Global Economy’s Achilles Heel: Unemployment

http://www.reuters.com/article/idUSTRE6504EU20100601

During the past couple of months, the world has been coming to grips with something that no world political or financial leaders want to admit – the global economy no longer works.  It’s collapsing under the weight of the one factor that economists never accounted for – unemployment. 

As reported in the above-linked article, the International Labor Organization (ILO), an agency of the U.N., is warning that measures being taken by governments around the world to reduce debt will likely lead to a recession, with rising unemployment potentially threatening social stability.  Yesterday, in an about-face from its recent lecturing of the U.S. to get its fiscal house in order, China also cautioned against moves to rein in debt.  (The Chinese are smart enought to know that every dollar or euro cut from government spending in the U.S. and Europe translates into lost exports for them.) 

But financial markets have become absolutely intolerant of high debt levels.  Ratings agencies like Moody’s and S&P, breathing a sigh of relief that they weren’t hammered harder with law suits and criminal prosecution for their role in the global financial collapse that began in 2008, are now ruthless in their slashing of credit ratings for anyone with the slightest potential of default. 

Without deficit spending, the global economy with its requisite trade imbalances doesn’t work.  Without trade imbalances, badly overpopulated nations like Germany, Japan and China face staggering unemployment.  With the trade imbalances, big importers like the U.S. face eventual default. 

The problem is that, with much of the world so densely populated that per capita consumption has been driven into decline, deficit spending is the only thing left in economists’ bag of tricks to prop up consumption and hold rising unemployment at bay.  Globalization is an unemployment sharing mechanism that spread unemployment away from overpopulated economies to the U.S., where gimmicks like the dot-com boom of the ’90s and the housing bubble of the ’00s could keep unemployment swept under a rug for a while.  But that ploy’s run its course.  Now, not all the king’s treasury secretaries or all the kings central bankers can put this Humpty Dumpty together again. 

It’ll probably take years for all of this to play out, but what we’ll see is an intensifying global battle for employment, World War III fought on an economic stage.  It’ll get worse as the world population soars by several billion more.  Whether the war can remain confined to the economic stage without spreading to the battlefield – only time will tell.