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Global economy: Calamity calling

Analysis: If it seems like the world is falling apart, that's because it is. Here's what you need to know.

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A thunderbolt lights up the sky above Chisseaux, France on July 8, 2010 (Alain Jocard/AFP/Getty Images)

BOSTON — Federal Reserve chairman Ben Bernanke is warning of "a huge financial calamity."

Moody's and Standard & Poor's are threatening to downgrade the credit rating of the U.S. economy, the world's largest.

President Obama and the U.S. Congress are apparently miles apart on negotiations to raise the U.S. debt ceiling — a move the Treasury Department says is needed to avert a default on U.S. debt, a nightmare scenario that could provoke panic on global markets and severely damage the American economy.

And that's just one story, in one country.

Now look farther, if you dare.

China — the world's second-largest economy — is showing serious signs of weakness, including worsening debt woes of its own.

Japan's economy — the world's third-largest — is in a precarious place four months after the triple disaster of earthquake, tsunami and radiation leakage. In fact, GDP in Japan has contracted for three consecutive quarters. 

Meanwhile, Europe has suffered violent street protests amid the worst debt crisis in the history of the E.U., with the economies of Greece, Spain, Italy, Ireland and just about every other country in the region hurting.

And, lest we forget, Libya is at war with itself and with NATO.

Yemen is burning, and its economy now faces disaster. Parts of Syria are in open revolt. Egypt's revolution has apparently stalled. Tunisia, the first Arab country to spring, is struggling economically and politically.

But that's not all.

Nuclear-armed Pakistan is a political and economic mess.

Once again, India has been attacked by terrorists.

North Korea's desperate economy is growing more frightful by the day

Mexico is gripped by increasingly brutal drug cartel violence and crime.

The wars in Afghanistan and Iraq are still raging. 

Even impersonal science offers bad news. The planet is warming. Record heat waves and punishing droughts are hitting much of the U.S., China, Africa and elsewhere. And our oceans are dying at a much faster rate than even the most pessimistic scientists once believed.

So if you're feeling worried you are forgiven. There is clearly plenty to fret about on poor planet earth.

But how did we get to this treacherous and vexing situation? And how can we get out of it?

Simply put, we have experienced a series of unfortunate events triggered by the Great Recession. 

Prior to 2008, the global economy had enjoyed its longest expansion since the end of World War II, driven in large part by booming China, India, Brazil, Russia and other emerging economies.

As a result, masses of humanity were transformed from poor, rural peasants into consumers who, not surprisingly, expected their lives to continue to improve. 

But then growth suddenly stalled. Economic opportunities worldwide evaporated. Anger, protest, unease and, in some cases, political revolution entered the picture.

While all of this has been painful for millions of people none if it is really a big surprise, at least according to the Davies J-curve

This useful political science theory says political unrest occurs when a people's rising expectations — about how much money they can make, what they can afford to buy, whether they have enough food or medicine — are suddenly dashed.

Simply put, people grow happy as they grow richer. But things turn ugly when the gap between their expectations and reality widens. This phenomenon occurs whether you're a migrant worker in China, a teacher in Athens, or a civil servant in Cairo. 

But here's the real problem: this dark global picture is unlikely to change any time soon. That's because in almost every calamitous case outlined above, the problems are being made worse by long-running and deeply-rooted stuctural issues.

The U.S. economy is right now being hijacked by a failed political institution. Congress simply cannot operate efficiently, even when faced with economic catastrophe.

China's debt woes are a result, in part, of Beijing's non-transparent government structure, as well as its opaque lending practices. 

Japan's economic recovery has been hampered by an inefficient government with weak and ineffectual leaders.

Institutional and structural barriers also lie at the heart of Europe's fractured and feeble response to the debt crisis. German voters, and hence the politicians who represent them, are reluctant to bail out their free-spending cousins in Greece and elsewhere.

Nascent governments in the Middle East, or those still coping with simmering protests, lack the institutional strength and flexibility to manage free and fair elections, create new jobs, or to root out rampant corruption.

On the environmental front no effective institutions exist to successfully address a global and costly problem like climate change, as evidenced by the repeated failures of Kyoto, Copenhagen and just about every other multilateral effort to fix it.

Big structural problems like these — from how goverments and economic institutions are set up and managed, to writing and enforcing laws that actually work, to establishing transparent processes that make companies, financial markets and political systems more accountable and more efficient — are notoriously difficult to tackle.

And that's true from Washington, to Brussels, Beijing, Tokyo, Tunis and beyond. 

So expect a long, hot and uncomfortable summer around the world. And probably a frightening fall, a worrisome winter, and an uncertain spring to follow. 

Of course, things will eventually get better for the global economy. Economic systems are the product of human imagination and ingenuity. We are, after all, adaptable and rational creatures who address problems in a logical, measured and pragmatic fashion. 

Aren't we?

http://www.globalpost.com/dispatch/news/business-tech/110714/global-economy-u.s.-debt-ceiling