When Will the World's Econ­omy Crash?

Trillions - - Contents -

In eco­nomic the­ory there is a pre­dicted and ob­served phe­nom­e­non called the Kon­dratiev Wave where the world's econ­omy goes from in­creas­ing growth to de­clin­ing growth and then no growth or re­ces­sion be­fore the next cy­cle of growth starts. His­tor­i­cally, the cy­cle lasts about 40-60 years. The Great Re­ces­sion that started in 2007 came 68 years af­ter the end of the Great De­pres­sion in 1939 but was tamped down by mas­sive loans, bail-outs, quan­ti­ta­tive eas­ing (print­ing money) and 10 years of low in­ter­est rates, which would not have been pos­si­ble in ear­lier re­ces­sions.

High-speed com­put­er­ized trad­ing us­ing ar­ti­fi­cial in­tel­li­gence backed by vast amounts of cap­i­tal has grossly in­flated and dis­torted mar­kets while frack­ing has cre­ated a tem­po­rary re­source boom and made the U.S. the cur­rent largest en­ergy pro­ducer and con­sumer.

Be­cause the Great Re­ces­sion was not al­lowed to run its nat­u­ral course and cor­rect some of the un­der­ly­ing fac­tors that caused it, the cur­rent down cy­cle was put on hold and has been smol­der­ing for the last ten years. The un­der­ly­ing eco­nomic driv­ers putting pres­sure on the econ­omy in many coun­tries re­main and more have been added. These driv­ers in­clude:

• ex­tremely high debt

• short­age of skilled la­bor

• ris­ing wages

• ag­ing work force

• rigged stock mar­kets

• mas­sive money laun­der­ing

• fewer tax pay­ers

• de­ple­tion of nat­u­ral re­sources

• gov­ern­ment cor­rup­tion

• wealth in­equal­ity

• ris­ing in­ter­est rates

• eco­nomic sanc­tions for po­lit­i­cal rea­sons

• in­creased mil­i­tary spend­ing

• sub­si­diz­ing the wrong in­dus­tries

• tar­iffs and other trade bar­ri­ers

• re­stric­tions on ben­e­fi­cial im­mi­gra­tion

• un­con­trolled mi­gra­tion

• ris­ing oil prices

• fi­nan­cial dereg­u­la­tion

• im­pacts of cli­mate change

Given the dra­matic tech­no­log­i­cal and eco­nomic changes in re­cent decades, the Kon­dratiev Wave the­ory is prob­a­bly no longer com­pletely valid but many of the ba­sic eco­nomic driv­ers un­der­ly­ing the the­ory are still a very real force. Com­bined, these driv­ers are far more pow­er­ful than short-term mone­tary pol­icy and tech­no­log­i­cal band-aids.

In the U.S., the tem­po­rary profit repa­tri­a­tion from the new tax law, in­ces­santly op­ti­mistic and mis­lead­ing procla­ma­tions by Trump and cur­rency woes in other coun­tries driv­ing des­per­ate in­vest­ments in the dol­lar, have merely masked the very real eco­nomic peril lurk­ing un­der the sur­face for the U.S. econ­omy and oth­ers.

Most rich coun­tries have reached their lim­its to growth un­der cur­rent eco­nomic mod­els and can only ex­pe­ri­ence short-term ar­ti­fi­cial growth or a de­cline. The re­cent cur­rency col­lapse in Turkey, Venezuela and some other na­tions may be the early tremors be­fore the big one.

Ma­jor in­ter­na­tional fi­nan­cial in­sti­tu­tions in­clud­ing the World Bank, In­ter­na­tional Mone­tary Fund (IMF) and Bank of In­ter­na­tional Set­tle­ments (BIS) have been sound­ing warn­ing bells in re­cent months.

Two re­cently re­tired top BIS lead­ers have pub­lished an im­por­tant book en­ti­tled "Rev­o­lu­tion Re­quired: The Tick­ing Bombs of the G7 Model", which warns of "tick­ing time bombs" in the global fi­nan­cial sys­tem just wait­ing to ex­plode and they urge a ma­jor rev­o­lu­tion in pol­icy to avoid a global eco­nomic dis­as­ter.

Yil­maz Akyuz, Chief Econ­o­mist of the South Cen­tre— an in­ter­gov­ern­men­tal or­ga­ni­za­tion of de­vel­op­ing coun­tries, warns in his book "Play­ing With Fire", of the ex­treme risks that de­vel­op­ing na­tions have from the ex­cesses of G7 na­tions and the shift­ing of gov­ern­ment debt to cen­tral banks and dis­tor­tion of mar­kets.

Some coun­tries are pay­ing at­ten­tion to the warn­ings and are re­duc­ing their risk by eas­ing out of the U.S. dol­lar and build­ing up their gold re­serves to sup­port their cur­rency if and when the dol­lar col­lapses in value.

As the United States con­tin­ues to iso­late it­self fur­ther from the in­ter­na­tional mar­ket its trade deficit will likely in­crease. Econ­o­mists are pre­dict­ing that the 2018 trade im­bal­ance could be the worst since 2008.

At present the dol­lar is strong, oil prices are not ris­ing too fast and the U.S. econ­omy is en­joy­ing a surge with record low un­em­ploy­ment and a mod­est in­crease in con­sumer spend­ing. But, the up-tick may be short­lived as the im­pact from the tax changes wear off, tar­iffs start cut­ting both ways and the un­der­ly­ing struc­tural real­i­ties kick back in.

The big dan­ger is the po­ten­tial fragility of the U.S. econ­omy, gar­gan­tuan debt and ris­ing in­ter­est rates. Last year, Wash­ing­ton spent $458 bil­lion on debt in­ter­est at ul­tra-low rates, with in­ter­est rates ris­ing debt cost will rise.

Be­cause the U.S. dol­lar is so deeply en­grained in the world econ­omy and there are tens of tril­lions of sur­plus dol­lars slosh­ing around, and the U.S. is still the world's largest econ­omy, what hap­pens to Amer­ica and the dol­lar cer­tainly has a big im­pact on the rest of the world and most coun­tries are not in a po­si­tion to han­dle any more eco­nomic pres­sure.

A rapid de­val­u­a­tion of the dol­lar could spook the herd and cause those with large dol­lar hold­ings to dump them and drive the dol­lar even lower. This would trig­ger the mas­sive quadrillion+ in de­riv­a­tives. An eco­nomic tsunami would then sweep the globe.

Cu­ri­ously, in 1973 MIT ran a com­puter sim­u­la­tion called "World One" for the Club of Rome (a club of uber wealthy con­cerned about the fu­ture) which pre­dicted that our stan­dard of liv­ing would start to de­cline dra­mat­i­cally around the year 2020, and we would wit­ness the “end of civ­i­liza­tion” around the year 2040.

World One took only pop­u­la­tion, pol­lu­tion and the ex­haus­tion of nat­u­ral re­sources into ac­count. It did not in­clude cli­mate change or the many other eco­nomic and so­cial chal­lenges now fac­ing hu­man­ity.

For many deep-thinkers, an­a­lysts and fu­tur­ists, the ques­tion is not if the world's econ­omy will col­lapse but when and how long and if the world can re­cover enough to meet the many chal­lenges fac­ing hu­man­ity. Fac­tor­ing in the im­pacts of global warm­ing and cli­mate change makes the sit­u­a­tion in­fin­itely more bleak and in­creas­ing num­ber of thought lead­ers are un­able to of­fer any hope.

How­ever, with the col­lapse of a deeply flawed eco­nomic sys­tem comes the op­por­tu­nity to cre­ate some­thing bet­ter.

A new hu­man cul­ture and eco­nomic model will be ur­gently needed for a post-growth re­al­ity on an in­creas­ingly un­in­hab­it­able planet.

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