Editor in Chief: Moh. Reza Huwaida Tuesday, July 17th, 2018

The Collapse of Global Financial System Has Become Inevitable

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The Collapse of Global Financial  System Has Become Inevitable

Dear friends and readers, I write this op-ed today primarily for those who are closely following the global economic, financial and political developments in the midst of an ongoing crisis of the world economy. We are standing at the crossroads of the deepest and the most far-reaching crisis that the human civilization has witnessed. In the developed countries of the west, the vast financial system that underpins the global economy is at the precipice of a worldwide systemic collapse that, upon unfolding, will take under the western economies and whatever left of a welfare state and middle class in the developed world. As many economists and experts warn, the standard of living of the people in the developed countries particularly the U.S. and other heavily indebted economies is set to sharply deteriorate over the next one decade.

The economies of the developing countries such as China and Russia, and the rest of the rapidly growing Asian economies will not escape unscathed from the inevitable collapse of the global financial system. The situation for Afghanistan might get further complicated since the very western economies that have so far propped up the artificial Afghan economy will no longer be able or willing to give out the mega billions as they have done since 2002. First let us get a preview of what has so far transpired in this ongoing unprecedented crisis.         

The global financial and economic crisis that took the world by storm in late 2008 and whose repercussions still resonate in the financial markets and economies of the developed countries is far from over. The greatest financial and economic crisis in the history of mankind is still in its early stages. By all indications, the writing is on the wall for those with eye for details that the ongoing crisis is heading for turning much deeper and its eventual culmination into the financial collapse of heavily indebted countries in the west such as the U.S. The ensuing global financial collapse and the economic devastation that will follow will have disastrous consequences for the world in large and our country Afghanistan whose artificial economy is tied to those of the western world.    

What has been touted as "recovery" is in fact the end of the beginning. The problem is that the very factors that caused the crisis in the first place have not been resolved. The finance capital, the runaway financial industry in the west to which the western governments including that of the U.S. and U.K. are beholden, have frustrated any move by these governments to reform the system, prevent abuses and misuses by them and above all reduce the insidious influence of the financial industries in the corridors of power in the western capitals. The western countries' prevention of the inevitable collapse of the world financial system in 2008 has in fact amounted to postponing the inevitable collapse. None of the underlying reasons that caused the crisis in the first place have been dealt with by the western governments. The collapse is now inevitable.     

As the crisis erupted with the fall of the investment bank Lehman Brothers in the U.S. in September of 2008, a cascade of bankruptcies and collapses ensued: banks collapsed, the governments the world over particularly in the developed world bailed out their bankrupt financial industries and in the process transferred trillions of dollars in losses of the banks to their own balance sheets thus further plunging their economies into a worldwide debt crisis. "You don't let a good crisis go to waste" was the maxim adopted by the entrenched western financial oligarchy in the wake of the crisis.

The way the money managers of the "too big to fail" banks did not let the crisis "go to waste" was through consolidation of the financial power in the hands of fewer and fewer people and elimination of competition as much as they could. In the meantime, the Greatest Recession, unprecedented since the Great Depression of 1930s, was slowly setting up millions of Americans for financial bankruptcy and the collapse of the housing market made millions of Americans lose their homes and with it their futures.

The hard truth is that the very underlying factors that led into the crisis in the first place have not been addressed. The global debt crisis characterized by the heavy indebtedness of the developed economies such as the U.S., Spain, Ireland, Greece, Italy, Belgium and a host of other countries is another dimension to the current crisis of the economies in the developed world. Of all the countries which are staring financial collapse in the eye, the case of the U.S. is particularly precarious. The U.S. Federal government has been heavily relying on debt raised by selling its Treasury bills and notes to other countries particularly China. The sovereign debt held by the U.S. Federal government has now reached its Congress-approved ceiling of $13.4 trillion.

The Congress is expected to raise the ceiling to $16 trillion by the deadline of August 02, 2011. As the value of dollar plunges and more and more governments, central banks and corporations the world over reduce their dollar reserves and investments in U.S. debt and instead take refuge in gold and silver, the dollar is steadily losing its pre-eminent position as the world's reserve currency. China for example has quietly been reducing its purchase of U.S. Treasury securities while reducing its dollar holdings by outright payment of dollar in billions in return for hard assets in Africa, Latin America and elsewhere. Not only China but governments, central banks and corporations the world over are increasingly opting for gold and silver and in the process reduce their investments in the U.S. debt and dollar. With the buyers of U.S. debt drying up, the U.S. Federal government, needing money to meet its current spending and debt servicing obligations (payment of interest on the massive debt) has had to rely on the country's central bank, the Federal Reserve, to buy its securities by creating money out of thin air and monetizing the debt.

In two rounds of creation of electronic money, more than a trillion dollars have been created and spent on buying the U.S. government debt and helping it meet its ongoing expenses. The third round of the so-called quantitative easing and money creation is on its way going by the policy positions announced by Ben Bernanke, the Federal Reserve Chairman. The interest rates in the U.S. and much of the developed economies are already standing near zero. Making the system awash with cheap money and credit by keeping the interest rate at historically low rates has not only helped to jump-start the economy but has worked to unleash an onslaught of runaway speculation in commodities such as oil and food and building the next grand bubble only to burst with disastrous consequences.

The fact is that the ongoing financial and economic crisis in the developed world is not a one-off passing wave of turbulence enough to be tackled with the right type of macro-economic, fiscal and monetary policies. This is a system-wide crisis and the largest financial and economic crisis in the human history. We are standing at the crossroads of the deepest and the most far-reaching crisis that the human civilization has witnessed. The unsuccessful policies adopted by the governments and the central banks across the developed world aimed at averting the collapse of the debt-based economies will only postpone the inevitable collapse. The world debt is simply impossible to be re-paid and the unraveling waves of defaults will ultimately result into the collapse of the indebted western financial and economic system.

The author is the permanent writer of the Daily Outlook Afghanistan. He can be reached at outlook afghanistan@gmail.com

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