Friday, September 20, 2013

Q&A: Has the Global Financial Crisis come to an End?

On Friday 09/06/2013 the G-20 Economic Conference was concluded in St. Petersburg with the adoption of the final statement. The statement said, as quoted by Reuters News Agency on 09/06/2013, "that the global economy is getting better..." Reuters also quoted Andre Bockarev, Director of the Department of Finances in the Russian Ministry of Finance, who participated in the drafting of the final statement of the G-20: "The most difficult and longest discussion was the assessment of the global economy". Recently data appeared indicating this improvement, and the European Union spread that its economy began to grow albeit slightly. The United States said that its economy grew by 1% in 2013, and China published that its economy grew this year until the month of July 2013 by more than 7%.
Is the global economy really improving and has the economic crisis eased, during the past six years since its outbreak in America in 2007? In case the economy has not improved, how then were these data and figures announced? Please explain and Jazakallahu Khairan!

We will review the economic reality of the economically most influential countries in the world, which are the United States, the European Union and China, since the economy of these three countries represent more than 50% of the global economy, and because of the economic crisis being closely linked to the capitalist system adopted by the United States and the European Union. Therefore they carry the driving impact on the crisis, while China's role during the crisis was to overcome it, thus playing a reactionary role rather than a progressive one, as we will demonstrate later. For your information, the U.S. economy alone approaches the economies of China, Japan and Germany combined, the three largest economic powers in the world that come after the U.S. economy respectively. The total size of the U.S. economy in the year 2012 amounted to $15.7 trillion, which represents 22% of the global economy. The Chinese economy reached $8.2 trillion, while the Japanese and the German economy have reached the $5.9 trillion and $3.4 trillion respectively according to the World Bank and the Organization for Economic Cooperation and Development. Because of the large size of the U.S. economy, America's economic crisis that resulted from the collapse of the mortgage market in America spread to the world. Accordingly we will focus the research on the economy of these three most influential countries in the global economy, and because the most prominent factors that give an indication of whether or not there exists an improvement are: the unemployment rate, domestic debt, department services such as municipalities and the social expenditures... then government debt... These three show the movement on the labor market, and the movement on the currency trading market, as well as the movement on the markets of governmental and private projects. Therefore we will focus our research on them, and then discern the truth about the alleged improvement of the global economy.
First: The United States of America:
1. Unemployment rate: The Central Bank has deliberately since late 2008 reduced interest rates on loans to near zero. It has doubled its balance sheet three times for up to about $3 trillion since then through the bond-buying program. In its last meeting the Central Bank has settled it at a monthly rate of $85 billion, all in order to reduce borrowing costs on the long-term, and then to facilitate the taking of loans for owners of business and projects to stimulate the labor market. However the unemployment rate continued to be high last month at 7.9 %, which is not much different from 5 years ago, when it reached 8.9 %. Although the United States approved the stimulus bill, i.e. pumping money into companies through buying shares, which began to be applied in 2009, the economy has not recovered! It did not lower the unemployment rate much, indicating that a deep crisis is still going on, and the economy has not improved.
2. Debt of the service sector such as municipalities: Sky News Arabia website reported on 08/11/2013 that "the burden of debt in the cities and municipalities of the United States and the inability to repay led to the bankruptcy of 41 cities within two years", which means that many American cities did not succeed in overcoming the effects of the global financial crisis until today. The ghost of bankruptcy returned to loom over American cities, after the State of Detroit requested to officially announce its bankruptcy last July, due to its inability to pay its debts amounting to almost $18 billion. Bankruptcy is a last resort for municipalities and cities for protection from creditors, in other words, to escape from reality and resort to the easiest solution. According to the statistics of the American Bankruptcy Institute, within the period between 2007 and 2011, America witnesses more than 40 cases of bankruptcy of cities and municipalities, with a rate of 8 cases per year. This news report shows that city bankruptcies during the last two years (between 2011 and 2013) were more than at the height of the crisis, as well as immediately before and after it. This raises doubts concerning the statement that the U.S. economy has improved.
3. Governmental debt: U.S. Secretary of Treasury, Jacob "Jack" Lew, on 08/26/2013 in his letter which he sent to Congress warned that "extraordinary measures that have been implemented last May to avoid the government's inability to pay its debts will expire in mid-October" and urged Congress to extend the right of the government to borrow." (Al-Quds website on 08/27/2013). The U.S. Secretary of Treasury, Jacob "Jack" Lew, in his letter to the Congress pointed out that "the U.S. government will lose the resources required to meet its liabilities by 15th October of this year, if the ceiling of total debt of state is not raised, which now permits to the fullest extent a total debt of $ 16.7 trillion." He went on to warn, "Malfunction may occur on the financial markets and the economy will collapse in case the ceiling of the state debt is kept at the current level." He added, "The task of Congress is to protect the trust in the United States, because there is no other institution that possesses the legitimacy of raising the ceiling of the state debt." (Russia Today website on 08/28/2013). I.e. the debt of the United States has reached the maximum limit of $16.7 trillion, however they are demanding the lifting of the debt ceiling to meet their obligations!
This is a picture of America's situation. The debt is too high and they have to resort to a lifting of the debt ceiling to pay their expenses, address the deficit and to prevent economic collapse. This picture does not indicate that the state of the U.S. economy has improved, nor that they have emerged from the crisis.
Secondly: The European Union:
1. Unemployment Rate: Christine Lagarde, the Director of the International Monetary Fund stated that "the unemployment rate in Spain and Greece is 27%", (Euronews web site 26/4/2013). She also stated on 3/5/2013 that: "Unemployment in the 17-nation euro area was 12 percent in February and the January figure was revised up to the same level from 11.9 percent estimated earlier, the European Union's statistics office in Luxembourg said today...The European Commission predicts unemployment rates of 12.2 percent this year and 12.1 percent in 2014".
Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro said, "In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe".
Raymond Torres, Director of the International Institute for Labour Studies at the International Labour Organization said, "If nothing is done, there is a risk of a prolonged labour market recession in Europe with a lot of people moving into long-term unemployment or even dropping out of the labour market, which means that they no longer participate."
He added: "It is also important to adopt and to move to a growth strategy, especially in the eurozone," and he said the ILO favours better investment policies: "Without new credit to small enterprises (businesses) it is unthinkable to imagine a job recovery in Europe." [Euronews 3/6/2013]
Euronews also added that "the Organization pointed out that unemployment rate has increased in nearly two-thirds of European countries since 2010. Over 30 million jobs are still needed to return employment rate to 56%, as it was in the pre-crisis level".
2. Social Expenditures: Euronews webpage published on 30/8/2013: "The Nordic countries, which have been long famed for their generous welfare states, are counting the cost and finding they can no longer afford such entitlements for their citizens, according to Denmark's finance minister Bjarne Corydon. The Organisation for Economic Co-operation and Development recently calculated what its members spend. France tops the list devoting 33 percent of its gross domestic product on welfare. It is followed by Denmark (30.8 percent), Belgium (30.7 percent), Finland (30.5 percent) and Sweden (28.6 percent)."
All these rates are too low to fulfill all the needs of these countries' residents... Except for Germany, whose social expenditures are acceptable to an extent... if these are the rates within the strongest spending countries, what would then be the situation of the other countries?!
3. Debt: Euronews webpage published on 22/7/2013 that, "The eurozone continues to sink deeper into debt in the first three months of this year irrespective of the measures taken to slow down the pace of fiscal tightening, as Greece, Italy and Portugal posted the worst while those with the lowest debt to GDP ratios are Luxembourg and Estonia." It also mentioned that, "The single currency bloc is trapped in recession, with a record high jobless rate and fragile prospects for economic recovery.
To help economic growth, European governments have decided to slow down the pace of fiscal tightening by quickly rising borrowing costs as investors worried that huge debts diminished their prospects of getting their money back."
It is worth mentioning that many of the EU countries borrowed money after they joined the EU, to the extent that borrowing exceeded the size of their economies. When the crisis reached Europe, many countries of the European Union were in a position which does not allow them to pay the debts they had prior to the crisis. Keeping in mind that Germany is the primary influencing State in the European economy, it has been able to impose austerity policies to reduce government expenditures and reduce the indebtedness of the nations, and it has worked on imposing this on the euro zone in the European Union, unlike America, which followed a policy of pumping money and increasing debt.
Thus, these statements and reports indicate that the economy in Europe still suffers from the effects of the crisis and was unable to get out, remaining in a state of recession, and therefore, it has not improved in a remarkable way.
Thirdly: China:
China's economy is a different matter, the Chinese economic analysts say that, "The increase in (economy) growth is largely dependent on the export and investment sectors, not on domestic consumption. And thus, the general public does not deeply feel the extent of the high level of their living conditions". Its internal market is still very weak. It is therefore not a measure and does not affect the economies of other countries. It is primarily dependant on exports to U.S. markets as well as mutual investment with the United States, whether it be through China buying shares of American companies with hundreds of billions of dollars or purchasing for the U.S. Treasury bonds in an excess of a trillion dollars, as well as the American companies investing within China, also making its dollar cash reserves more than $3 trillion. China is not a leading state in the Capitalist world, but it is its follower due to it following the Capitalist way and its economic ties being with America, and it hastens to work on the implementation of the decisions led by the global Capitalist economic institutions under American influence. It can not declare itself as a Capital state, thereupon working on the leadership of the capitalist economy, because it formally and traditionally declares itself as a communist socialist state, and works to maintain this image officially for fear of losing its independent existence, and out of fear that those who lead the state, and who embrace the Communist ideology, of losing their privileges. Thereby, the Communists and their party timidly act on applying that capitalist systems and maintaining their link to America's economy, the leader of capitalism.
For this reason, it is not expected that China abandons this policy, and hence take the lead in the capitalist world becoming the one affecting the world economy. Hence, when we address the financial crisis of capitalism that has affected the world, we focus on America primarily, and Europe secondly, because the world that is dominated by the capitalist system is economically affected by these two: firstly by America and secondly by Europe.
Fourthly: Economies of the other countries:
The economies of the other countries whose impact on controlling world economy is low:
-Japan's debt reached 245% of GDP according to IMF figures, who once again asked Japan to develop a medium-term credible budget plan in order to reduce this enormous debt, while not reducing the impact that more than 90% of it is owed to Japanese creditors.... "The Japanese government announced on 8/8/2013 its intention to cut about $85 billion of public expenditure within two years, i.e., the opposite of what is required by the Japanese stimulus policy ..."
- As for Russia, it applies the Capitalist systems internally, and works on imitating the West in its application and in the establishment of economic organizations with other countries without having the ability to being creative, it therefore worked on establishing economic organizations with its affiliate countries like the European Customs Union which was established with Belarus and Kazakhstan in 2010, in stimulation of the European Customs Union... Over all, the Russian economy follows the Capitalist system, led by the West and works on following its footsteps and implementing its decisions as well as imitating capitalist countries in creating economic organizations; Therefore Russia in this regard is not affecting the global economy, but is affected by the Western Capitalist economy more than the fact that it affects it effectively.
-As for the rest of the BRICS group (Brazil, India and South Africa), and the rest of the emerging nations (Mexico and Turkey)... they have no notable influence in the global economy. They directly follow the Western economy and are tied to the American and European financial markets. Some of them primarily depend on loans for the increase in growth like Turkey, which is not a real economy, and as such consumption increases with the people relying on borrowing, and likewise the state institutions and private institutions and companies. In some of them, like India, corruption is rampant and most of the funds are smuggled abroad. Thus the economies of these countries are unstable and not dependent on real economic resources. Brazil and South Africa have economic influence in their regions, South America and Africa, and not on the motion of the global economy.
In general one does not focus on these economies when studying the creation or removal of crises.
Fifthly: As for the numbers and data that are announced, they are sited as the economic institutions want in the states that issue this data..."
1. The growth in 2013 that the United States officially mentioned was in reality because the American government changed the way in which it measures the economy. It changed the way in which it measures growth by introducing intellectual property into the economy, such as music production and the property rights of producing medicines and drugs... and this change lead to a 370 billion dollar increase in the economy, which represents a change (increase) representing 2.5%. Despite this, the economy of the United States is struggling to grow at a time in which its citizens have cut their spending; therefore, the reports that the recession has ended are due to the way in which statistics are published, and are artificial and not real.
2. As for the data issued by European officials, they too are not based on sustainable growth. The data that was announced is merely a preliminary estimate, and does not include all of Europe. They did not include countries that are suffering economically like Ireland and Greece. And the data issued was only an estimate compiled by the European data Agency, Eurostat, which depends on the data provided by the national statistics offices, which collects data differently, and depends greatly on surveys for its preliminary estimates of growth. These estimates are usually revised many times. The German statistics office indicates that the revisions can take place even four years after the preliminary estimates because additional data can be taken into account. Therefore, given the statistical flaws, one cannot actually say that the situation in Europe has improved.
3. As for China, there have always been many questions and much suspicion around the data that is issued about its economy. China is a large country; with the largest area and largest population in the world. Collecting data about the performance of its economy is a very hefty undertaking...
What raises the doubts of observers is that China issued figures of annual gross domestic product (GDP) in the third week of January for the previous year, and it is extremely difficult for the Chinese government to organize an entire year's results within three weeks! This has given credibility to the idea that the Chinese data is in reality what it wants the world to know about its economy!
Sixthly: Conclusion:
The global financial crisis has not yet ended, and its repercussions are still present and are still being dealt with by pumping money as America does, or with austerity as Germany does in Europe. America pumps the amount of 85 billion dollars into the market, and gives this money to companies so that they will stay afloat, and Europe follows the policy of austerity. This is evidence that the crisis is still present and that the economy is not progressing normally without the intervention and help of the state, as if the state is the economy's ventilator. This is with the knowledge that the intervention of the state is at odds with the Capitalist system; as this system affirms ridding the market of the clutches of authority, so it does not allow the state to intervene in the market to rescue the companies and the rest of the financial institutions or to limit the movement of the market. It necessitates that there be absolute freedom, and that the market correct itself on its own, so according to the capitalist ideology intervention hinders advancement, and survival will be for the fittest, so the companies which are unable to work must fail so others can work, and only the companies able to compete remain in the market. This is how the economy advances and works freely according to the Capitalist theory which is contradicted by reality and refuted by the practices of the capitalist states. The causes of the crises and the sources of problems have not been dealt with and are inherent in the capitalist system. At every moment a setback may occur, like an ill man suffering from a chronic disease who is given reports that his health has improved due to some cause, and soon after other reports are given saying the opposite, so he is given analgesics and injections to keep him alive but he suffers from unending pains and aches...
Likewise the global economy has not improved and the crisis remains, and the problems still stand, and will stand as long as the capitalist system remains, resulting in poverty and deprivation for billions of people and the wasting of much wealth before it reaches the people; wealth that they would have benefited from had it been distributed among them. So unhappiness and misery pervades the lives of many people, and a small number of venture capitalists account for a majority of the wealth. And because of this the crisis remains as a volcano, erupting sometimes and then calm at other times, but the inside of the volcano rages. From here we can say that there is no real solution except for Islam, which views the economic problem as the proper distribution of wealth, and enabling every single individual to benefit from it and obtaining their share, and preventing the accumulation of wealth in the pockets of certain people. Islam does not look at society by overview, and does not decide that the individual's share is a given amount given the amount of wealth and resources, where in reality it all ends up the share of a very small class!
We ask Allah Almighty to return the rule of Islam, the Righteous Khilafah, that will spread happiness and contentment, and the sound economic life, not only for the Islamic Ummah, but will spread goodness to the four corners of the Earth, and Allah سبحانه وتعالى is mighty and wise.
03rd Dhul Qi'ddah 1434 AH
09/09/2013 CE

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