The World Economy: What Really Went Wrong?

Published on 2nd December 2008

Are you worried today that you are not living as well as you once did?  That your monthly pay can no longer sustain your bills?  That the company you have worked for  many years may dump you?  That you are in the bottom rung of the economic ladder?  That you may never see a middle class lifestyle?  Or if you are a single parent, or part of a young working family, you will never be able to save enough to buy a home?  That you are paying more than your fair share of taxes?  And most pressing, that the people who should represent you in government are taking care of themselves at your expense?


These are the worrying questions that a majority of citizens are grappling with on a daily basis.  To most of them, the current crisis is one that many do not really understand the root cause. As days unfold, no one seems to be sure if the situation will get better or worse.  One sad reality about the crisis is that it is global in nature.  Its impact is being felt in both small economies as ours, large ones as Japan and emerging ones like Brazil.


At a recent meeting by the not so old G20 Economies, it was almost certain that the origin of the current mess is attributed to the United States.  But even if it was, does it mean that the world economy goes into a freeze because of an issue that once seemed so domestic in the hands of the US economy?  And if the US is purely to blame, what really went wrong?


A person deprived of oxygen will turn blue, collapse and eventually die.  Consequently, deprive economies of credit and a similar process kicks in.  As the financial crisis has broadened and intensified, the global economy has began to suffocate.


And according to the latest economic outlook from the IMF, a major downturn seems inevitable as the world seems to be in the most dangerous ‘shock’ since the 1930’s.  The question then arises, where was the IMF when signs that all was not well started trickling into the market?  This year’s failures are not the first in the corporate scene.  Remember the Enron and the Worldcom collapse with so much of shareholder funds?  Unlike then however, the magnitude of the collapse is huge at the moment.  Remember Bear and Stearns, Lehman Brothers, Merrill Lynch, Citi and a couple of other financial institutions that are still in trouble and expect big bailouts from  the federal reserve?


The basic fact is, when these markets are drained off the liquidity they need, it means that they cannot lend and investors funds are jeopardized.  Global growth measured by the purchasing power parity (ppp) basis is set to come down in next year.  The US for example has lost 159,000, car sales have gone down to 16 year lows owing to low access to credit.  A clearer demonstration of this is consumer spending which has dropped to its worst since the 1980 depression.


A more worrying question on everyone’s mind is, what really went wrong?  And to answer that, remember the Clinton era?  Bush took over power from Bill Clinton when the US economy had a budget surplus of over US$. 126 billion.  He squandered all that and as if that was not enough, drove the economy into a deficit of over US$.10 trillion.  This excludes the debts of Freddie Mac and Fannie Mae which are the largest mortgage lenders and the key causes of the current financial crisis.  Then the smaller devil, the Iraqi war whose price tag is at over US$. 3 trillion and still counting.


I strongly believe that the current situation is a making of the United States.  Further, and with the current bailouts that could just form another cycle of trouble, a lot is desired of the IMF.  For now, the world needs to forget about self regulation for countries and build stronger international systems that work. 


The harder challenge at the moment is that of monetary policy, that is, balancing the risk of inflation and the risk of a deeper downturn.  Inflation seems to be our greatest undoing.  We therefore need to raise interest rates and cut deficits.  That way, we will restore confidence and thereby the economy.


By Michael Musau

CEO Emerging Africa Capital

Licenced by The Capital Markets Authority (CMA)

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