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Snapshot Observations on the Global Economic Crisis

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CNN Money is running an interesting feature by David Goldman entitled “10 countries, 10 solutions” which details the particularities of the global economic crisis facing 10 key countries. In typical old-media fashion, the layout makes no sense from a user-friendliness perspective, so I’m going to take significant liberties in reposting their original content. They also have a single table layout of the 10 countries here. Time Warner lawyers, if you’re watching this, get your editorial guys to put their content into a more sensible format that doesn’t require constant clicking and I won’t have to go such lengths to discuss it and in turn will actually drive more traffic to your site. Got that? Good. Now then, first some observations and then a full listing of the 10 countries in question.

Observation #1: Isn’t it just a tad bit ridiculous that the United States has the cheapest gallon of gas here?

Observation #2: The only unemployment figures I’m trusting are Germany, Japan, the UK and the US. All the others, as far as I’m concerned, are not even guesstimates on a good day that have significant degrees of error. I’m happy to engage further on this skepticism, but let’s finish up here first.

Observation #3: Do not be fooled by the Stock Market performance indicator. In this day and age, quoting this without quoting the concurrent currency movement alongside it tells us absolutely nothing useful unless the gains are meant to be dollar terms, which Mr. Goldman does not make clear.

Observation #3A: Quoting stock market performance alongside interest rates is potentially better than nothing, though still has its limits.

Observation #4: Comparing interest rates against inflation is really the most useful exercise here. On a very general assessment, interest rates and inflation should be more or less in alignment with each other. Where interest rates outpace inflation is an indication that – generally speaking – a prompt lowering of interest rates by the monetary authorities is in order so as not to stifle economic growth. With this in mind, the countries that look to have the most difficult way forward should be those with interest rates higher than inflation where economic growth is already negative: Germany, Iceland, Russia and the UK. Iceland will be leaning on some sort of multilateral money for its foreseeable future and both Germany and the UK have stable monetary and currency regimes in relatively diversified economies. So, we’re left with Russia. I say this, of course, with the age-old economist’s assumption that all other factors are equal.

Observation #5: On Russia’s “Challenges and Solutions”, there’s been some rumbling lately about a rouble devaluation with the Kremlin in full denial mode as should be expected. At some later point I’ll take up this particular topic but suffice it to say if I had to choose a currency to be long in, it would not be rubles.

Ok that’s enough of my rambling. Without further adieu, following is the full list of the countries in question. As previously mentioned, one thing CNN did get right is compiling the stats in an easy-to-read table accessible here.

United States

GDP -1.6%
Inflation 0.2%
Unemployment 8.1%
Markets -10.7%
Gallon of gas $1.99
Interest Rates 0% to 0.25%

Challenges: Home prices have plummeted since the summer of 2007, devaluing many of banks’ holdings that were backed by mortgages. To prevent further losses, banks largely stopped lending. The economic downturn that ensued led the economy to shed 4.4 million jobs in the past 14 months.

Solutions: The government flooded the frozen financial system with trillions of dollars of unprecedented liquidity programs, including a $700 billion bank bailout. After a $168 billion stimulus package unveiled in February 2008, the Obama administration produced another $787 billion stimulus plan in February 2009.

United Kingdom

GDP -1.2%
Inflation 0.1%
Unemployment 6.3%
Markets -11.2%
Gallon of gas $4.85
Interest Rates 0.5%

Challenges: The pound fell to a 23-year low against the dollar in January 2009 as the banking sector continued to post historic losses. The country’s productivity and home values have plummeted, leading the nation’s economy into a recession.

Solutions: Prime Minister Gordon Brown unveiled a $63 billion bailout for the banking sector in October. In January, the Bank of England set up a special fund to buy up to $74 billion of high-quality private sector assets. The new plan also created a wide scale insurance program aimed at protecting banks against further losses and guarantee bank assets backed by mortgages and other loans.

Russia

GDP -0.7%
Inflation 12%
Unemployment 8.1%
Markets 16.2%
Gallon of gas $2.81
Interest Rates 13%

Challenges: Sinking natural gas and oil prices have shrunk exports. Russian banks have been hit particularly hard by the credit crisis because they hold significantly more in foreign debt than national assets. The rapidly declining ruble has some worried about out-of-control inflation.

Solutions: The central bank set up a $50 billion lending facility for financial institutions in October. A month later, the government sent another $28 billion to banks. The central bank has also worked to lower interest rates to control inflation.

Mexico

GDP -0.3%
Inflation 6.2%
Unemployment 5%
Markets -9.3%
Gallon of gas $2.19
Interest Rates 6.75%

Challenges: The Mexican economy’s close ties with the U.S. economy slowed growth to a near-standstill by the end of 2008, especially due to the drastically lower price of oil exports to the United States. The economic situation has increased tension between the two nations, as budgetary constraints keep the United States from helping to quell an escalation of drug-related violence near the border.

Solutions: The Mexican government announced a $54 billion stimulus plan on Jan. 7 that increased public works spending and froze prices on gasoline, natural gas and electricity. The government also said it would invest in small businesses in an attempt to boost the struggling labor market.

Japan

GDP -2.6%
Inflation 0%
Unemployment 4.1%
Markets -4.2%
Gallon of gas $4.09
Interest Rates 0.1%

Challenges: The Nikkei hit another 26-year low in mid-March after rebounding slightly in the beginning of 2009. The housing crisis and inability to export goods that were once in high-demand have led to rising unemployment.

Solutions: To ease credit, the government cut interest rates in October for first time in more than seven years, and trimmed them again in December. The Bank of Japan also unveiled a $100 billion plan to buy up bank loans. In October, the government unveiled a $275 billion stimulus package, including loans for small and medium-sized businesses, as well as tax rebate checks to households. Prime Minister Taro Aso called on the government to provide even more stimulus in March.

India

GDP 5.1%
Inflation 10.4%
Unemployment 6.8%
Markets -7%
Gallon of gas $4.06
Interest Rates 5.5%

Challenges: In the last two months of 2008 and first month of 2009, the Indian economy expanded, but yielded the slowest growth in more than five years. Rescue options are limited with soaring inflation, an escalating budget deficit and a mounting liquidity crisis.

Solutions: The central bank lent $37.4 billion to financial institutions in October in an effort to boost credit. In December, the government unveiled an $8 billion stimulus package that includes tax cuts, small business spending and a program to help troubled homeowners.

Iceland

GDP -10%
Inflation 17.6%
Unemployment 6.6%
Markets -9%
Gallon of gas $8.20
Interest Rates 18%

Challenges: This tiny country suffered near total economic collapse in 2008 in the wake of the global crisis. Iceland’s three largest banks, which held assets 10 times larger than the entire country’s economy, failed in October. As a result, Iceland’s central bank went bankrupt and the stock market crashed. The Krona fell nearly 67% against dollar in 2008 before stabilizing in early 2009.

Solutions: Iceland has received $5.1 billion from International Monetary Fund to stabilize the free-falling currency. Prime Minister Geir Haarde stepped down in February, and the new government is working on a massive financial sector restructuring plan that caps banks’ size and puts the country in a position to repay its massive debts.

Germany

GDP -2.5%
Inflation 1%
Unemployment 7.9%
Markets -11.9%
Gallon of gas $5.97
Interest Rates 1.5%

Challenges: The German economy, which is Europe’s biggest, slid into its deepest recession since World War II in the third quarter of 2008I. Officials say they don’t expect to see any economic growth in 2009. The world’s largest exporter has seen a rapid decline in industrial production as global demand for goods has fallen sharply.

Solutions: The government launched a $642 billion financial sector bailout in October in an attempt to prop up the nation’s banking system. Chancellor Angela Merkel’s government launched a $25 billion stimulus initiative in November, followed by another $66 billion plan in January, both of which include tax relief and infrastructure investments.

China

GDP 6.7%
Inflation -1.6%
Unemployment 9%*
Markets 22.1%
Gallon of gas $3.01
Interest Rates 5.31%

Challenges: The country’s GDP fell to a 5-year low in 2008 as manufacturing exports slowed amid weak global demand. And mass layoffs at factories are worse than the official 9% unemployment rate suggests, since China does not track employment outside of major cities.

Solutions: Premier Wen Jiabao’s government unveiled a $586 billion government stimulus package in November, aimed at boosting housing, health care and infrastructure, including more than $70 billion in tax breaks for struggling exporters. In mid-March, Wen said another stimulus may be needed to bring economic growth back up to 8%.

Brazil

GDP 1.8%
Inflation 5.9%
Unemployment 8.2%
Markets 6.9%
Gallon of gas $4.17
Interest Rates 11.25%

Challenges: Sinking crude prices have dealt a tremendous blow to this oil-driven economy. Falling global demand for oil and manufactured goods have driven up unemployment, and in January, Brazil experienced a trade gap deficit for the first time in eight years. Many economists say the largest Latin American economy is in a recession.

Solutions: President Luiz Inacio Lula da Silva’s administration boosted an existing government infrastructure plan, called the Accelerated Growth Program, by about $62 billion to $280 billion in February. The central bank has also orchestrated increased lending programs to banks, lower interest rates and currency swaps with the U.S. Federal Reserve.