For
many, the global financial crisis and the meltdown in value of money
and wealth, the increasing shortage of funds in government treasuries,
banks and corporate coffers, the bailouts of Ireland, Portugal, Spain
and Greece, with the possibility of the United States defaulting on its
treasury bonds interest rate payments over one trillion dollars to China
alone, is nothing short of mystery.
Nigel Farage, UK’s firebrand independent politician with a seat in the European Parliament has been calling for the death of the euro zone, claiming that it is a menace to the global financial system. Peter Schiff, CEO and chief global strategist of Euro Pacific Capital has been predicting the coming financial and economic collapse as far back as 2006 and 2007. Most dismissed his arguments as baseless and him as a chronic pessimist, although he had all the numbers right.
And on BBC, in order to make people understand what the crisis was all about, they introduced the Clarke and Dawes comedy show where one asked question and the other answered:
Q. How much does Greece owe ? 367 billion
Q. To whom? Other European countries.
Q. How much does Ireland owe? 865 billion
Q. And to whom? Other European countries
Q. How much do Spain and Italy owe? One trillion each
Q, To whom? Mainly France Britain and Germany.
Q. How will they pay all this money back? Other European countries will bail them out.
Q. From where will other European countries get the money to bail them out? How can one country that is broke bail out the other country is that broke hoping that a country which is broke can pay all this money back...did you include Portugal?”
The comedy show was a hit and viewers loved it all, but the messages could never sink deeply enough. The reason: very few people understand a billion or a trillion. These sums of money are unreal in their lives.
The latest statistics on national debt across countries is staggering. National debt, as percentage of annual GDP is as follows: Japan 471% United Kingdom 466% Spain 366% South Korea 333% France 233% Italy 315% Switzerland 313% United States 296% Germany 285% Canada 259%, China 159% Brazil 142% India 129% Russia 79%.
From the sub-prime mortgages to multibillion dollar real estate booms, It seems everyone was riding on borrowed money and on borrowed time while mountains of debt piled up and value of major currencies began to dip. The simple question is “ where did all this money come from to be given to sovereign states and major corporations?”. What has been the root of the chaos that we have now where even the United States, the industrial and financial powerhouse, is viewed as a potential candidate for default on debt payments.
It all began with the introduction of an obnoxious financial product called “derivatives”, actively supported Alan Greenspan, the mighty head of the Federal Reserve, which delinked value and money from the real economy. When a humble woman in a village rears chicken and sells her eggs, she is contributing to the real economy. But when an investment bank funds a forward contract for a 100 million barrels of oil at $7.5 billion, hoping that the oil on contract maturity will reach $9 billion, deriving a quick $2.5 billion in gross profits, it is taking a gamble. Here, a certain value is created on perhaps an intelligent speculation but the reality is that $2.5 billion remains a speculated value, in many cases unreal, and allows the investment bank to leverage that speculative value of $2.5 billion to obtain a loan of $25 billion or more which again could be used to underwrite another speculative derivate amounting to $25 billion, again with a speculative derivative value of perhaps $ 5 billion. The world of derivatives from options on shares to oil to minerals and many other commodities have thus led hungry investment bankers to build a castle in the financial sky, starving the real economy of farmers, builders and creators of wealth of much needed funds for development. In the ivory towers of big time and high profile financial empires, there was massive momentum in making large profits and bonuses on quick deals.
The share markets, often admired as the greatest and commendable distributors of corporate wealth among millions of people, also remains flawed. Short selling- buy in the morning and sell in the afternoon- provided yet another vehicle for speculators and punters, prices often driven by externalities of war and peace, floods, droughts and earthquakes or the change of governments and policies. Trading rooms soon became more a gambler’s paradise, again, delinked from the real assets and liabilities of corporations although traders subscribe to the sublime theory of the efficient market hypotheses where all information is available on real time.
The dollar is low and it may help the US exporters. Euro zone is in deep trouble, bailing out the bad boys. Japan needs another 10 to 15 years to recover from its unprecedented natural disasters. The British pound has lost its value sharply and the UK economy is going through the worst time since World War 2. At the end, tax payers everywhere will pay the price for resuscitating failing banks and economies. The paramount need is for a global financial regime that facilitates development of real economy and reigns in the speculators who create artificial and unreal wealth. It will take a very long time as the gatekeepers in Europe and the US may not have the political will to take on an established financial system that is all too powerful and which determines the nature of life for all people. An apt lesson for emerging nations is to ensure that the production forces of real economies- from farms to manufacturing, from infrastructure to services, from tourism to education, take top priority for financing.
Guy de Fontgalland is President of Eurasia Management House in Georgia. He is a Harvard educated investment banker who has worked internationally for over 25 years in senior positions in commercial banks, World Bank group and with UNDP.
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