Editor’s note: This article was first published in February 2013 as news commentary. The fourth-quarter 2012 GDP figures (euro area of 17 countries -0.6%, United Kingdom 0%, Japan -0.4%), the bank layoffs announced and the expected mass layoffs in Spain “this year” all refer to that moment.
The good news is that there’s a lot of money in the world. The bad news is that the flood of dollars, euros, yen and pounds injected into the world economy by the main central banks in recent years has yet to translate into growth, investment and job creation. On that front, we’re failing.
The global strategy so far, aimed at building confidence among the world’s main economies, has been to keep the banks afloat and carry out sweeping debt restructurings. These measures have managed to avert an economic debacle, a global depression. The question now is whether the central banks (not the governments) have reached the limit of what they can do to help. According to The Washington Post, for three of the four central banks that have taken part in these capital injections, their home economies will remain in recession. Thursday’s data showed that output in Europe fell more sharply than analysts had expected, with GDP in the 17-nation euro area down 0.6% in the last three months of 2012 compared with the previous quarter.
Growth in the United Kingdom was 0%, while Japan’s economy shrank by 0.4% at the end of the year.
Domenico Lombardi, a former member of the International Monetary Fund’s board and now an analyst at the Brookings Institution, says that enormous liquidity has been pumped into the system in the United States, Japan, Britain and the euro area in general, to the point of reaching the threshold of what is acceptable, since he considers it somewhat excessive. In his view, these measures could do more harm than good to the global economy if all this money doesn’t translate into job creation in the short term.
Structural changes in the economies of Europe, Japan and the United States could prove useless if the banks don’t make a move. For Lombardi, governments have already hit their debt ceiling, so they are practically not allowed to borrow any more.
So if governments can’t borrow to fund real growth policies and restructuring policies (cuts and austerity) carry on, while the banks, the private companies that received public money to revive the economy, are not using it for that purpose so far, and part of that money is going into buying government debt (“I bail you out and you buy my debt”), the economy will keep failing to grow.
More layoffs around the world, including Wall Street
There’s no need to talk about Spain here, as we already know that mass layoffs are expected this year at many large companies, especially in the banking sector. But Wall Street is red-hot on this issue too.
Last week, ING and Société Générale announced significant layoffs, even though the rest of the economy has supposedly seen a slight improvement over the last 12 months. Citi has already restructured but has promised more layoffs in the future, and JPMorgan has announced substantial job cuts.
Most companies listed on stock exchanges around the world (with some exceptions) will have to slim down their workforces to generate profits for shareholders. In other words, they will have to cut jobs to make more money.
The banking sector may have the easiest time of it, since new technologies and the creation of online branches allow it to do so, but companies in every sector will try to do more with less until the economy can grow again.
The problem with these dangerous measures is that if every company does the same thing (lays people off), we will enter a cycle of job destruction and economic destruction.
Unless someone comes up with something better than a currency war and more capital injections that never reach consumers, my friends, the recession is a long way from ending and very close to getting even worse for household finances.
Further reading
Featured image: Wiiii, CC BY-SA 3.0, via Wikimedia Commons.
