When Will the World's Economy Crash?
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.