- Increasingly a deep divide within the world of globalization
is emerging which will have the most profound significance for the future
of G7 nations' economic and political stability. The divide is between
those nations which are still embedded within the dollar system, including
countries in the Eurozone, versus those emerging economies-especially the
BRIC-Brazil, Russia, India, China-where new economic markets and regions
are rapidly replacing their over-dependence on the United States as prime
export market and prime source for investment finance. The long-term consequences
will be an aggravation of the trend of the United States as a political
and economic superpower in terminal decline, while dynamic new economic
zones, initially mainly of regional importance, will arise.
- The one great asset which nations like China, Indonesia,
India and Brazil bring to the emerging divide is the one greatest long-term
economic deficit or liability of the older industrialized world, USA, UK,
Germany and the EU generally. That is their demographic advantage.
- With the exception of Russia, all the growth economies
possess young, dynamic and growing populations. Interesting to recall is
that the hidden story of the pre-1914 German 'economic miracle' was based
on a similar 'secret'-rapid and dynamic young and growing population, while
that of Great Britain and France was stagnant or in decline after the British
Great Depression of 1873 which led to huge emigration of population to
- It's no accident that the leading political elites of
the G7 argue that the greatest threat globally is the rapid birth rate
in developing countries. Translated from their euphemism, they really mean
the greatest threat to their continued dominance of world affairs is population
expansion in emerging economies, as new contenders inevitably rise.
- New growth regions emerging
- Almost naturally in the past eighteen months, once the
initial shock of the worst financial and economic shock since the 1930's
began to subside, China and its immediate trading partners along with the
other high-growth emerging economies, began looking for new alternatives
to the dying dollar system.
- The present crisis is no short-term epiphenomenon as
Ben Bernanke, Treasury Secretary Tim Geithner or Barack Obama would wish
us to believe. It is the reflection of more than 65 years of defective
US economic policy, a defect which reached epidemic proportions after the
decision to abandon the gold exchange standard in 1971. Let's be clear
, that gold standard as well as its predecessors was no magic economic
panacea. But the break by Nixon in August 1971 allowed Washington to embark
on a de facto financial imperialist policy which ruined much of the world
economy in its ravages of the past thirty eight years.
- Today the contrast between declining G7 economies and
emerging dynamic high-population growth economies could not be clearer.
The G7 nations from USA to Germany to Italy are choking in public debt,
ranging from 80% of GDP in the United States to well over 100% in Italy
and a staggering 199% in Japan. Only Zimbabwe with 218% debt to GDP tops
that. Germany has a ratio of 77%.
- By contrast, of the emerging dynamic high-growth countries,
only India has significant public debt, a legacy of the British colonial
era, of 58% GDP. Brazil, despite a severe debt crisis in the 1980's, today
has a public debt to GDP level of a very manageable 45%, while Indonesia,
one of the fast-growing newly emerging economies, has 34%. South Korea
with a high domestic savings culture has a mere 28% debt ratio and China
a mere 18% debt to GDP level. Russia, which used the recent boom in oil
and gas revenues to pay down its foreign and IMF debts, while the country
has severe demographic problems, has a public debt to GDP as of 2008 data
of 6%. It has also slowly rebuilt foreign exchange reserves after the crisis
last year to a level of $404 billion this month, making its reserves the
third largest in the world.
- So, with the economies of the USA and EU caught in the
jaws of a twin scissors-like crises between growing public debt and declining
population growth rates to service that debt long-term, the emerging economies
of Asia and Eurasia as well as Brazil in South America are booming, precisely
because they enjoy the twin assets of low public debt to GDP ratios combined
with dynamic growing populations.
- In China, India, Indonesia, Brazil economic growth continues
to advance significantly. Governments are not buried under a mountain of
debt and citizens remain optimistic about their future. This divergence,
between the once rich and the once poor, will mark a geopolitical shift
in the pivot of world history when viewed retrospectively by future economic
- Caught in the blades of a twin crisis
- The most notable aspect of the crisis is the thorough
discrediting of western academic economists, including every single winner
of the Economics Nobel Prize. Their grandiose theories justifying their
laissez faire 'free market' economic model of globalization has been proven
fatally wrong, in effect a transparent promotion gimmick to justify the
process of one-sided globalization, little more. They have been exposed,
to use the terms of one of my favourite children's stories by the Danish
writer H.C. Andersen, like the Emperor with no clothes.
- The dollar system their world had been based on since
Bretton Woods in 1944, is undergoing a death agony. Every measure advocated
to date by two US Administrations-Bush and now Obama-as well as the other
G7 governments has amounted to giving heavy and even heavier doses of financial
chemotherapy to a dying patient. The ever higher doses of taxpayer bailout
to maintain a failed financial and banking model on artificial life support
is merely worsening the underlying health of the US economy.
- The record US financial bailouts since September 2008,
a span of a mere ten months, have brought the US Federal debt from some
60% to a whopping 80% of GDP. Private US household debt is now above a
record 100% of GDP, significantly worse than in the bad recession year
1974 when it was a mere 40%.
- More alarming, for any prospect of growing out of the
US economic downturn, the long-awaited phenomenon of demographics has slowly
begun to impact. In the coming 1-3 years the impact of Baby Boom generation
retirees in record numbers will hit. They will be forced to draw down their
public Social Security retirement from the Government as well as selling
their private 401k and similar stock and bond investments in order to live
in retirement. In economic terms they will become a net drain on the US
pubic finances whereas rising unemployment among younger workers whose
taxed earnings are needed to pay into the Social Security fund, will aggravate
the US public debt level rapidly to Italy or even Japan or Zimbabwe levels
in coming years. Unemployed workers do not pay taxes. They draw on state
- In April, India's car sales were 4.2 percent higher than
they were a year prior. Retail sales rose 15 percent in China in the first
quarter of 2009. China is likely to grow at 7 or 8 percent this year, India
at 6 percent and Indonesia at 4 percent.
- By contrast, even using badly flawed official data, the
US economy contracted at an annual rate of 6.1 percent last quarter, Europe
by 9.6 percent and Japan by a frightening 15 percent, something that rivals
- In the West, plus G7 member Japan, banks are overleveraged
and thus dysfunctional, governments paralyzed with debt, and consumers
are rebuilding their huge debt burdens. America is having trouble selling
its public debt at attractive prices. The last three Treasury auctions
have gone badly. Its largest state, California, is veering toward total
fiscal collapse. The current fiscal year US budget deficit is going to
surpass 13 percent of GDP, a level last seen during World War II.
- By contrast emerging-market banks are largely healthy
and profitable. Every Indian bank, government and private, posted profits
in the last quarter of 2008. The governments are in good fiscal shape.
China has the world's largest foreign currency reserves, $2 trillion in
reserves, and a budget deficit less than 3 percent of GDP. Brazil is now
posting a current account surplus. Indonesia has reduced its debt from
100 percent of GDP nine years ago to 34 percent today.
- Unlike in the West - where governments have run out of
money or creative new ideas and are now praying that their medicine will
work - these countries still have options. Only a year ago, their chief
concern was an overheated economy and inflation. Brazil has cut its interest
rate substantially, but only to 10.25 percent, which means it can drop
it further if things deteriorate even more.
- The mood in many of these countries remains surprisingly
upbeat. Their currencies are appreciating against the dollar because the
markets see them as having better fiscal discipline as well as better long-term
growth prospects than the United States. Their bonds are rising. This combination
of indicators, all pointing in the same direction, is unprecedented.
- The United States remains the richest and most powerful
country in the world. Its military spans the globe. Even if its leaders
prefer not to call it such it represents the most powerful informal empire
in history to date. But just as previous global hegemons went into irreversible
decline--the Spanish Empire of the 16th century to the British Empire in
the 20th century--great global powers sink into terminal decline once they
become overburdened with debt and stuck in slow growth.
- *F. William Engdahl, author of Full Spectrum Dominance:
Totalitarian Democracy in the New World Order (Third Millennium Press),
may be reached via his website, www.engdahl.oilgeopolitics.net.