The Coming Economic Hurricane Will Be Worse Than 2008: Central Banks Are Now Fighting With Each Other, Europe Is Deeply Divided Politically, Chinese Economy Is Entering A Permanent Slowdown, And The Effect Of QE Is Diminishing!
October 30th, 2012
Global Economic Collapse: Causes and Some Potential Outcomes, by C.D.W.T.
I believe the global economy stands on the brink of meltdown. The immediate trigger of this collapse is the European Debt Crisis, but the build up to this catastrophe has been building for years and decades.
Three of the major drivers of Global economic growth: the US, Europe, and mainland China , are all on the verge of economic slowdown, if not outright collapse. Usually, if one region of the globe is contracting other regions are growing and able to take up the economic ‘slack’. For the first time in modern history, all regions are slowing at once. This is uncharted economic territory.
I will look individually at how each region got into the economic malaise it is in and what some consequences may be.
Greece is the poster child for Europe’s economic problems, but they are not alone. Europeans have lived beyond their financial means for decades and now the bill is coming due.
China sits on the edge of a housing bubble that will make the US housing bubble of a few years ago seem tiny.
China has grown into a global economic power by becoming a factory to the world. When the US went into recession in 2008, China kept their factories humming bylaunching a stimulus program costing trillions of Yuan.
The US economy still hasn’t fully recovered from the housing crisis that started in 2008. Like Europe, The US has lived beyond it’s financial means for decades. Government spending (at all levels) is out of control.
Central Banks Are Now Fighting With Each Other
The Coming Economic Hurricane
Bernanke’s now obvious desire for a cheaper dollar is a dangerous escalation in what has become known as the global currency war. Other central banks are actively seeking to offset the effects of capital inflows and ensure their currencies remain competitive. The resulting currency instability further complicates the difficult task of investment for global companies. Faced with currency volatility, the fiscal cliff and the uncertain outcome of the election, companies are sitting on their hands with the US and global economy suffering the consequences. The GDP report and the durable goods report, along with various regional manufacturing surveys, show a reluctance to invest. Non residential fixed investment fell in the most recent quarter while shipments and new orders of capital goods (ex-aircraft) are down 2.1% and 10% respectively year over year.
The perfect storm of a failing monetary policy, flatlining corporate earnings growth, falling investment, the potential for a massive fiscal contraction and more political gridlock will not be easily weathered by the markets. Currency instability in particular is a whirlwind that could reap a nasty crop of protectionism and a further contraction of world trade. That won’t be in anyone’s best interests and the sooner the Fed is allowed to pursue more normal policies the better. Unfortunately, that can’t happen until we see better tax, spending and regulatory policies. No matter who wins the dubious prize of the Presidency I find it hard to be optimistic in the short term on that front. It may take another recession – but hopefully not a full blown crisis – before the politicians get the message. In the meantime, we continue to maintain a larger than normal cash reserve until the storm blows over.