What if another Great Depression?

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What if another Great Depression?

Wichit Chaitrong talks to Somkiat Osotsapa about the worst case scenario 
for the world if the leaders of the main economies fail to act. 

Wars between neighbouring countries and social unrest within a country 
as resources are depleted will become the norm if the world economy 
plunges into another Great Depression, according to Dr Somkiat Osotsapa, 
a leading economist from Chulalongkorn University. 

As the Asian contagion spreads to Eastern Europe and Latin America and 
starts to affect the US economy, a new Great Depression is imminent, 
says Somkiat who last year was among the first people to forecast that 
the Asia financial crisis would spread to other parts of the world by 
the middle of this year. 

According to the economist, the worst case scenario will rapidly develop 
following patterns of failed leadership among superpower economies, 
particularly the United States, deriving from a conflict of interest 
between their domestic economies and the world free market economic 
system. 

Subsequently, there will be a world assets price deflation with advanced 
economies not having the capacity to further shore up assets price 
inflation which has steadily been accumulating since the end of the Cold 
War.  

Then, there will be a collapse of commodities prices due reduced demand. 

The crisis will engulf every country from commodity exporters to 
countries in transition, as well as centrally-planned economies to 
market economies. Food exporting countries and advanced economies will 
be badly affected and there will be a retreat into  protectionism which 
will result in the end of world institutions such as World Trade 
Organisation, World Bank and International Monetary Fund. 

Finally, there will be chaos, social unrest and widespread wars. 

Yet, there are some arguments that counterbalance such predicaments, 
according to Somkiat. 

The world leaders and other market participants will not let such an 
unfavourable situation lock them into a doomsday scenario because they 
have been educated through the       lessons of the Great Depression of 
the 1930s. 

The advanced economies could save assets from threatened price 
deflation. The world will also protect international trade through 
economic policies that will stimulate demand. 

Somkiat, however, pointed out that the world today is larger and more 
complex than the world of the 1930s. Past experience is unlikely to be 
sufficient for people to       understand what is going on and its 
magnitude.  

The world asset prices are destined to deflate, according to Somkiat, 
because assets such as land, bonds, stocks and money markets have gone 
to the level of the price bubble -- after rapid growth since the end of 
the Cold War, as evidenced by the asset price bubble bursting in 
emerging markets, Japan and Hong Kong.  

He predicted that international trade will further contract as almost 
all countries are facing economic deterioration, with people consuming 
less and travelling less. So both the real economic and services sectors 
will be hard hit. 

The closure of Philippines Airline is a good example, and other regional 
airlines will soon fail, says Somkiat.  

World leaders may avert another Great Depression if they are serious in 
dealing with current economic crisis issues and adopt suitable measures. 

The cut in US interest rates will help a great deal since it will 
stimulate demand, help to reduce non-performing loans among financial 
institutions, ease costs and lower the foreign debts of Asia, Latin 
America and Eastern Europe. It will open a window of opportunity for 
developing countries to borrow from the world financial market and 
enhance international trade, he said. 

The G-7 have to lay down a scheme for world debt restructuring by 
lowering principal debts, interest rate burdens, or equity-debt swaps.  

The US may recycle the capital which flew back to America to strategic 
areas such as South Korea and Thailand or other countries to demonstrate 
that an open economy is better than protectionism. The US wealth 
distribution could be done through a free dollar scheme or low interest 
rates on long term loans.  

The US should abandon trade barriers such as the US environment 
standards, and labour rights, which President Bill Clinton has 
emphasized.  

Those countries enjoying a huge trade surplus, such as Japan and China, 
should open their markets to imported products. 

The IMF's role should be changed from a creditor representative to 
economic salvager by relaxing its austerity programme and aim instead to 
stimulate economies. So far there are about 80 countries out of the 200 
which have run economic policies under the IMF's       prescriptions. 

Investment speculation by the hedge funds should be restricted, since 
their activities can easily cause further damage to the world economy, 
suggested Somkiat.  

However, such concrete measures are unlikely to be adopted due to the 
confusion of world leaders and conflicts of interests, lamented Somkiat.  

Germany has already refused to coordinate among the G-7 to see that 
interest rates are lowered. It is not surprise if looking into the past 
debacle of the European Monetary       System (EMS) when Germany raised 
interest rates to save its domestic economy which was threatened by 
inflationary pressure caused by the reunification with East German, 
rather than to low rates to help other European countries facing slow 
economic growth. 

The US may not cut rates to show its leadership for the same reason, 
because America is less dependent on the world export markets. 

The interest cut is the responsibility of the US Federal Reserve which 
is not a political institution. Its chairman, Alan Greenspan, has the 
duty of protecting US interests, and therefore is reluctant to cut 
interest rates for the sake of other countries.  

Clinton, US Treasury Secretary Robert Rubin and Greenspan have become 
confused with their policies in a world where hedge fund managers such 
as George Soros have become more powerful than the combined leverage of 
the world's central banks, said Somkiat. 

While US policymakers and Soros have pushed for world economic 
stability, they have also seen the financial crisis as benefitting the 
US private sector and individuals.  

The US policy of pushing other countries to open their financial sectors 
for US companies to make profits and buy cheap assets, and the right of 
hedge funds to speculate on currencies, also benefits individual US 
investors. Therefore, it is unlikely the US will restrict the hedge 
funds. 

''The Great Depression will make the world really cruel, losers will be 
ignored. Anglo-Saxon economies ? Europe and the US -- may survive, while 
net food exporters such       as Denmark and Thailand may be protected 
by self-sufficiency -- fundamentalists will regain political power in 
Arab countries and South Asia, revolutionary heros like Che Chevara will 
be reborn in Latin America, authoritarian rulers and fascists like Adolf 
Hitler will arise, and consequently homelessness, starvation, anarchy 
and war will prevail,'' Somkiat predicted.  

Editorial & Opinion The Nation, 
September 26, 1998

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