in accounting standards observed by companies quoted on various stock markets around the world are causing distortions that add up to over $14 trillion (equal to the size of the US economy). With this much ambiguity about corporate valuations under different norms, punters are unlikely to continue taking investment risks, especially against a likely backdrop of teetering major banks.
A sharp slowdown in Indian growth would be particularly dangerous for the world economy because its mass of poverty could become like a huge ball and chain hindering global recovery. China, while likely to remain quite rich, just cannot generate sufficient demand to be a locomotive for the entire world without drowning in inflation and social unrest. The human rights consequences will not be pleasant if people complain loudly enough to shake the Communist Party’s rule in Beijing.
Between 1000 and 1820, India and China dominated the world economy. Their economic importance collapsed for the next 170 years and started to pick up in 1990. But both have feet of clay. China is much wealthier and technologically advanced than India, but neither has the base of knowledge and technology needed to boost the West. Neither can grow without exporting more to the West and to one another. Neither can be strong without a prosperous and stable West.
In turn, Americans and Europeans cannot enjoy high quality and well-paid jobs without helping China and India to grow and consume more. This interdependence is fragile. India’s own public debt issues are potentially devastating at both federal and state levels while China may be sitting on a series of bubbles as its economy overheats. Some experts say its state-owned banks may be understating risky loans by as much as $1.5 trillion.
So the budget deadlock in Washington and European muddle may have negative consequences much more far reaching than imagined earlier. Too many American jobs are at stake to continue taking a narrow view in Washington.