Global Economic Perspective of a US spiral

World's GDP (or total global economic activities) per year is about USD60 trillions in Y2008. US GDP accounts for USD13 trillions (about 22%). Due to the US multiplier effect of about 4, a growth rate of 1% by US will increase US by 4% or world's GDP by at about 1% but vice-versa, a US drop of 1% will decrease global GDP by 1%.

US total debt to-date is about USD45 trillions; Corporate debt is USD18 trillions, Govt (or national) debt is USD11 trillions, and Personal debt is USD16 trillions.(11 trillion of mortgages, 4 trillion of credit card, 1 trillions of others). Of the three, the personal debt is of most concern.

Corporate debt is considered a form of capital investment and working capital. Given the USD18 trillions corporate borrowings to the annual activities of USD13 trillions, most analysts would consider the ratio of 1.38 times as very effective capital usage where the payback shouldn't be of any concern. The Corporate USA should be self financing as its projected future earnings is expected to pay for itself. The low capital utilization is due to US high service sector component of the economy.

As for national debt, it is assumed that most of the borrowings were used for infrastructure development which is also considered a capital investment too. US govt expenditure is an exception as a sizable portion of the infrastructure development is not paid by the US government. US govt spent most of its money on wars and its war machinery, health care and some basic education expenses and as such, a sizeable national debt are for consumption and not capital investment. The US baby boomers' generation is going into retirement and with the increasing demand on health care, which in turns will put further pressure on US national debt.

The total US personal debt of USD16 trillions without any savings poses the biggest hurdle to the return of normal economic cycle as US' individuals would not be able to sustain itself and repay its debt. Though USD600 billions have been written off, it is still far from over. The recent financial seizure is just the beginning of the spiraling downward of credit crunch. Now, there is hardly any interbank loaning activities. The US banks are cutting back of normal business loans to businesses (or companies) and also to individuals. This will leads to companies cutting back on employment which will result in sizable unemployment. Unemployment and lower personal loans availability will feed into fall of consumption which will further cause the drop of businesses and further cut back of employment. As such, companies' profits will be badly hit which causes the big drop of US share prices. This vicious cycle will not only affects US economy, but the world's economy as US is the largest consumers' nation.

In 1931 where US has 300% debt against its GDP, the economy simply collapse, resulting in the 1st Great Depression. At that time, there was global contagion, resulting in the collapse of the global economies, one after another which resulted in the 2nd World War.

Today, US has 350% debt, though with the benefit of advance economic and management theories, US will enter into a severe recession, but the bigger concern is will US drag the world's economy into the 2nd Great Depression?

Paper cannot wrap in the fire...an old Chinese saying

While the scientists are busying ramping up the CERN system, seeking to unravel the secrets to the universe's beginning, mankind on the other hand, through their greed, is also unraveling the economy (please note that it is not just the financial sector), unseen by any man that is still alive (unless he is still alive during the Great Depression era...according to Greenspan's assessment).

My Mar08 blog highlighted the key economic events which more less has come to pass. Since we are entering into the final phase of the global economic disruption, I hope to provide a roadmap of the likely outcome of the economic (including financial) meltdown as

1. Some large US financial institutions are falling apart
2. The big corporates are failing (corporate borrowings are now very constricted which will lead to corporate failures)
3. US jobs are disappearing
4. US consumers (which accounts for 70% of US economy) has decapitalated, as they have run out of assets to mortgage away while piling up credit card debt of USD4 trillions and USD12 trillions of mortgage debt with ZERO net savings and other debts of probably another USD 4 trillions.
5. US national debt stands at USD10.6 trillions or 11.3 trillions with the mortgage rescue package(US annual GDP is USD13 trillion) and still piling up USD50 billions deficit on a monthly basis.
6. Boeing machinists went on strike from recently, stopping the Boeing production over demand for higher salary and outsourcing practice.
6. Foreign investors are now having cold feet when it comes to anything American debt, as US are fire selling (or shutting down) some of the biggest companies; Lehman operations, AIG, ...etc

Many US companies and citizens are now banging on FED's door for 'rescue' money.

1. After receiving USD120 billions in May08, US citizens is asking for another USD120 billions or more (as tabled by the Democrats to the US Congress)
2. After 'footing' the bill (in the form of guarantee of bad debt) of USD30 billions for Bear Sterns debt, market is banging the door for USD85 billions in AIG bail-out and many more to come.
3. General Motors, Ford and Chyraliser are also asking for USD30 billions from FED
4. To-date, FED has dish out USD900 billions. The list will get longer as the weeks passes, as more and more companies tumble


Beside USA, Britain will be the next country that will undergo severe economic downturn. Europe will slowdown and Asia economic growth will also eases.

It is now a foregone conclusion that the developed economies are experiencing recession, but the big question is WHEN will the global economy recover from this downturn. Some are still holding to their dreams that it will be similar to recent previous recessions of 6 months, while others are looking at a 1990s Japanese recession that lasted for about 15 years. Recently, Greenspan (ex-chairman of FED) thinks that it is close to the 1930s Depression or may even surpass it (as he calls it once in a century event). Our deputy PM, Tony Tan highlighted the danger of economic meltdown effects on the global social and political stability.

I will try to offer my views on the likely outcome of this economic unraveling in my next blog.