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13 JANUARY 2012
Economic outlook: Leaders will only follow the crowd
by Jim Jones
When envisaging where global economies and commodities might be headed in 2012, it is wise to err on the side of scepticism if expecting politicians to be other than self-serving. That is especially so when they are facing elections.

In a year already offering the prospect of deepening recession and trade disputes, the US, Russia, China, France and even SA will be embroiled in picking national leaders. And contenders might not be counted on to endorse policies that, while temporarily painful, might help avert a 1930s-style depression. They would rather use Band-Aid palliatives than face rejection at the polls.

Spotting harbingers of depression should not be difficult. First might be a deepening failure of conventional Keynesian deficit financing, priming financial pumps to induce consumers to spend and thereby set factories humming - all very well if the factories are at home rather than in a mercantilist China belching out ephemeral goods.

But they are not. In the 10 years since China joined the World Trade Organisation (WTO), thereby winning access to export markets, swathes of manufacturing industries have been shuttered across the globe.

China, the world's second-largest economy and its largest single-party state, has helped destabilise the global economy, firstly by amassing gold and foreign reserves rather than using trade surpluses to buy others' goods and, secondly, by allowing a property bubble to threaten its own structurally weak domestic banking system.

QE, or quantitative easing (holding interest rates at near-zero and flooding the banking system with liquidity), was supposed to help, but is failing to spur consumer spending in the US or Europe. Households fearing for job security are opting for the safety of reducing their debts while banks are tightening up on granting credit, in part to strengthen their own balance sheets.

Next is the possibility of insidious protectionism, particularly when accompanied by a smokescreen of pious affirmations of adherence to WTO rules.

In recent months we have witnessed disputes between the US and the EU over alleged subsidies to Airbus and Boeing; there has been China's application of duties on imports of American SUVs; Brazil has imposed a "temporary" 30% tax on cars with less than 65% Mercosur content; Paris has tied assistance to French car makers to their returning manufacturing to France from other EU countries; Beijing has continued to flout WTO accords by fastidiously blocking foreign entry into service sectors such as the internet; the list is unending.

The fact is that beggar-my-neighbour trade strategies are being used to promote short-term employment at home, and to hell with the likelihood that they can lead, as they did in the 1930s, to a global economic worsening.

Europe's and the euro's problems might appear superficially parochial. They are not - they encapsulate this year's greatest economic threats, particularly those of sovereign debt default and bank failures.

Berlin and Paris are wriggling every which way to ensure that Greece neither defaults nor extricates itself from the single currency. A default would threaten to bring down some major German and French banks that piled into high-yielding Greek bonds some years ago and that are belatedly facing the stark fact that high yields reflect high risks. As it is, Greece has effectively defaulted on at least half of its debt with write-offs.

The euro may well be beyond salvation, short of tight fiscal integration of the 17 eurozone countries. It is hard to see that happening if it implies spendthrift governments of endemically deficit countries being brought to heel.

All in all, it's difficult to see the world escaping a year of further economic decline or even collapse into full-blown depression. Minimising the effects is another matter given that QE is singularly failing.

The US and Europe might focus on the sort of infrastructure spending that characterised the New Deal 80 years back rather than trying to persuade a consumer to buy yet another iPad that puts Chinese fingers to work.
Useful resources:

Sunday Times
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