One of my favorite issues to write about is the status of the world economy and the economies of Europe and North America, which constitute a major share of the global economy. Things have certainly become very interesting in recent months and woes and doom and gloom are once again ruling over the world economy. In America, people have suffered a lot economically over the past few years in the hands of these mainstream media pundits, who do not want to or cannot tell the truth.
In the run-up to the 2008 crisis and before the crisis hit and millions of people lost their hard-earned lifetime savings, the same mainstream media pundits were all painting a rosy picture of the situation.
Many that knew the real situation and wanted to wake up all to the coming tragedy were ridiculed and dismissed as "doomsayers"; they were ignored and no one took them seriously. It is important to follow events free from the bias and prejudice sold by some of the mainstream media and their talking heads.
The diverse set of problems that afflicts the global economy has proved to be worse than earlier thought. The large-scale Keynesian-style stimulus packages implemented around the world by governments and central banks were a temporary fix to the situation, helping to jump-start economies only for a limited time period after the banking crisis and the recession struck in 2008.
Now, there are strident calls being made for more stimulus injections. Many institutions and individual experts believe that in order to take the world economy higher to a self-sustaining trajectory, governments should step up to the plate by pumping in more money.
The major source of troubles for the global economy comes from mainly the European and American economies. However, the question remains whether more government spending by these countries is a realistic policy option when these countries are already reeling under piles of public debt.
In Europe, some major banking giants such as the French Société Générale need urgent capitalization as their assets are to a large extent exposed to Greek and Portuguese debt. The management in these banks would like to dismiss it but their near bankrupt situation is now an open secret across the global financial community.
To put it in simple terms, we have some very major banks in Europe particularly in France and Germany, who lent a lot of money to Greek and Portuguese governments back then when every thing was fine. Now that the Greek and the Portuguese economies have gone bust, these banks are unable to recover some of the massive monies lent.
This is inherently a dangerous situation; it can easily have a contagion effect and spread to other countries and sectors of economy. It undermines the financial strength of France, Germany and few other countries that still remain intact.
Gold prices have skyrocketed. Gold today was trading at around 1840 USD. Although it has come down marginally from the peak of near 1900 USD of a while ago, these prices for gold are historic. In recent decades, such high prices for gold have never been seen.
The price of silver too has reached historic heights. What does it show? Is it a bubble as many say? Will this bubble pop soon? Precious metals; such as gold and silver, work as safe havens. In today' world, where all currencies are fiat and no currency is backed by or pegged to gold, at times of danger and peril people rush to gold and silver in order to preserve their hard-earned money and wealth.
Just like when many of our own Taliban in Afghanistan flee across the border when in danger, investors, countries, people and institutions the world over rush to buy gold and silver when they sense an acute sense of economic danger. Stock markets have lost hundreds of billions of dollars in recent months as fears of another recession in the developed world have set in.
The world is spellbound when the chairman of the Federal Reserve in the U.S. prepares to announce a new policy decision. The impact of the U.S. economy on the world economy and global financial markets is massive.
For now, Ben Bernanke, the chairman of the Federal Reserve, has announced that it will not implement a third round of quantitative easing or, in simple terms, printing money. Interest rates will also remain almost zero for another two years.
Clearly, the Federal Reserve, in whose hands the fate of the U.S. economy and much of the world economy rests, has exhausted all its major policy tools. Its toolbox is empty. Keeping the interest rates low and making the banks and the economy awash with cash and credit is a standard textbook method of jump-starting the economy and maintaining its momentum.
But in the case of the U.S., in the real world and not the textbook world, bringing the interest rates to zero has made the banks awash with cash and credit but not the real economy. This is where an important part of the problem lies.
American banks refuse to lend to businesses because the confidence in the economy is low. They are not sure if they will be able to recover their money when the loans come due. That is, in part, why banks are sitting on piles of interest-free money, while businesses need money to create jobs and employment.
Here you need a government to step in and clear the mess. But government in the U.S. cannot do that. It neither has the resources nor the required machinery to make a massive intervention in the economy.
It is not a developing world country government. As many economists said long ago, for the global economy to get out of the current difficult phase, it will require major contributions to be made by developing countries such as China.
The Chinese have said many times that they will invest more in developed countries to help them with their problems. But ultimately, a short-term resolution of problems is impossible. Many things have to change first and many other things should be started anew.