Exchange rates in Central and Eastern Europe may spell trouble for the West

With all attention turned towards the struggling economies of the developed world it has become less and less important what happens to other parts of the globe. However, in the current economic downturn one must remember that globalisation has NOT disappeared over night. In fact we are pretty much in the same interconnected world we used to be before all this mess started. This means that what happens in one part of the world will, in one way or another, have repercussions on the other side of the globe. So taking this into consideration, we should then at least show some interest to what happens to other parts of the world, especially those which are strongly related to the West and its financial system/crisis.

The issue

Since November last year (2008) exchange rates across Central and Eastern Europe have been plummeting at unexpected rates. Some have even reached lows that have last been experienced in 2003. Obviously the first suspect is the world financial crisis, but this is just a simple explanation that overlooks the deep roots of the problem and what its repercussions might be on the Western countries.

Why are the rates plummeting?

There are 3 main reasons:

1. Western banks and investment funds have been investing heavily in emerging markets. This is because, as these markets are on the rise and many of their assets are under valuated, there is a good chance they could make a nice profit while maintaining a relative low amount of risk. And one of the best emerging markets is or used to be the former communist states of Central and Eastern Europe.

This means that a lot of western cash (dollars, euros and pounds) have been poured into this region. And now, as things have gotten worse back home, Western investors need that money to plug the holes in their own back yard. As a result, investors are just selling off what they have in Eastern Europe and taking the money home. However, their money is not in their home currency (USD, EURO, GBP) it is mostly hold in the local currency. So as they sell the local currency (the currency of Central and East European countries) for dollars and euros, these local currencies start to devaluate.

2. Losing confidence (risk aversion) - as now investors have a hard time knowing where to put their money, the economies of Central and Eastern Europe seem less certain than those they have back home. After all, they should know more about what happens in their home countries rather than what happens in some country all the way across the sea. Also investors tend to trust more the governments of the rich developed world, believing they are better prepared in taking good decisions than those of less developed countries. This means that less dollars and euros are sent towards less developed regions like Eastern Europe. As a result, there is less demand for the local currencies. Thus, the local Central and East European currencies slowly start to devaluate.

3. Growing western deficits – As the trouble in US and Western Europe becomes increasingly more acute, their governments try desperately to salvage the economies. One of the most used methods is to basically inject money into the system, hoping it will somehow stimulate the economy and bring it out of recession. But the money must come from somewhere…

One solution is to print more money but this can very well just lead to inflation and in combination with the economic crisis it might just spell the apocalypse of the capitalist world. The only other solution is to barrow the money from … somewhere, usually from some banks and organisation specialised in lending to governments. Nonetheless, these organisations also need to get the money from somewhere and that somewhere is the rest of the world. Also the money needed must be in western currencies. That means dollars, euros and pounds because you cannot stimulate your economy by injection some other random currency, you need your own. One of the places where a lot of dollars and euros have been poured into is Central and Eastern Europe and now the West needs those dollars and euros to finance their deficits. As more and more government lending organisations try to buy the dollars and euros from Eastern Europe, the local currencies again start to devaluate as they are being sold for the western currencies.

The implications for US and Western Europe:

Now that things have been explained it remains to understand what this tells to the rich developed countries. Going back to the previous points there are two which need more careful attention. Firstly that dollars and euros are leaving Central and Eastern Europe in order to plug the holes of struggling Western financial institutions and secondly to finance Western government deficits. This is not a major issue as long as there still is an easy way to get the dollars and euros from “somewhere” without creating inflation. But what happens if the money runs out? Money is not infinite…

The basic problem is simple, as long as the West can gather money from Eastern Europe, in other words, as long as the currencies of this part of the world continue to devaluate there is still hope for a sound economic recovery of the rich Western world (they will have from where to get the money to support their economies). HOWEVER, if the West does not show any signs of recovery by the time the devaluation stops and the Central and East Europe currencies start to evaluate again, we can safely say that we are probably experiencing the end of a chapter in human history. Hopefully this will not happen.

Other information:

Central and Eastern Europe is not the only region experience currency devaluation; countries across the global are experiencing this. From Kazakhstan, Tajikistan to Philippines and South Korea currencies have been losing ground against the dollar and the euro. But Central and Eastern Europe has a much closer tie to Western Europe and the US, receiving more foreign investment and thus being a better representative case.

The amount of money being drawn out of Eastern Europe is impressive. In the case of Russia, in less than 6 months, $ 800 billion left the country as western investors were bailing out from the Moscow stock exchange and other short term investments, this was in November last year. It was the period when most stock exchanges in the less developed countries collapsed as Western investors virtually fled these countries. These were short terms investments but now we are looking at medium and long terms investments and deposits, once these are out, there is virtually nothing left.

The amount of public deficit ran in Western countries is breaking historic records. In US, in 2008 government deficit was about $ 450 billion (3.4% of the GDP) and for 2009 it is projected at almost $ 1,700 billion (more than 10% of the GDP). In UK it was 4.6 % GDP in 2008 and projected at 9 % of GDP in 2009.

 

Economic crisis in EU / Europe (2009 roundup)

By now everyone in the developed world knows it: we are living an economic crisis. Still unclear is why a recession, which according to economic specialists is not something completely unusual, is now considered a crisis. Maybe it is just a mass-media gimmick or maybe it is something far worse than a recession. For now the answer will be left opened to debate and the focus will go on what shall we expect in the next few months.

Last week, the Commission of the European Union, the institution responsible for managing the major economic aspects of the world’s largest economic power – the European Union, has released its predictions for 2009. Although the picture is not a cheerful one, it is neither a devastating one.

Here is the official link:

http://ec.europa.eu/economy_finance/thematic_articles/article13727_en.htm

And on short what the Commission predicts:

Nr.	Country	GDP growth 2009	GDP growth 2008	GDP growth 2010	Public Budget 2009 (%GDP) (negative = deficit)
	EU	-1.90%	-0.20%	0.50%	-4.50%
1 (18 )	Latvia	-6.90%	-2.30%	2.40%	-6.30%
2 (1)	Ireland	-5.00%	2.00%	0.00%	-11.00%
3 (16)	Estonia	-4.70%	-2.40%	1.20%	-3.20%
4 (20)	Lithuania	-4.00%	3.40%	-2.60%	-3.00%
5 (3)	UK	-2.80%	0.70%	0.20%	-8.80%
6 (9)	Germany	-2.30%	1.30%	0.70%	-2.90%
7 (12)	Italy	-2.00%	-0.60%	0.30%	-3.80%
8 (10)	Spain	-2.00%	1.20%	-0.20%	-6.20%
9 (2)	Netherlands	-2.00%	1.90%	0.20%	-1.40%
10 (4)	Belgium	-1.90%	1.30%	0.30%	-3.00%
11 (8 )	France	-1.80%	0.70%	0.40%	-5.40%
12 (5)	Portugal	-1.60%	0.20%	-0.20%	-4.60%
13 (14)	Hungary	-1.60%	0.90%	1.00%	-2.80%
14 (11)	Sweden	-1.40%	0.50%	1.20%	-1.30%
15 (6)	Austria	-1.20%	1.70%	0.60%	-3.00%
16 (13)	Finland	-1.20%	1.50%	1.20%	2.00%
17 (7)	Denmark	-1.00%	-0.60%	0.60%	-0.30%
18 (-)	Luxembourg	-0.90%	1.00%	1.40%	0.40%
19 (15)	Greece	0.20%	2.90%	0.70%	-3.70%
20 (17)	Slovenia	0.60%	4.00%	2.30%	-3.20%
21 (-)	Malta	0.70%	2.10%	1.30%	2.60%
22 (19)	Cyprus	1.10%	3.60%	2.00%	-0.60%
23 (22)	Czech Rep.	1.70%	4.20%	2.30%	-2.50%
24 (25)	Romania	1.80%	7.80%	2.50%	-7.50%
25 (24)	Bulgaria	1.80%	6.40%	2.50%	2.00%
26 (23)	Poland	2.00%	5.00%	2.40%	-3.60%
27 (21)	Slovakia	2.70%	7.10%	3.10%	-2.80%

It looks like EU will not be doing very well, especially in 2009 when there will be a general recession in almost all EU countries. It is noticeable how optimistically the Commission has predicted 2010 with an already recovering EU economy, right now the economic future of the western developed countries is quite gloomy and any predictions beyond 2009 may just be hard to be taken in consideration. Also we must take notice that most of the EU countries try as much as possible to stick to their commitment for not running a to big budget deficit, most trying to remain around 3%. This is a considerably small deficit in times of recession and it is unclear if this will prove helpful in the end.

What can we do?

Most of us wrongly believe that the economy is something impersonal and beyond our control, most of us believe that all we have to do is tighten our belts and wait for the recession to pass. However this is a wrong way of seeing things. The economy we live in, is our economy, is made by us, by our transactions, our work and our ideas, it is not a force of nature or God. We build our economies with our own hands and minds and becoming passive, just waiting for the recession to pass, will not improve things.

It is like living in a house together. The roof has broken and now we all wait for someone or for some way to have it fixed so we can get back to our daily business. Unfortunately the only way to fix the roof is for us to get working on it and stop staring at it. So try to do something, if there are no more jobs try working on your own or with your friends, try ideas that you think might work, be inventive. A recession is not the end of the world.

Remarks:

As a note to my previous article on the economic crisi: “Which countries will be worse hit by the current economic crisis?”. I compared the predictions of the EU Commission with the ones made in the article above. The average difference between the Commissions’s ranking and my ranking was 5 which is not very promising for my predictions. However, when broken down, out of the 27 countries, 4 I got completely wrong, 5 close but not close enough and 18 almost entirely right. I would say that this means that in most cases my predictions were correct. Also it seems that they work very well for big countries with populations above 20 million while for those below they usually tend to unreliable.

 

Greece’s riots are a sign of the economic time

Well, it certainly seems that the predictions of this humble author were not entirely empty make-believes. One should keep in mind that riots and public unrest are in no way a novelty to Greece – in fact just about every major event spawns a series of unrest followed by looting and fighting – be it Olympics, EU summit or other thing. However, unrests that last for weeks at the time are indeed something the government should take as a sign to start worrying. If an average Greek Kostas can stay off Frape and the game of tavli for more than a couple of days to partake in some demonstration, it can only mean that this time he`s angry for real. And a kind word of reassurance that life would be better tomorrow would not work by that stage.

Change is needed, and not just a mere transition of powers between Pasok and their counterparts, but a full-time transition. And there is only one party left after the big two are gone – the communist KKE. Why, I can practically envision mass executions, the hand of KGB in every major country affair big and small and red draping hanging on every wall. This is, of course, what the Greek prime minister would like his people to believe in the last desperate attempt to cling to his big boss chair. Sadly for him, the time when his word was trusted is rapidly coming to an end. Do we have to point you to the door, Mr. Karamanlis? Don`t forget your shoes on the way out – someone might not resist the temptation of a modern shoe-tossing trend.



Guest article by Tovarish

 

No reason to panic – it`s all under control…

Ukranian Defense Ministry claims its armed forces relocation has nothing to do with Russia specifically, but is a process of spreading army more evenly across the country (original article in Russian). Defence Minister Yuri Ekhanurov recently stated(rus): “The recent Caucasus situation development makes every country think about its ability to deal with new challenges. It seems it is not so quiet, and Europe can still have armed conflicts”.

Touché, Monsieur Ekhanuroff. The challenges indeed makes you think. It puzzles me, however, what kind of thoughts make you reinforce your army positions along all of the borderline. Perhaps you got a tip that a full-scale assault of two-headed reptilians from Alpha Centauri is due to start the coming Tuesday straight after morning tea? What kind of threats does Ukraine fear in Europe? Moreover, what kind of threats does it think it can REALLY tackle? It seems to me Mr. Obama would be more reluctant than his predecessor  to fish you out of the pot once the soup starts boiling.

The most probable threat Ukraine is preparing to face

Guest article by Tovarish

 

A tale of one Dictator

Once upon a time in a blissful place of forests, glades and lakes appeared a Dictator. He (of course it was a he) was greedy and evil beyond measure, and quickly made his mind to usurp the whole place where people knew no troubles. In no time did he gather everyone and proclaimed himself to be the new master of all, everpresent and evervigilant. The world was his, and nobody could object to his rule.

As he was gloating over the pathetic minions who lost their freedom to him, he was approached by his team of trusted advisors. “You are at great risk now” – said they. “We are the only people you can trust to shield you from danger of haters and rebels. You have to favour us – give us the share of your power, and we would be your trusted helpers always”. And so the Dictator did.

Next came the military of the country, and this they said: “We are many, and we have guns. We do not care for your rule or anyone else`s. But we don`t object to your presence either. Give us the share of your power, and we would serve you loyally from now on”. And so the Dictator did.

Next came the police of the country, and voiced their cliams: “Your enemies are many, and they all plot against you. We hunt them night and day, and it`s a hard job. Without us you are not safe, and for this we want to live better than the rest. Share your power with us – you have much of it as it is”. And so the Dictator did.

Next came the judges, and appealed to Dictator`s reason: “The criminals the police catch are fearless, for they know they did no wrong in plotting against you. Bars and chains do not break their spirits. We need harsher measures to punish them and make the rest fear you – and for this we need your power”. And so the Dictator gave them some.

Next came the aristocracy of the country, and complimented the Dictator: “Your Highness, we worked hard for our capital and social standing, and the same maggots who seek to overthrow you want to kill us too. Give us the share of your power, so we can keep the unwashed peasants in check”. And the Dictator reluctantly did this.

Finally came to Dictator his trusted Foreign Minister and said: “Your Highness, it is well known the rest of the world hate you, for you call yourself Dictator. In my opinion, we can prevent a war with all of them if we but do a few minor changes, for formality only. It is my suggestion that we change your official title to President, and hold elections once in a while (just to keep rebels in check, eh?). Also, there should be some sort of puppet opposition, let`s call it Parliament, where village elders would gather once in a while and debate on matters useless and uninteresting. You would still be our benevolent Dictator, but all the others would be fooled into thinking you are not, and you do not have to fear for your life no more. This would be a very wise decision”.

And so the dictator ruled the land of paradise from then on, untill one day he choked on a cherry from a jar.

Guest article by Tovarish

 

A trouble brewing in the Land of Toys?

Prime Minister Costas Karamanlis spent his second consecutive weekend trying to convince people in the provinces that the 28-billion-euro support package for banks would benefit the real economy

Greeks are truly having a time of their lives being in EU. How else can you explain that, during the very agony of the world economy as we know it, Karamanlis spends days walking in mud in the middle of nowhere convincing locals they would have more goats as a result of some smart government move? He is talking to the same people that were offered money by EU agrarians not to grow their crops and sit all day in the sun for a few years now. During my time living there, even my schoolteacher got a couple of “suit dudes” coming up to his country house offering something on the line of 30 Euros not to grow olives on his almost dry tree in the backyard.  In a country flooded by archaic bureaucratic system, external enemies on all fronts and hundreds of unwelcome ethnic Greeks with no passports or jobs, there never seems to be a cloudy day.

Why, on the less sunny side of Greece we have a whole island network of  tourist industry that might just be breathing its last. With consumers in Europe saving their money in their pillows rather than in their holiday plan, a lot of places might not see tourists wobbling towards the beach in the next swimming season. Of course, Greek government does not have to address this problem – it is well known that 90% of people employed in the tourist industry are seasonal workers, and disappear into thin air once summer is over, creating no poverty, despair or votes for the opposing party.

Kostas Jabba Karamanlis the Hutt, as the world knows him

Guest Article By Tovarish

 

Which countries will be worse hit by the current economic crisis?

Politicians keep telling us that, despite the situation being grim, they have the means to deal with the crisis and save our country’s economy from a long and deep recession. Even when thousands of people lose their jobs daily, they still come on television and tell us that “it will be alright”. The sad and simple truth is that politicians will pretty much say whatever it takes just to gain some public support. In fact, many of the economies hit worst by the current crisis are fairly limited in their ability to deal with it.

Briefly what is happening

In general, the prescribed medicine until now has been to pour money into the economy and cut taxes in order to stimulate consumption and investment. But money does not just come from thin air, it is either printed, thus creating inflation, or is borrowed. In general, central banks or governments try to avoid printing money, because if this leads to rampant inflation it would just worsen the situation. So in most cases, the only way to deal with economic crisis is to run a government deficit, which means cutting taxes in order to stimulate your internal market, while injecting money into the economy and praying that all this would actually work.

Moreover, as the world is highly interconnected nowadays, exporting countries which rely on Western markets for their products suddenly face a drop in demand. As their economies are threatened, the only solution is to try to move from the external market towards the internal market. But again this has its limitation if, for example, you are an oil exporting country, it is unlikely your internal market will be able to compansate for the loss of demand abroad. If you are like China, exporting manufactured goods, then there should not be any major obstacles for turning towards the internal market, provided you can stimulate your internal consumption.

The key elements

Taking this into consideration, by using some broad macroeconomic indicators you can predict which country is better prepared than others to deal with the crisis. In other words: who would be hit worse. Bear in mind, that this is just a broad picture: government leadership, structure of the economy, exporting partners and many other factors can also affect the evolution of events.

Public Debt – this is the debt gathered by the government. Chances are that the bigger this is, the greater is the difficulty of the government to run a deficit. Simply because when you have a lot of debts that you keep stacking, creditors know it is unlikely you will pay them, so they will be reluctant to lend you more money.

External Debt – this is the debt of the entire country to creditors outside it. The bigger this is,  the harder it is once again for the countrys` government and private sector to receive new loans.

Unemployment – The proportion of workers without a job and actively seeking one. In the current situation, if you have a high unemployment rate it probably means you already have some very big issues and the current crisis will probably matter little on top of the problems you already have.

Exports – The amount of good and services you sell to other countries. In the current situation, the more export orientated you are, the bigger the impact on your economy of the fall in the global demand for goods and services. However, in most situations you will be able to revert to your internal market, but this will not be without its costs.

Reserves of Foreign Exchange and Gold – the amount of foreign money and gold you have at your disposal. This money can be used for various means: in exchange for your own currency in case you need it to stimulate your own economy, pay external debts or lend it to other countries so that they can buy your products.

Stock of domestic credit – is the total amount of credit owned by non-banking institutions. Usually not a big deal, but in the current situation, the bigger this,  the larger the number of defaults. This will probably apply better to the states which were worse hit by the financial crisis.

GDP (exchange rate) – the value of all final goods and services produced within a nation in a given year. This value is calculated in the domestic currency and then transformed into USD at the official exchange rate.

GDP (PPP) – the value of all final goods and services produced within a nation in a given year. This value is calculated by evaluating the internal goods and transactions at their value in USA and thus directly in USD.

Building a rating

Putting the above elements together is not an easy task and requires some intuition. The result is by no means a strong predictor. Rather, it is an indicator of which countries will experience more difficulties than others.

The formula: R= [%Public Debt + ExternalDebt as % of GDP + (Exports as % of GDP)/2 – ForeignReserves as % of ExternalDebt – (ForeignReserves as % Exports)/2 + Domestic Credit as % of GDP]

The higher the rating, the less likely the country can deal successfully with the crisis. A world average is computed weighted by the countries economic power (GDP at PPP). And then, based on this average a score can be given.

The results

Unfortunately, there is not enough information to make this formula work for all countries, but there is still enough for 117. Here are the countries ranked by their crisis vulnerability (the higher the score the worse isthe situation for that country):

Countries with scores above 60 are in a very bad situation. 40-60 - pretty bad, but probably a good crisis plan will get them ashore. 20-40 should not be very badly affected but this will depend on leadership. Below 20, some difficulties but generally the crisis will consolidate their position.

And the score of the biggest 20 economies in the world based on their PPP GDP.

Rank	Country	Vulnerability Score	GDP PPP (real valure) (millions of USD)
16	European Union	45.67	14,546,184.50
24	United States	40.54	13,780,000.00
117	China (PRC)	0	7,099,000.00
18	Japan	43.33	4,272,000.00
111	India	17.26	2,966,000.00
13	Germany	47.5	2,807,000.00
4	United Kingdom	62.57	2,130,000.00
110	Russia	17.35	2,097,000.00
12	France	49.07	2,075,000.00
77	Brazil	27.48	1,849,000.00
20	Italy	42.9	1,800,000.00
15	Spain	45.68	1,361,000.00
81	Mexico	26.91	1,353,000.00
19	Canada	43.09	1,271,000.00
83	South Korea	26.75	1,206,000.00
62	Turkey	29.71	853,900.00
71	Indonesia	28.45	843,700.00
23	Australia	40.64	773,000.00
115	Iran	7.08	762,900.00
90	Taiwan	25.71	698,600.00
3	Netherlands	62.58	645,500.00

What does this tell us?

The highest ranked country is Zimbabwe. This may seem weird for some, but given that they currently have an inflation rate of over 230million % (yes, that is correct, 230 million) and that they rely heavily on loans from outside the country, this comes at no surprise.

However, other countries on top of the list are well developed countries. This is because they have a substational Public Debt as well as an External Debt which is sometimes 4 times the size of their GDP, their low foreign currency reserves also means they are somewhat limited in they ways they can help themselves. However, given their good economic performance until now it is likely they can still manage to deal with the situation, but the impact of the crisis will still lay heavily on them.

US has ranked quite well. This is because their External Debt is not very big in comparison with their GDP. Also they can probably rank even better (lower) because although officially they have low reserves of foreign currency they have the power to print dollars which is still a very powerful international currency.

On the other side of the big countries is Russia and China. Both countries have low public debts, low external debts and high reserves of foreign currency. For China the situation is still difficult because they rely heavily on exports, but this can be offset by the high level of foreign currency reserves. They can lend this money to other countries which in turn buy Chinese products with or exchange the money for Chinese currency and help their own economy. For Russia the situation is not that good, especially because they are primarily a gas and oil exporter and they just cannot replace foreign demand with internal one, they will have some difficulties but probably not a crisis.

 

They did what?

MOSCOW – RUSSIA is giving one US$1 billion (S$1.53 billion) to the International Monetary Fund to help countries overcome the global financial crisis, Prime Minister Vladimir Putin said on Thursday.

Let me get this straight – so now we here, in the liberal free-loving West, are beginning to accept blood money from Russia? We all know that those funds come primarily from selling Chechen babies to be trained in death camps of tolerance in Siberia. How can we accept this money in time of need from RUSSIA? After all, everyone knows Communism has failed, this country should not even exist anymore.

As a concerned citizen, I cannot understand why we have to take money from the people who caused the crisis in the first place. Everyone knows the primary source of our excessive borrowings (that led us all into this mess) are 1) China`s profits from selling the “Free Tibet” T-shirts and 2) Russia`s oil money (primarily found under some loose floorboards in Khodorkovsky`s summer condo). It is all their fault and in fact they should be bringing over their goods for free as an apology for all the mora they have done to us.

And now we are just meant to owe them money? I understand being fully dependent on USA, but Russia? They are not real people anyway, right? I mean, they are on the WRONG side of Europe. And we have absolutely nothing in common with them except for oil and gas trade, as well as considerable amount of history (those stories of the dead people you slept throught in school). I say these tendencies are wrong, and we should stop the cancer before it spreads. Make your contribution to the crisis – turn your gas off and let those Russians beg us, not otherwise.

All your base belong to us!

Guest article by Tovarish

 

The financial crisis and Karl Marx

Thanks to mass media, by now most of the people of the world have some idea about the global financial crisis. No one knows exactly how this crisis came about and although there are many explanations, none manage to get to the root of the problem in a convincing way. Moreover, rarely is mentioned that today’s crisis is not unique and that other similar crisis have occurred through history. To explain this a bit better some examples may come in handy:

1857 – The Panic

It was a short economic depression which started in US and also affected major European countries, especially UK. The reasons were multiple, from an already slowing down US economy to land speculations based on railroad expansion and lack of bank liquidity. But the trigger was when the market for railroad bonds collapsed leaving thousands of investors ruined.

1873 – The Great Panic

Again the reasons are multiple from the expansion of cheap imports from US to Europe to the poor financing of urban development and housing and land speculation. The trigger was the collapse of the construction industry in Europe financed by poor lending practices; the situation was almost identical with the recent collapse of the housing market in US.

(1914-1918 ) – World War I

It is important to note the First World War because implications of such a war are far beyond the ones of any financial crisis. Such a war was an economic disaster for most of the world.

1929 – The Great Depression

It is hard to say what or who was to blame for the Great Depression; there are many theories which try to explain it in a way or another, some of which are even contradictory. The underlying problem was that consumer consumption was pushed upwards by cheap credit partially resulted from an uncontrolled expansionary monetary policy lead by the Fed. In other words consumption became artificially much higher than it should be or than what people could afford. Eventually this hit back when the people could not repay their debts and the entire economy tumbled down. The trigger for the crisis was the Wall Street crash on the 29^th of October 1929, in just two days the stock market lost almost 20% of its value.

(1939-1945) – World War II

Similar to World War I but much worse.

1973 – Oil Crisis

Although much of the blame for the crisis of 1973 is on OPEC’s oil embargo and its attempt to increase the price of crude oil, some elements of the crisis also have roots in the financial/economic sector. Before the crisis began the US economy was already facing difficulties due to increasing government deficit and net trade deficit. The crisis came at a time when the dollar was weak and US just could not bare to pay an increased price for oil. As a result it just settled for a limited supply and faced an economic depression which affected the entire western world.

(1989-1991) – The Fall of USSR

At that time the Western block had some economic difficulties of its own (e.g. the Black Monday of 1987) but these paled in comparison with the collapse of the Soviet Union. In just a few years the former socialist countries experienced massive unemployment, huge inflation and a decrease in GDP of over 25% (in some countries it decreased by as much as 60%) . By 1996 the former “communist” states were in economic ruin. Although this apparently had little to do with the capitalist system, it did provide a huge new market for its products and its financial expansion.

2008 – ???

One of the major economic and financial crisis of the beginning of the 21^st century, its causes are still unknown. The trigger was the collapse of the housing market in US in late 2007 combined with rabid consumerism financed partially by credit and a huge trade deficit. The effects propagated throughout the world affecting every country engaged in the world financial markets.

What do all these examples tell us?

The examples above tell just a broad story of capitalism. Other smaller crises have been ignored, just in the past 20 years there was the Mexican crisis, the Asian crisis, the dot com crisis etc. But the major story remains the same, major economic crisis do happen and what we are living today is not unusual. The question is why we keep reliving these events? After all if they are not something new, leaders and economists should have learned how to avoid them. Is there anything these crises have in common?

The classic economic theories give little insight when it comes to explaining broad events or patterns. However, there is one explanation which has been looked away ever since the fall of the Soviet Union and that is Karl Marx’s critic of capitalism.

There is no point in going into Karl Marx’s theories and concepts as they require at least a few hundred pages of discussion, it is better to concentrate on what is relevant to the case of economic crises.

According to Karl Marx, unless the capitalist system is faced with an external shock like the World Wars or like when in 1973 OPEC decided to skyrocket oil prices, it will experience from time to time crises of its own. According to him, the capitalist system is designed to create so much wealth and so many goods that they eventually surpass the needs of the people. At that point economic downturn begins because the system needs to rebalance itself. This sends the economy into disarray: unemployment rises, inflation rises, public investment slows down, more shortly the standard of living of the population is generally decreasing. For Karl Marx all these crises have something in common: over evaluation and overproduction. In 1857 it was the over evaluation of the railroad bonds and over investment in railroad development. In 1873 it was the overinvestment in the construction industry in Europe. In 1929 it was a general overproduction in almost all sectors. Today it was the overproduction of houses. According to Marx’s ideas, the World Wars and the fall of USSR are just part of the same story. The World Wars avoided any crisis because they were a crisis by themselves, while the fall of USSR meant opening of new markets where capitalism could expand thus avoiding overproduction. But when there was nowhere else to go, capitalism did exactly what Karl Marx predicted, it entered the crisis experienced today.

Karl Marx being the father of communism is a much disputed figure, his ideas and theories have been many times questioned or hard to believe especially in the western world. It is less important at this point what he wrote about communism, but what he wrote in his critique of capitalism. There may be many valuable lessons to be learned from his work even if they may be hard to accept.

copyright for the image goes to Reuters

 

The Cold War never ended…

Although the growing tensions between United States and Russia have been recently discussed in mass-media, there are still many people who either have little knowledge about it or are not interested. With last month’s conflict between Russia and Georgia, the differences between United States and Russia have become more and more apparent. The gap between these two world powers has now grown so big that the possibility of a new Cold War has been mentioned more and more often on television and in the written press.

In an article posted on this blog more than a year ago, (Russia and USA – a broken friendship?) the signs of a worsening relation between US and Russia were already quite clear.

Going even further, in the past years there were several times when officials especially on the Russian side declared not that a new cold war is going to start, but that the cold war has never actually ended.

To name just a few:

Back in 2005, India Daily quoted Russian air force commander Gen. Vladimir Mikhailov: “Although Russia has ended the Cold War and is peacefully disposed, […], U.S. arms production and planning indicate that the United States has not ended the Cold War.” Regardless if this is pure Russian propaganda or actual facts, it indicates that the idea of a Cold War was not out fetched for Russian officials.

In 2006, after some harsh criticism made by Dick Cheney against Russia, the “Russian media on Friday described Vice President Dick Cheney’s harsh criticism of Russia and President Vladimir Putin as the start of a new Cold War”. – Washington Post . They were probably over-exaggerating.

In January 2008, Andrei Lugovoy, the newly elected member of the Russian Parliament (the State Duma), former KGB/FSB spy and alleged murderer of Alexander Litvinenko, stated in an interview for Los Angeles Times that: “I don’t agree that the Cold War is back. It has never ended”.

Litvinenko was a former Russian spy who fled to UK and started spilling all sort of information about Russia’s FSB operations, still unclear how much of what he said was true.

And from a more impartial source (Taipei Times – Taiwan), written in 2004, it seems that the conflict in Georgia of August 2008 was to some degree predictable. The article has the fallowing ending: “Saakashvili [current president of Georgia] is sure of election tomorrow, but what happens next is unclear. Will the new team in Tbilisi move towards a more confrontational anti-Russian nationalism, or will they understand that supporting Bush’s policy of a new cold war in the Caucasus offers Georgia no benefit?”

Maybe the Cold War did end, but not for everyone.