WORLD TOWARDS A NEW IRREVERSIBLE GLOBAL ECONOMIC AND FINANCIAL CRISIS AND BRAZIL
Fernando A.G. Alcoforado
PhD em Planejamento Territorial e Desenvolvimento Regional
Fernando Alcoforado*
This article aims to demonstrate that the global economic and financial crisis tends to get worse with: 1) the escalation of the global debt that threatens to put the world capitalist system in check in the face of the possibility of the explosion of the public debt bubble in the United States and the China; 2) the drastic downturn of the economy in the United States, China and the European Union, which could enter into recession in 2023; and, 3) the possibility of two giant global banks, Credit Suisse and Deutsche Bank, going bankrupt because they are on the verge of collapse triggering a new global economic and financial crisis similar to the Great Recession of 2008 and the Depression of 1929. This article raises, also, the need for President Lula's government to adopt an economic policy that makes Brazil less dependent on foreign markets in terms of export markets, international capital and foreign technology and that, consequently, prioritizes the development of the internal market.
The global debt crisis results from the fact that the world has, in 2022, a record US$305 trillion in unpayable government, corporate and household debt, more than three times the Global Gross Product (US$96.1 trillion). Figure 1 shows the evolution of global debt from 2013 to 2020. Figure 2 shows the share of countries in global debt in 2020. The United States and China are the largest debtors on the planet, accounting for 40% of the total debt. Figure 3 presents in detail how the increasing debts of households, non-financial companies, governments and the financial sector are distributed in the formation of global debt from 2003 to 2018. All these debts show increasing amounts over time.
Figure 1- Global debt from 2013 to 2020
Figure 2- Participation of countries in global debt (%)
Figure 3- Global debt from 2003 to 2018
There is the possibility of an explosion of the public debt bubble in the United States, which corresponded to US$ 30.01 trillion, a value higher than the country's GDP (US$ 23 trillion) in 2021, a historic record, which could reach 140% of the GDP by 2024. Total state and consumer/household corporate debt has been rising and state and local governments are nearly bankrupt. The US government spends and buys beyond its capacity by issuing dollars and Treasury bills. The risk of major catastrophes has not disappeared, but has spread over time, at the price of increasing in proportion and exploding when it does. It should be noted that the public debt of the United States is strongly related to military spending. This monstrous debt is unpayable.
In turn, China's global government, corporate and household debt reached 285% of its Gross Domestic Product (GDP) in 2020. This debt approached 310% of its GDP in 2021, one of the highest levels of indebtedness among emerging economies, which is an unsustainable rate for their economy. The global financial crisis has forced China into debt. China's global debt is largely unsustainable if it continues to manage its economy at these debt levels in the future. United States and China are the main drivers for the increase in global debt. Both accounted for nearly 40% of global debt in 2020. The world's largest economies are therefore giants with feet of clay. Like the United States, China and the vast majority of countries in the world have debts that far exceed their respective GDPs.
The world is currently heading towards a more severe crisis than the one recorded in 2008 with a similar magnitude or worse than the 1929 depression. The countries' debt is so large that interest rates need to be artificially negative, otherwise debt service would be very burdensome for governments. Even with negative interest rates, or close to zero, this debt has a very high probability of never being paid off. If interest rates become positive, there will be no way to pay them. It is a bubble about to burst. This situation is not sustainable in the medium and long term. The current crisis in the world economy is an indicator that all this dynamic is coming to an end.
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All over the world, governments have little room for fiscal maneuver to overcome the economic and financial crisis they are facing due to the current situation of the public debt, given that a large part of their budgets are destined to the payment of the public debt. In Brazil, for example, almost 40% of the government's budget is used to pay interest and amortize the public debt. Due to the absence of these traditional Keynesian stabilizers (increased public spending, tax cuts and interest rate cuts), the ongoing recession in most indebted countries tends to get worse than on previous occasions. There are several signs pointing to a prolonged economic downturn. The world's financial markets are predicting what appears to be the “Armageddon" of the global recession. What can be done to reduce global debt levels?
Promote the economic growth of countries would be the main strategy to reduce debt, which is difficult to implement in an environment of global recession. Economic growth would be the main strategy to reduce the debt. The improvement in economic activity should happen with the proactive role of governments in carrying out investments, especially in infrastructure in each of the indebted countries, which is quite difficult to occur under current conditions because almost all countries adopt the neoliberal model of non-intervention of the government in the economy. Another basic recipe is for the government not to spend more than it collects in taxes, which is difficult to do in the current conditions of increased social demands in all countries of the world. If governments reduced their spending and deficits, there would be less need to issue government bonds that generate new debt. It is very difficult to put this type of solution into practice for the debt problem in view of the populations' growing social demands. Budgetary balance is considered crucial in order not to increase the debt.
Another important measure to reduce the amount of debt would be to generate inflation. Most loans would be made on nominal terms. Therefore, an increase in prices would help reduce debt. In this case, however, there are several problems. A runaway escalation in prices could force interest rate hikes faster than desirable. Higher inflation would only be useful if it resulted from an increase in wages, which is difficult to happen today. If that were the case, there would be greater demand and both nominal GDP and tax revenue would grow. All these measures for the solution of the global debt crisis are, however, palliative.
The real solutions to problems related to the global debt crisis would be difficult to implement because governments would have to implement the following measures all over the world: 1) cancellation of a good part of the sovereign debt, considered illegitimate, as well as a good part of the debt domestic; 2) establishment of a stable international financial system not subordinated to finance capital; 3) adoption of correct taxation for finance and capital income; 4) re-establishment of true public control of the credit system; 5) carrying out strict control of capital flows; 6) the end of tax havens; and, 7) constitution of a world government aiming at economic and financial ordering and stability at world level.
The World Bank says that the global economy could enter a recession in 2023 in the face of the drastic retraction of the economy in the United States, China and the European Union. In a new study, the World Bank warns of the risk of a global recession in 2023 that could cause lasting damage, not only to core capitalist countries, but also to peripheral and semi-peripheral capitalist countries, and that the global economy will suffer the most pronounced slowdown since the 1970s. In 2022, central banks across the globe are raising interest rates in unheard of synchrony in the last five decades in order to respond to rising inflation, which was driven by the Covid-19 pandemic and the war of Russia against Ukraine, especially in the energy and food sectors. Interest rate increases could push the global inflation rate to reach 5% in 2023, nearly double the five-year average before the pandemic.
The economy is heading towards a stormy environment around the world. To reduce global inflation to a rate corresponding to their targets, banks have to raise interest rates, aggravating the process of recession. Countries will have to adopt restrictive fiscal policies in 2023, which should reach a level greater than that registered since the beginning of the 1990s. The drop in global economic growth tends to worsen the levels of poverty, hunger, cost of living and food insecurity and energetic. Governments will have to establish public policies and adopt workable plans to provide targeted help to vulnerable families, bring the unemployed back into the labor market, increase the global supply of basic commodities, reduce and strengthen global trade networks in order to resume economic growth worldwide.
To make worse the serious situation represented by the possible explosion of the global debt and the deep recession of the world economy, two giant global banks, like Credit Suisse and Deutsche Bank are on the verge of collapse that could trigger a new economic and financial crisis similar to the Great Recession of 2008 and the Depression of 1929. As for Credit Suisse, the second largest bank in Switzerland and one of the largest in the world, its share price has dropped by around 75% since February 2021, which could have more disastrous consequences than the bankruptcy of Lehman Brothers that triggered the Great Recession worldwide of 2008. Credit Suisse posted losses of around four billion Swiss francs in the last three quarters. Deutsche Bank, Germany's biggest bank, is going through its biggest crisis in 149 years. In 2021, Deutsche Bank had a drop of 35.37% of its shares traded on the New York Stock Exchange and runs the risk of "breaking", too.
Deutsche Bank belongs to the top echelon of G-SIBs (global systemically important banks), according to the Financial Stability Board (FSB). In 2018, Deutsche Bank was second only to JP Morgan Chase. The ruin of this bank could cause a real “domino effect”, ruining first Deutsche Bank, then Germany, and consecutively the European Union with the bankruptcy of Italy, France and Spain (because their main banks are linked to Deutsche Bank). As both banks are “too big to fail”, the Swiss and German governments will save them from bankruptcy, probably by paying their bailouts, respectively, with Swiss and German taxpayer money, while distribute bonuses to their shareholders and members of their board of directors.
This catastrophic scenario for the global economy should serve as a warning for the future Lula government from Brazil to adopt an economic policy that makes Brazil less dependent on foreign markets in terms of export markets, international capital and foreign technology and that, consequently, prioritizes the development of the internal market. This would be the smartest decision to be implemented in the current situation pelo governo Lula because it would be harmful for Brazil to strongly link the Brazilian economy to the global economy as has been happening since 1990. For Brazil not to suffer the consequences of the global debt explosion, not to be contaminated by the world recession and not to be impacted by the failure of two gigantic global banks, Credit Suisse and Deutsche Bank, the Lula government should adopt the developmentalist national economic model of selective opening of the Brazilian economy that would allow Brazil to assume the course of its destiny, contrary to the neoliberal economic model that makes the country's future dictated by market forces, all of which are committed to international capital.
It can be concluded, based on the above, that the global economic and financial crisis is irreversible, which is why peripheral and semi-peripheral countries, such as Brazil, which are heavily dependent on global markets for the export of their products and capital and foreign technology, should adopt strategies of development that contribute to reducing these dependencies in order to minimize the impact of the global crisis on their economies. The future Brazilian government of President Lula will have to promote national development, seeking not only to overcome the economic recession that has shaken the country since 2014, but also to provide Brazil with strategies that make the irreversible global economic and financial crisis bring disastrous consequences for Brazil from a political, economic and social point of view.
In order to gain governability, meet the social demands of the entire Brazilian population and avoid the return to power of neo-fascism in Brazil, the Lula government will have to promote the country's development with the reactivation of the Brazilian economy on bases diametrically opposed to those that have prevailed in the past Brazil since 1990 when it adopted the neoliberal economic model that economically and socially devastated the country. To reactivate the Brazilian economy as soon as possible aiming to overcome the recession, the Lula government must carry out 7,000 public works that have stopped, build a large number of new public works, with emphasis on economic infrastructure (energy, transport and communications) and social infrastructure (education , health, housing and basic sanitation), adopt the import substitution policy and use the idle capacity in the national industry to bring an immediate end to the existing unemployment in Brazil.
In addition to reactivating the economy to eliminate unemployment, the Brazilian government should encourage the development of the Social and Solidarity Economy, which is an important alternative for the inclusion of workers in the labor market, giving them a new opportunity to work in a new way. of production in which profit is no longer the main objective, but the creation of jobs, and the development of the Creative Economy, which is one of the most effective ways of generating new jobs linked to the knowledge economy by stimulating work based on cultural traditions of each region and credit to creative sectors of the economy such as Fashion, Art, Digital Media, Advertising, Journalism, Photography and Architecture. To eliminate poverty in Brazil, the first action to be implemented consists of eliminating unemployment with the strategies described above, complemented by the adoption of the basic income transfer strategy or universal minimum income for the poor population through the restructured Bolsa Família program. There will be no social peace in Brazil if unemployment is not eliminated and a basic income policy for the poor population is not adopted.
In order to eliminate inflation in Brazil, strategies must be adopted to eliminate demand inflation and production cost inflation, which are present in the Brazilian economy. Demand inflation results from the insufficiency of national production to supply domestic demand and production cost inflation results from the vertiginous increase in the costs of its components such as wages, raw materials, inputs and taxes. To eliminate demand inflation, the Lula government should annually plan the national economy with the participation of the productive sector so that national production has the capacity to meet the internal demand for goods and services. The priority of national production is to meet domestic demand. Only when there are production surpluses would they be exported. In order to eliminate production cost inflation, the Brazilian government should monitor the evolution of wages, raw materials and input prices, as well as federal, state and municipal taxes, in order to adopt measures that contribute to prevent their growth with the adoption of incentives to increase productivity.
To finance all the actions necessary for the execution of the Lula government's plan, it is necessary to adopt two strategies; 1) suspend for a period of 4 years the payment of interest and amortization of the internal public debt that corresponded to 39.8% of the federal government budget in 2020 or renegotiate with its creditors in order to extend its payment to reduce the costs with the payment of the public debt so that the government has the necessary resources for the public investments necessary for the resumption of development and the fight against unemployment and poverty; and, alternatively, 2) use the international reserves of US$ 296.40 billion available in 2022, if necessary, to complement the resources allocated to public investments aimed at reactivating the economy and combating unemployment and poverty. Without the adoption of these strategies, Brazil will not resume its development, will suffer the consequences of the global economic and financial crisis and will inevitably be led to political, economic and social ruin.
* Fernando Alcoforado, awarded the medal of Engineering Merit of the CONFEA / CREA System, member of the Bahia Academy of Education, of the SBPC- Brazilian Society for the Progress of Science and of IPB- Polytechnic Institute of Bahia, engineer and doctor in Territorial Planning and Regional Development from the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning, urban planning and energy systems, was Advisor to the Vice President of Engineering and Technology at LIGHT S.A. Electric power distribution company from Rio de Janeiro, Strategic Planning Coordinator of CEPED- Bahia Research and Development Center, Undersecretary of Energy of the State of Bahia, Secretary of Planning of Salvador, is the author of the books Globaliza??o (Editora Nobel, S?o Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, S?o Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, S?o Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona,https://www.tesisenred.net/handle/10803/1944, 2003), Globaliza??o e Desenvolvimento (Editora Nobel, S?o Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporanea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development- The Case of the State of Bahia (VDM Verlag Dr. Müller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, S?o Paulo, 2010), Amaz?nia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, S?o Paulo, 2011), Os Fatores Condicionantes do Desenvolvimento Econ?mico e Social (Editora CRV, Curitiba, 2012), Energia no Mundo e no Brasil- Energia e Mudan?a Climática Catastrófica no Século XXI (Editora CRV, Curitiba, 2015), As Grandes Revolu??es Científicas, Econ?micas e Sociais que Mudaram o Mundo (Editora CRV, Curitiba, 2016), A Inven??o de um novo Brasil (Editora CRV, Curitiba, 2017),?Esquerda x Direita e a sua convergência (Associa??o Baiana de Imprensa, Salvador, 2018), Como inventar o futuro para mudar o mundo (Editora CRV, Curitiba, 2019), A humanidade amea?ada e as estratégias para sua sobrevivência (Editora Dialética, S?o Paulo, 2021), A escalada da ciência e da tecnologia e sua contribui??o ao progresso e à sobrevivência da humanidade (Editora CRV, Curitiba, 2022) and a chapter in the book Flood Handbook (CRC Press, Boca Raton, Florida, United States, 2022).