Opinion: 40% of world’s wealth destroyed

By Neville Bennett The leaders at Davos's World Economic Forum (WEF) acknowledged that 40% of the world's wealth has been destroyed in the past 5 quarters: and that's just for starters, as "the crisis can only get worse". My question is: Are things actually getting worse? My earlier blogs this year are relevant to this discussion. I prepared readers for the WEF position by writing about a new age, and England being hammered. I am returning to the England story because it is suffering the most from the crisis, its economy is wilting, its wealth is evaporating, and a bottom to its housing market is not in sight. It will take a generation of effort for the British to recover their recent prosperity.

The Davos meeting started with Steve Scwartzman, chair of Blackstone admitting that an "incomprehensible amount of cash had vanished" and that business would be "very different" in future. That is an important theme: some large businesses have turned to the state for funds, notably the banking industry but increasingly manufacturers like General Motors, and giant miner Rio which is looking for $10 billion from China. For many London-listed companies, January has been a perfect storm. Stock prices have fallen, the banks have been gripped by a second crisis, organisations are revising their forecasts downwards furiously, confidence is collapsing and lending lines are largely frozen (there is a nasty "new mercantilism" emerging where banks will lend only to their own nationals). In Britain the banks estimate that industry requires about ₤50 bn in funding, which banks and fund managers lack. Some observers think capital will dry up in two months. There is a rash of rights issues as some quick footed companies scramble to beat the bunch to go to the market and shareholders before the bucket empties: this includes the mining giants Xstrata and Rio Tinto, Premier Foods (the UK's greatest food producer), Wolseley the building merchants, and Inchcape the car dealers. Returning to Davos, Sir Howard Davies, Director of the London School of Economics considered the outlook as "grim" and things were getting "even worse". The major international organizations agree. Jobs The International Labour Organization says that 51 million jobs will be lost globally this year: it acknowledges that the financial crisis has now become a "jobs crisis". Most financial institutions have made well-publicised cuts, but recently iron-makers and Caterpillar have announced huge job-cuts. Unemployment is highest in Sub-Saharan Africa and South Asia. Most job creation came in 2008 in South, Southeast and East Asia (57% of the global total) and the lowest unemployment is 3.8% in East Asia. The EU and developed nations have lost 900,000 jobs. Economic Growth Growth in the US plunged at a terrifying annualised rate of 3.8%. The outlook is grim because consumer spending, which makes up about two-thirds of GDP, fell a second quarter in a row by 3.5%. Spending on big-ticket durables fell by 22%, and the decline in car sales alone dragged GDP down by 2%. Business investment fell by 19% against a backdrop of a 27% fall in sales of equipment and software. Exports have also suffered with the global recession; they are down by 19.7%. As anticipated in an earlier column, consumer behavior is changing. Savings are a positive 3%, as consumer worry about rising unemployment, the tightening of credit and falling asset values, especially housing and shares. The IMF predicts -1.6% negative "growth" this year in the US. The IMF expects the global economy "to come to a virtual halt" in the "worst crisis in 60 years". The UK has the worst recession this year (growth projected at negative 2.8%, followed by the Eurozone at negative 2%. Toxic debt is actually growing and is estimated at $2 trillion. The emerging economies will grow, but the rate of growth will fall from 6.25% in 2008 to 3.25% in 2009 due to falling demand for exports . The IMF adds that policy efforts to boost the economy have concentrated on threats to financial stability and liquidity support. But "the uncertainty about long-term solvency" of financial institutions is unresolved, and it recommends toxic assets being parked in a "bad bank". UK Debt This writer is a little disconcerted about the way successive speakers at Davos applauded massive spending by governments in stimulating the economy. Invariably they also added that governments were not spending enough. I am sufficiently a Keynesian to approve spending in principle, but also to disapprove of free lunches. How much spending is enough? What about the fiscal consequences? Should New Zealand observe what the UK is doing? The Institute of Fiscal Studies calculated that public debt in the UK has recently risen by ₤10,000 for every family in the country, and children would be paying off debt incurred in this crisis well into their 30's. Moreover, the crisis was costing ₤50 billion in lost tax receipts and increased benefits. Their government is trying to part-fund the big spend by some tax increases and spending cuts, but it plans, perhaps optimistically, on a ₤12 billion-a-year shortfall. The Institute believes revenue will fall more than projected so debt will grow. The UK's debt is ₤698 billion, equivalent to 47% of GDP ! Gordon Brown's recent ₤37 billion bank bail-out could add 11 pence in the pound to income tax for many years to come. Good comment comes for Mike Denham's blog, "Burning Your Money". Denham is a former treasury official who is increasingly concerned about debt market response to the problem: "What if they demand to see severe fiscal restraint including big tax increases before they will lend a bean?" Other critics warn that the Royal Bank of Scotland's ₤1.8 trillion of liabilities should be added to the Government's balance sheet by the Statisticians. That would leave the UK as the world's most indebted nation with debts of about 160% of GDP. As in New Zealand, pressure is mounting to slash the number of civil servants. The concensus forecast is grim, but only good policy and good fortune can mitigate that. ------------------ *Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.