Global economic conditions today are awfully bleak and momentum in global economic growth is certainly uncertain. The European fiscal fiasco jeopardized global growth as a whole and further situations became aggravated with the inability of European leaders to put in place a plausible accord that can ensure a bright future for the Euro Zone.

Reasons for fiscal complications of the eurozone are many and varied, but perhaps fiscal dissonance among member nations is the prime cause for this economic menace. Eurozone as an Economic Union almost failed to maintain fiscal integrity with respect to expenditure patterns of the government and solely focused on monetary management overlooking the totality of fiscal significance.

The root cause of the delayed response to the Sovereign Debt crisis is nevertheless the limited capacity or lack of willingness on the part of the European Central Bank (ECB). A return to economic stability relies on ECB allowing greater authority and becoming a last-resort lender to troubled economies,

Industrial orders in the eurozone fell by 6.4 percent in September, the steepest decline since the dark days of 2008. Another closely watched index, based on surveys of the purchasing manager in manufacturing and services is also precarious, falling below 50 percent to 47.2, where anything below 50 implies shrinking activity.

“Europe is going into recession, if not already in one,” according to Frederic Neumann co-head of Asian Economic research at HSBC. Pranay Gupta, Chief investment officer for the Asia Pacific region at ING in Hong Kong, said “Europe is where the United States was three years ago.”

The financial crisis of 2008 was firstly an output of regulatory deficit over the financial industry and a consequent credit crunch that followed, along with other events such as death of Lehman. However, the eurozone economic headwinds is basically due to exhausted state resources and the high cost of borrowing.

Recently, Germany suffered from a lack of strong demand for its 10-year safe bunds with the government selling only 3.6 billion euro bunds. The results suggest that “Germany is not immune to increasing risk aversion in the euro–zone but market”, according to Marc Chandler of Brown Brothers Harriman.

“The only thing that would work is printing Euros, paying down the debt and risking inflation” said Dave Rovelli, Managing director of U.S equity trading at Canaccord Genuity. The only alternative in sight is to establish a consensus among European leaders as to how to get out of this mess and also, how to avoid falling into the same trap in future.

Image Courtesy of   http://www.flickr.com/photos/europeancouncil/

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With the recent near-default of the American government, we are forced to take a closer look at the dark rabbit hole that has become the federal budget. A short plunge into history will surface in a debate of the politics of the current financial crisis: Over the past century, the world has changed dramatically, contributing to and resulting from globalization.

Like the domino effect, once science reached a certain point of innovation, the world population exploded, creating a systematic and uncontrollable increase in both processes over the following years. The U.S. government reflects a clear example of this incredulous expansion. The 20^th century saw America transform from an infant nation into the leading nation of efficiency, compassion, and modernity.

At the helm of the 1900’s, the U.S. government consumed merely 6.9 percent of Gross Domestic Product (GDP, a minority of which was due to federal spending. However, World War I brought a kick to spending, and culminating at about 12 percent of GDP in the 1920s.

President Roosevelt and the New Deal brought spending up to 20 percent during the Great Depression, but it was during World War II that government spending peaked to 53 percent of GDP in 1945. In terms of government spending, the post -World War II era marked itself as the Golden Age, despite President Clinton’s 1995 declaration that big government spending has finally come to an end.

Immediately after WWII, spending dropped to 21 percent, but by the recession of 1980-82, hit a peak of 36 percent. Government spending averaged 32 percent of GDP until the disastrous recession of 2008, in which spending surged to wartime-like spending, 45 percent, thanks to bank and automotive industry bailouts.

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The federal budget for the 2011 fiscal year outlines exactly what the enormous percentage of the GDP amounts to. As seen in the pie chart below, courtesy of usgovernmentspending.com, the $3.8 trillion in expenditures is divided into 5 categories, in descending order of dollars spent: defense, healthcare, pensions, “other”, and welfare.

Defense, 25 percent of the budget, plunders a whopping one trillion dollars. Health follows at a close second with $0.9 trillion, or 23 percent. Pensions, at 21 percent, translate to $0.8 trillion. Welfare constitutes 13 percent of the budget with $0.5 trillion, with the remaining 18 percent pulling $0.6 trillion – including, but not limited to, education.

According to USA Today, the national debt has mounted to such a number that, to repay it entirely, each American household would have to fork over a whopping $668,621. In other words, with absolutely 0% interest, the most manageable payment plan would involve a $13,364 annual payment for the next 50 years per household, or approximately the annual tuition rate for a state-subsidized public American university.

To clarify, this number is only the amount of debt as it stands today, not the additional debt of next year, the year after, etc.

The level of debt has become so outrageous that, last month, the United States government was forced to raise its debt ceiling or face default. The latter decision would have crippled the government, rendering it incapable of basic function and placing the civil population into very real danger.

Welfare and public education would eventually become inaccessible, and troops abroad would be marooned without funding. Additionally, a debt default would have led to an enormous depreciation of the dollar and possible another global recession, due to a reduction in worth of all dollar-back assets worldwide.

Luckily, the Senate cobbled together a last minute compromise that left much to be desired. This heartbreaking piece of work was the result of months of partisan bickering and head-butting. As a result, the DJIA drop 1500 points in little over a week, and the S&P graciously downgraded U.S. debt for the first time in history.

How this will affect the American economy remains to be seen, but the future surely is not bright. Think the government can tighten their belts and spend within their limits? If it means we all must draw back a little bit, then here’s a rally towards a healthy economy in the unfortunately far off future.
Stephen C. / Shutterstock.com

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