Question:
Western media has recently published speculations from news agencies suggesting that the worst stages of the financial crisis have ended and that some Western economies have begun to show signs of economic recovery, which is considered the first fruit of the efforts exerted. These press reports cited the opinions of economic and political experts who are optimistic about stock markets and bank profits. They claim that the return of rising oil prices is an indicator that the global economy has reached its lowest point and has begun to recover, leading to prices rising again! Is there truly a recovery in the economy? If not, and if it is merely media hype to restore confidence in the global financial system, what has caused these phenomena to appear in stocks, commodities, and the rise in petroleum prices?
Answer:
It is a mistake to look solely at financial indicators, such as the rise in the value of financial markets or the rise in commodity prices, to judge the recovery of the economy. Rather, one must look at the volume of corporate production, the total national income, the numbers of unemployed, consumer commodity prices, the volume of consumer and corporate spending, the number of mortgage foreclosures, and cases of bankruptcy filings—which have affected long-standing companies like General Motors—and other economic manifestations. From there, it becomes clear that there is no positive indicator anywhere in the world pointing toward an economic recovery!
Below we mention some data indicating the continuation of the crisis:
1- The Economic Situation in America:
The unemployment rate reached 8.9%, the highest rate in 26 years, and the national income level dropped by 6.1% in the first quarter of this year. To match sales volume with goods, companies reduced the goods offered to their lowest level since World War II; they were reduced by the equivalent of $103.7 billion in the first quarter of 2009 after being reduced by $25.8 billion in the fourth quarter of 2008. The volume of annual investments was reduced by 38%, and the volume of exports of goods and services dropped by 30% in the first quarter of 2009, following a 23.6% drop in the fourth quarter of 2008. Furthermore, the number of foreclosure cases due to default rose in March 2009 to reach 341,180. This figure represents a 17% increase since February 2009 and 46% since March 2008. Added to all this is that the US government spent billions of dollars on collapsed banks and lending companies. If this is the state of the United States, then undoubtedly the rest of the Western countries are suffering similarly.
2- The Economic Situation in Germany:
The unemployment rate in Germany reached 8.2%, which is considered the worst recession since World War II. Were it not for the proximity of elections and the government's method of announcing unemployment figures, the announced rate would have been even higher. The Federal Employment Agency stated on May 28, 2009, that the rate of employees losing their jobs is increasing and that the real statistics for job losses have been altered, alongside the reduction of daily working hours to try to mitigate the increase in the unemployment rate. The economic expert in the credit sector, Andreas Rees, noted that unemployment statistics were manipulated to appear contrary to reality and to look as if they improved in June. He stated: "There is no doubt that many employees will lose their jobs soon... the employment sector remained the weak point on the path to the recovery of the German economy."
Furthermore, the management of heavy industry and equipment factories expressed concern that German industry is still globally weak and does not match international requirements.
The German engineering sector saw a decrease of 58% in April compared to last year, which is considered the largest setback for this sector since its inception. The heavy machinery association stated that "there has been a contraction in global demand to 60% and local demand to 52%." The German government, owner of the largest European economy, expects to contract by 6% this year, its lowest rate ever, and some economic observers are more pessimistic than the government.
3- The Economic Situation in Europe in General:
Retail sales declined rapidly in May 2009 due to the rising unemployment rate, meaning consumers have refrained from spending. Bloomberg company managers observed that consumers are still hearing bad news about the labor market and that the unemployment rate will continue to rise. Nick Kounis, chief European economist at Fortis Bank Netherlands in Amsterdam, said: "The unemployment rate in Europe rose to 8.9% in March, the highest in three years, and the rate will rise next year to 9.9% and then to 11.5% in 2010 according to the European Commission." The Eurozone economy will contract by 4% this year according to the European Commission, due to the setback in exports and companies reducing their number of employees.
4- The Economic Situation in Japan:
The unemployment rate in Japan reached 5% in April 2009, the highest in five years. The monthly report from the Ministry of Internal Affairs and Communications stated that there are 3.46 million unemployed, which is 25.8% higher than April of last year. There are only 46 jobs available for every 100 job seekers, making this ratio the worst since 1999.
The government issued a core consumer price index which showed a decline of 0.1% in April compared to the same month last year. The consumer price index—which excludes fresh food prices—showed a decline in March, the first decline in a year and a half, reflecting a decrease in demand amidst the global economic recession.
Average household spending also fell in April by 1.3% compared to the same month last year. Household spending is considered a primary indicator of private consumption, accounting for more than half of Japan's Gross Domestic Product (GDP). Japan's GDP shrank by 10%, as the contraction of Japan's GDP from January to March formed the worst setback for the Japanese economy since 1947. Glenn Maguire, chief Asia economist, stated: "Generally, a 10% decline in growth is considered a depression, and Japan almost reached this limit with the Japanese economy contracting by 9.7% during the current year. This confirms that the economic crisis has hit the Japanese economy—which is a developed economy—a severe blow."
5- The Global Economic Situation:
Perhaps the most indicative sign of whether the global economy is on its way to recovery or not is the current health of the global economy. According to the New York Times, the economy in developing countries has gone through its worst quarter in decades. The Organization for Economic Co-operation and Development (OECD) said on May 25, 2009, that there are indicators that the worst is yet to come, and that the total GDP of the thirty countries in the organization shrank by 2.1% in the first quarter of this year compared to the preceding quarter. It added that if the rate stabilizes at this figure, this decline will be the lowest since 1960, when the organization began collecting such information. The national product of the organization's members fell by 2% in the last quarter of 2008.
The economies of the OECD countries constitute 71% of the total global national income according to the World Bank. These economies contracted by 4.2% in the first quarter of the past year. America's contribution to this was 0.9%, while Japan's contribution was 1%, and the contribution of the 13 largest countries in the Eurozone was 1.3%, while the contribution of the rest of the countries was 1%. Meanwhile, China, which is one of the few countries not holding membership in the organization, saw its economy continue to grow in the first quarter.
All of this indicates that the actual reality of the global economy has not recovered from the economic crisis; rather, it is still suffering from it.
As for why the rise in stock markets and the prices of goods and services was observed, it is due to three reasons:
First: The US government's support for the insurance company (AIG) with $173 billion of taxpayers' money, of which the company spent $90 billion to pay its debts to American and European banks. On March 15, 2009, it became clear that AIG distributed the money to several banks and institutions, where Goldman Sachs received a total of $12.9 billion, Merrill Lynch $6.8 billion, Bank of America $5.2 billion, Citigroup $2.3 billion, Wachovia $1.5 billion, Barclays $8.5 billion, and the Swiss UBS $5 billion.
Regarding the importance of saving AIG, the US Federal Reserve Chairman Ben S. Bernanke commented by saying: "This company, AIG, made various irresponsible bets, and when those bets were proven to fail, the company failed and the collapse occurred in the financial market system." In order for the government not to support those banks directly for fear of causing public anger, the government supported AIG, which in turn delivered those funds to the banks. Consequently, many of those banks announced profits, such as Bank of America announcing profits of $4.2 billion, Citigroup announcing profits of $1.6 billion, and Goldman Sachs $1.8 billion. In Europe, Barclays Bank announced profits of £5.28 billion, causing the shares of those banks to rise.
In reality, this rise in stock prices is not due to economic activity that caused profit, but rather due to that support, the effect of which will soon wear off.
Second: At the beginning of this year, the US government announced its program to support American banks aimed at instilling confidence in investors regarding American banks to suggest that they are fine and not in great distress. The program was designed by the US Treasury Secretary Timothy Geithner to give the impression that most distressed bank assets could be removed from the balance sheet. On May 6, 2009, the government announced that some banks like JP Morgan and Goldman Sachs did not need government support, while banks like Bank of America, Morgan Stanley needed some support from the government. In summary, the ten largest American banks needed only $75 billion, meaning this could be covered easily and the government would not need to ask Congress for more support! This atmosphere and these statements caused the shares of American banks to rise, as the value of shares for Wells Fargo rose by 8.5%, Morgan Stanley by 0.9%, Bank of America by 4%, and Citigroup by 7%. It is clear that what happened is akin to moral propaganda support to raise shares, similar to what speculators do by spreading certain news about the progress of a company's economic situation or an expected advancement for that company. This leads to increased confidence and a rise in share prices, then after the purpose of the speculation ends, the decline or collapse returns, as happened in the causes of the current economic crisis. Therefore, regardless of the state of joy that gripped investors, many observers said that the tests point to tragic results. For example, Mick Holland commented saying: "Conducting tests for the markets is a waste of time," and Yara Harris, a currency trader with Praxis Trading, said: "At worst, there is deception and testing for the wrong thing. For me, mentioning the unemployment rate or that Citigroup is stronger than JP Morgan are laughable matters. Therefore, I will be happy when these procedures end, and I agree with others who say that the structure of banks has deteriorated in the last few years, and this is what explains them being in a mess now." On May 4, 2009, global financial monitoring estimated that the losses of American financial institutions were $2.7 trillion in the global credit crisis, meaning it is double the estimates issued six months prior.
Third: At the beginning of this year, both the US Federal Reserve and the Bank of England announced plans to start buying toxic assets from banks, corporate bonds, and other distressed financial assets. Naturally, increasing the injection of money inevitably leads to inflation and a rise in the prices of goods and services, because an increase in the money supply will lead to a weakness in purchasing power, and thus inflation—meaning higher prices. The Bank of England had already begun expressing its concern about the rising rate of inflation in the economy, which led to the economy suffering as it reached its lowest level since 1930. In a statement issued by the Bank of England, it said "there are promising signs" as the wheel of deterioration began to slow down. But the Bank of England also said that the slowdown is receding due to the high rate of inflation, which reached 2.9%, higher than the expected rate of 2%. This explains the rise in the price of oil from $36 to $58 per barrel; meaning that the rise in oil prices does not indicate increasing demand for it. Energy consumption decreased in 2009 for the first time since World War II, clearly indicating that the global economy is far from recovery. It is worth noting that oil prices usually increase when the value of the dollar is low; therefore, the rise in the price of oil is not necessarily an indicator of an increase in demand for oil, because America monopolizes the price of oil to prevent the collapse of the dollar's value.
Accordingly, talking about a Western economic recovery is premature. The Western governments' policy of lowering interest rates and buying toxic assets is only to delay the economic collapse. In fact, it is expected that the Western governments flooding the markets with cash will lead to inflation, the collapse of the commodity market, the emergence of monetary bubbles, and subsequently to a tragedy greater than what the world is witnessing now.