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David Smick

When David Smick warned of the potential for a global economic crisis before it occurred in his book "The World is Curved: Hidden Dangers to the Global Economy," experts called him "astonishingly prescient". Based on his most recent analysis of the world economic scene, provided at the Center for National Policy, all of us should be very concerned about the future of the global economy.

Smick described current economic stimulus efforts by the United States and other governments as "spitting into a Force Five Hurricane."  For Smick said the sub prime "bubble" is only the first of nine more "bubbles" looming on the horizon. The other "bubbles" which are at risk of bursting, include emerging markets, commercial real estate, government bonds and credit cards. The value of these "bubbles," according to Smick, theoretically exceeds $100 Trillion.

Assuming a 10% loss in these areas as a result of "bubbles bursting", some $10 Trillion of worth would then be lost to a world economy with a total of $60 Trillion GDP. The devastating effect on the global economy of such a loss in worth is why global financial markets remain so nervous.

Smick traced the origins of the "bubbles" to the fall of the Berlin Wall and the rise of the emerging market export model. US consumers were the target of this model adopted from China to Chile, and these economies became dangerously export dependent. The emerging market export model, which led to the underpricing globally of financial risk, is currently doing a crash landing.

Mr. Smick does not see help from overseas coming to the rescue of the global economic system. In fact he sees potential peril. In Europe, banks are particularly exposed to the decline in exports as most major European banks have extended credit to customers in Eastern Europe. This could be why European governments are loath to embark on a new round of stimulus spending, for they know funds will be needed to bail out their overleveraged banks.

China's economic growth rates are officially pegged at 8%, however other experts estimate Chinese economic growth at half that rate.  Historically since the creation of the People's Republic of China, that great nation has slipped into social chaos when economic growth has gone below 4%. The Great Leap Forward, Cultural Revolution and Tiananmen Incident are all such examples of times when those conditions have occurred.. Mr. Smick notes that the millions of rural poor who left their villages twenty years ago for jobs in the cities are losing their jobs and do not have their traditional social safety net. They remain the unemployed idle in China's 150 or so cities.

As for the United States, Mr. Smick says that the stimulus was "way too small to have an effect". If current rates of job loss (600,000 per month) continues for the first half of 2009, and decrease to 200,000 per month for the rest of the year, the unemployment rate in the United States will still go to 10% by year's end. A stubborn jobless rate at that level will impair consumption and keep the economy from operating at potential.

Smick's prescription for re-starting economic growth in the United States is to encourage small business start-ups. He also believes the Obama Administration needs a contingency plan in case the economy gets worse. They need to answer the question "what if this gets worse". Smick sees entrepreneurs as "heroes" who are going to be the ones who can grow the economy once again. Ensuring that risk capital flows to those with good ideas wanting to launch IPOs is one important way to prompt the kind of job-creating economic activity necessary to break the Great Recession.