Economy


Do not judge for how I write, but for what I write.

In the past years, colleagues, friends, family, girlfriends have often criticised me for being … a pessimist. Since I am tired of justifying my pessimism, I have decided to write down my story, although, fundamentally it is a story about all of us.

I have always been the curious kind. Learning more about the world usually sparks my deepest emotions regardless of the beauty or ugliness of the things I witness. Fortunately for me, during my childhood, my thirst for knowledge had been satisfied with books, documentaries, field trips and even instruments (a microscope, a telescope, various electronics, etc.)

Later, during my teenage years, I had the opportunity to travel and visit many countries, meet many people and explore many capitals. Slowly, living in or just visiting famous cities, whether they were Paris or London, became less and less exciting. People from different countries, even though they may have dressed differently or spoke differently, or were more respectful, fundamentally started to seem all the same to me. As arrogant as this may sound, the truth is that for me the world was becoming smaller and smaller.

At the same time, in magazines, on TV and in movies, the future was looking better and better. Just a few centuries ago humans have set foot on the Moon, and the fall of the Berlin Wall filled our hearts with high expectations. Overall, the future looked bright.

All of us (especially Westerners) lived under the impression that there was nothing to stop us from solving the problems related to resources, poverty, corruption, so that we may reach beyond the limits of our planet. I was convinced that my generation will be different, that we will take the first steps towards a “wonderful” future.

This conviction led me to study physics and mathematics, in hope that one day I will become an accomplished physicist who will contribute to that bright future. Those aspirations seem childish now, but for a 17 year old kid, anything is possible.

However, before I applied to college, I had a moment of lucidity in which I realised that the technological progress of our world is not determined by the dreams of enthusiastic teenagers like me, nor by the benefits that it can bring, but by the will of the political establishment. Moreover, I was aware that it would not be wise to explore space as Europeans, Russians, Americans or Chinese. Not only because it would be completely inefficient, but also because it would be ridiculous to carry with us our earthly conflicts and start arguing over what patch of Moon belongs to whom, when we should focus on exploiting its resources for everyone’s benefit.

Thus, in the last minute I changed my mind and instead of following a career in physics or engineering, I chose to follow a career in international relations at a prestigious university in the United Kingdom. I thought that by doing so, I will have the best chances to help build a “better” future.

I was thrilled, certain that by going there I will learn how to help the world, how to manage the political and economic space in such a way that the distribution of resources and investments will benefit not only us today, but also countless generations to come. I was perfectly aware that my influence on the world will be mire at best. But I was not interested in feeding my ego, participating even in the slightest towards that “wonderful” future was more than enough for me. After all, even the most insignificant contribution is better than nothing. Strange as it may seem, I also felt a sort of responsibility for the world and its people. Most likely because I was aware that the “careless” life I was enjoying at the age of 20 was mostly thanks to those that were before me. It felt natural that in return, I should be preoccupied for those that will come after me, so that they too will enjoy the same quality of life as I did.

Unfortunately, the academic environment that I discovered had nothing in common with my enthusiasm and idealism. In the academic world and among my colleagues, their concerns were completely different from mine. Excluding the false preoccupation for those around them and their ephemeral friendships, mimicked for admiration and social prestige, almost everyone seemed to care only about their own personal and financial gains, advertised at different parties or social events. Initially I thought I lacked the ability to understand this world, but after 4 years of college I was certain that my preferences and expectations were parallel with this academic world.

To evade any misunderstandings: people have all the right to think of themselves and be egoistic. This is currently the rule in our world. But I am talking about universities that should represent the world’s elite and I am not exaggerating when I say that many of their graduates will reach important positions in ten-twenty-thirty years. Maybe I am absurd, but personally I was expecting their students to be different from others. Unfortunately, in 4 years of college I only met two people who were genuinely and unselfishly preoccupied by the future of our world. Otherwise, I met a lot of folks, driven by pure egoistic reasons, who would give their best to impress others with their preoccupation for different social causes or with their outstanding revelations discovered in some book or pint of beer.

What disappointed me even further was that the university invested no effort in helping us realise that our attitudes and way of thinking will determine our collective future. Most debates and discussions revolved around tolerance and discrimination, but most commonly about what theory of some group of scholars was better than another. Applying these theories to real world scenarios was usually off-limits, which is understandable, since most of them make no predictions that can truly be tested in the real world. Therefore, we were dragged into pointless debates wrapped in a subtle certainty that all of us there, participating in them, were somehow superior. Moreover, the discussions and the promoted way of thought focused almost entirely on “trendy” problems, and when attention was moved towards future developments, we all started to suffer from some form of acute mental myopia.

Even though I graduated with honours, I reassured myself thinking that, for some reason, I just did not understand that world. But I still hoped that as technology and communication evolves, it will start to penetrate deeper into the personal space of every individual, gradually changing their general attitude. I thought that as people become better informed, so their concerns will focus more on the actual and far-reaching future problems, and that the benefits of research and technology will become self-evident.

To my surprise, it seems the opposite is happening. We are indulging ourselves more and more into a virtual personal space, as the reality behind our screens is falling apart.

I am not just throwing around words, here are a few concrete examples:

  1. We kind of abused our planet through excessive deforestations and rampant pollution, and the effects will very soon become self-evident. No, I am not talking about warmer winters and rainier summers, I am talking about hundreds of millions of people who will suffer from starvation in the next 30-40 years. And not in some forsaken place in Africa, but right here, in our very own backyard. Few seem to genuinely care about this, although on words and “Likes” we are all great self-proclaimed environmentalists. Even sadder is that most “Green” NGOs or political parties come up with completely unrealistic proposals, with little regard for economic and social realities.

  1. Our ageing and declining population raises serious social and economic concerns, but the core of the problem is usually avoided. It mostly comes down to the lack of interest of current generations for conceiving more than one child (if they conceive one at all). I am aware that when it comes to children, everyone has the right to do as they see fit and I can understand that at our standard of living, having children can sometimes seem annoying and useless. The result however, is that in about 50 years entire societies will simply die out. Our biology has rules independent of our personal desires.

I find it alarming that this subject is very rarely opened to debate or it is immediately “solved” with the “immigration” solution. In the current conditions, immigration is nothing else but the replacement of one society with another. It is not a receipt for success, it is the symptom of a society which has failed biologically.


  1. Religious fundamentalism is gaining more ground. I have no issues with anyone’s religion, but when we have a large group of people who effectively reject any form of scientific research, without which we would still be travelling with ox and carriages across Europe, I think we have a serious problem. Even more so, given that a large part of this group can be found among the “immigrants” who solve our aging and declining population problem mentioned at point 2

  1. We are experiencing an economic crisis that I think will carry on for at least another decade. Because this is not just an economic crisis, it is a social crisis, rooted in our attitudes. We all want to live fine, happy lives, but between what we want and what we do for what we want, currently there is a massive chasm. I do not want to criticise our attitudes, because this is a debate which I can hardly cover with my thoughts. But I can criticise our lack of debating this subject on TV, on the internet or even over a pint of beer with our friends. The fact that we do not ask ourselves if this crisis we are experiencing is caused by us, but we mystically attribute it to “others”, suggests some sort of social schizophrenia.

To finalise…

When we were kids, in the 80s-90s, we were promised that by now we will have outposts on the Moon, massive space stations and our feet would have left their imprint on the dust of Mars. That our leaders will be more peaceful, wiser and less corrupt. That if we will study and work hard, our value and effort will be recognised, and that those who are lazy and mischievous will be prevented from climbing the social ladder.

In exchange, we have economic stagnation, radical demographic changes, natural catastrophes and resource depletion. The world sees these things but does not feel them, because their effects do not yet have a significant impact on our lives. Somehow, everyone lives under the impression that nothing bad will happen, that the future I am talking about is just a bad dream – they criticise me and tell me to be positive.

I resign myself with the thought that as “pessimistic” as I may be, and despite all I have written above, I still hope that one day humans will fly towards the stars. But I would have been much happier if they were “us”.

Translated version below.

For my friends back home:

Pe vremuri, vasele de croaziera precum Titanicul aveau o impartire pe etaje care reflecta foarte bine ierarhia sociala. Cei mai bogati stateau la etajele de sus, unde traiau in lux si bunastare. Cei care o duceau bine dar nu isi permiteau inca luxul erau cateva etaje mai jos, iar cei mai saraci, clasa a III-a, stateau cel mai jos, aproape de linia de plutire a vasului, cate doi-trei in camera si in conditii minime de comfort. Exista totusi un nivel si mai jos, sub linia de plutire a navei, un loc in care nimeni nu voia sa ajunga sau sa intre, un loc unde era mereu cald, mirosea a transpiratie iar totul era negru de carbune. Acel loc era sala cazanelor si a motoarelor. Desi era plasat cel mai jos, acel nivel genera energia pentru tot ce se desfasura pe vas, de la miscarea de inaintare, pana la apa calda de la robinete si lumina de pe coridoare.

Fata de acum 100 de ani, aceasta structura nu s-a schimbat foarte mult. Lumea este in continuare impartita in 3 clase sociale, intre oameni care muncesc foarte mult si cei care asteapta sa le vina apa calda la robinet…pentru ca asa “trebuie” sa vina. Incepand cu 2008 insa, motoarele economiei, atat la noi cat si in multe alte tari, au inceput sa nu mai functioneze si imediat au aparut problemele: nu mai era apa calda suficienta, curentul avea fluctuatii, vasul nu mai inainta. Toata lumea a inceput sa vorbeasca despre solutii, despre taieri, ajustari, stimulari, fara ca nimeni sa coboare acolo jos, in mizeria aia. Acolo unde se munceste 10 ore pe zi, pe 700-900 RON pe luna, fara bonuri de masa sau alte  nebunii. Unde “patronii” care n-au timp sa doarma sau sa manace, care se chinuie sa mai ramana cu ceva dupa ce isi platesc toate contributiile la stat, s-au vazut nevoiti sa inchida pravalia sau sa-si stearga economiile pentru a putea ramane in piata. Nu, nu e vorba de “patronii” care au contracte cu statul. Nu, e vorba de aceia care au contracte cu piata. In acel loc nimeni nu vreau sa coboare. Multi ajung sa se indoiasca de existenta lui si de fapt exact acolo este problema cea mai mare.

Se vorbeste despre mariri de salarii, de pensii, de locuri de munca, de coruptie si dictatura, in timp ce muncitorii de la cazane si din sala motoarelor se chinuie cat pot sa tina vasul inca in functiune. In mod normal, capitanul ar trebui sa organizeze treaba ca sa se rezolve problema, dar capitanul este ales democratic, asa ca el vinde gogosi la clasa cea mai numeroasa de pe vas, la cei de la clasa a III-a. De voturile lor depinde ca el sa ramana capitan, sus de tot, chiar deasupra etajelor de la clasa I. Le povesteste “celor multi” cum o sa le dea si o sa faca, cum el “are solutii”, in timp ce cazanele mai au un pic si plesnesc, iar motoarele risca sa se opreasca.

In definitiv, pe cei de la clasa I nu-i intereseaza foarte mult ce se intampla cu vasul. Pe ei ii intereseaza sa-si pastreze luxul si conditiile pe care le au. Daca vasul se scufunda, ei stau cel mai bine. La fel ca pe Titanic, cei de la clasa I au avut primii acces la barcile de salvare, iar cei de la clasa a III-a au murit inecati.

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.

dollar gone crazy

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.

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.

Costas Karamanlis

Kostas Jabba Karamanlis the Hutt, as the world knows him

Guest Article By Tovarish

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):

results2

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.

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 29th 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 21st 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 goes to Reuters

copyright for the image goes to Reuters