Gwynne Dyer: Global economy faces a financial crisis "perfect storm"

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      You know how it is with buses? You wait ages for one, far longer than seems reasonable—and then three arrive all at once. Financial crises are a bit like that too.

      The financial crisis everybody in the business has really been waiting for is a “hard landing” of the Chinese economy, now one of the two motors of the global economy. (The other is still the United States.)

      Everybody thought it was bound to come eventually—well, everybody who was not too heavily invested in the Chinese market—and it now appears to be here, although the Chinese government is still denying it.

      The second crisis, less widely anticipated, is a credit crunch that is sabotaging economic growth in almost all the developing countries except India. In many cases their currencies have fallen to historic lows against the dollar, making it harder for them to repay the dollars they borrowed. Moreover, it’s getting harder for them to earn dollars from their exports because commodity prices have collapsed.

      And a third crisis is looming in the developed economies of Europe, North America, and Japan, which can see another recession looming on the horizon before they have even fully recovered from the effects of the banking crash of 2007-08. And it’s hard to pull out of a new recession when your interest rates are still down near zero because of the last one.

      These crises are all arriving at once because they are all connected.

      When the huge misdeeds and mistakes of American and European banks caused the Great Recession of 2008, China avoided the low growth and high unemployment that hurt Western countries by flooding its economy with cheap credit. But that only postponed the pain, and between 2007 and 2014 total debt in China increased fourfold.

      The Chinese government is more terrified of mass unemployment than anything else. It believes, probably correctly, that the Communist regime’s survival depends on delivering continuously rising living standards. So the Chinese economy went on booming for another six years, but the “solution” was fraudulent and now it’s over.

      The huge amount of cheap credit sloshing around the Chinese economy mostly went into building unnecessary infrastructure, and above all into housing. That did preserve employment, but property values soared and a huge “housing bubble” was created. There was nobody to buy all those houses and apartments, and there are now brand-new “ghost towns” all over China, so property values are falling fast.

      Since the crash on the Chinese stock markets began last month, the government has done everything it could to stop it. It has dropped interest rates repeatedly, it has devalued the currency, it has ordered state institutions to invest more—and nothing has worked.

      Chinese exports have fallen eight percent in the past year, and even the regime admits that the economy is growing at the lowest rate in three decades. Nobody outside the regime knows for certain, but it may scarcely be growing at all. The “hard landing” is now close to inevitable.

      Now for the second crisis. While China’s artificial boom was rolling along, its appetite for commodities of every sort, from iron to soya beans, was insatiable, so commodity prices went up. The other “emerging market economies” grew fast by selling China the commodities it needed, they attracted large amounts of Western investment because of their rapid growth, and they borrowed freely because Western interest rates were at rock-bottom.

      The collapse of Chinese demand ends this party too. From Brazil to Turkey to South Africa to Indonesia, exports are falling, the value of the local currencies is tumbling, and foreign investors are fleeing. Capital flight from the 19 largest emerging market economies has reached almost one trillion dollars in the past 13 months, and the outflow is still accelerating.

      And the third crisis, in the West? The problems that caused the crash of 2007-08 have not really been addressed, just papered over. What limited growth there has been in Western economies is due almost entirely to absurdly low interest rates and “quantitative easing” (governments printing money).

      The average time between recessions in the West is seven to 10 years, so one is due around now anyway. The likeliest trigger for that is a collapse of demand in China and in the other emerging economies, which is now practically certain. And when it hits the West, neither of the traditional tools for pulling out of a recession will be available. Interest rates are already near zero, and the money supply has already been expanded massively.

      It would be rash to talk about a long-lasting global depression in the style of the 1930s, because a lot has changed since then. But it is certainly safe to say that the global economy is heading into a perfect storm.




      Aug 27, 2015 at 10:50am

      Everything has to change, we live on a finite Planet, and constant growth has almost destroyed our "home" Gaia. Well certainly destroyed a Lot of species. So ya, false country economies will collapse. Grow a garden, help a neighbour we are all in this together!

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      Greg G.

      Aug 27, 2015 at 6:07pm

      The main reason for all the global financial woes over the last decade are caused by the some fundamental reason as other global financial crises; an overabundance of saving over investment opportunities, which causes global capital to chases any opportunity for speculative profits all over the world, causing the housing bubble, which when it crashed led to the banking crisis, etc. The same thing is driving the problems now. Read Paul Krugman's columns over the last year for more detail. This is a fundamental flaw in a capitalistic global economic system with no regulation on capital movement, with no easy fixes.

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      Greg G.

      Aug 27, 2015 at 8:01pm

      ... but one thing that would be a huge help would be if income was spread out over more demographics. Multinational corporations and the 1%, more accurately the 0.1%, are sitting on trillions and trillions in cash and parking in tax havens, whereas if the bulk of GDP was distributed across the board, the chase for profits around the world, which has currently chosen the US again as it's current parking lot, would stop; ordinary people usually spend 100% of their incomes, and then some hence the unsustainable credit balances, which would make economies the world over boom with no quantitative easing needed. Also, if banks passed along the incredibly low, sometimes even negative, interest rates to consumers, rather than getting free money from central banks and still gouging customers with higher credit card and mortgages rates, again,, that would be money that would be spent by consumers, rather than as profits by the big banks sitting on mountains of cash currently sitting idle.

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      Renard Johnson

      Aug 27, 2015 at 10:58pm

      Great article. I agree that the times we are in are the ramifications of the 2007-2008 crash. To me today feels just like back then only worse. Bernake testified that 2008 was the worst financial collapse in human history. I wrote a real time organic record of the crash in my book. So this is the same destruction. I predicted the crash of 2008, the European collapse and much more that has all come to pass.
      We are all witnessing the fall of the old guard making way for the new paradigm shift. I told many people eight years ago my vision shows me a great collapse of the develop world. I wrote a book about it. Now we must accept this path of financial evolution. Truly since 2008 nothing is as it was. So come along for the next phases of the rest of you and your family members lives. Keep life on a positive tip. Could be rough seas ahead.

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      Aug 28, 2015 at 4:14am

      If I'm going to be very speculative I would say this:

      I think some of the game theory dynamics around the financial sectors of the world have matured to an equilibrium, where they prosper from and perpetuate financial crisis. I think the solutions to the last crisis have made this worse. Too big and too important to fail is now dogma.

      For example Greece's unmanageable level of debt falls on the troika and ultimately tax revenue. If they default it is other EU states that take a loss, not the banks that loaned them the money. This is really just one example of one dynamic. The risk is on sovereignties, not banks. But, banks take the risks and they have no incentive to avoid them.

      China is certainly going to jump into this dynamic. They will spend sovereign funds to save large private companies, especially financial firms.

      Nearly all the losses fall (quite unfairly) on middle classes. "quantitive easing" is free from a government's perspective, but is very like a tax on cash savings. The middle class holds the cash. It also provides a nice across the board salary cut. When interest rates go down building booms happen, transferring wealth from middle class home buyers to builders and banks.

      I think the current system of regulated financial institutions, central banks and monetarism is on its last legs.

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      Gulf of Tonkin

      Aug 28, 2015 at 6:29am

      This is yet another example of financial propaganda. Dyer implies that this crisis has it's origin in China by it's actually caused directly by the low to zero to negative interest policy of G7 central banks especially the US Fed, and China is only responding to it in the best way that it can.

      The manipulated US dollar is the source of the problem and thats why most of the world wants to dump it's reserve currency status.

      Due to Canada's totally incompetent government, Canada refused to join the AIIB and will miss out on 30 trillion in infrastructure projects over the next 35 years. Indeed, the financial future of Canada looks very negative.

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      I Chandler

      Aug 29, 2015 at 12:19pm

      @Tonkin: "Due to Canada's totally incompetent government, Canada refused to join the AIIB "

      Maybe Harper succumbed to pressure?

      Canada (along with North Korea, Taiwan, Ukraine, Colombia, Japan and the US ) have Not become AIIB members. The bank is seen as contributing to the spread of China's “soft power”, possibly at the expense of the US.

      The US pressured allies, such as Australia and Britain, to not join the bank, and expressed disappointment when they did: "A US government official stated that the British decision was taken after "no consultation with the US." In response, the UK indicated that the subject was discussed with the US Treasury Secretary for months preceding the decision. "

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      Marty Murphy

      Aug 31, 2015 at 7:17pm

      Mr. Dyer, you write intelligently and somewhat reasonably. You deserve a better group of comments. Too many of the above are off their meds or need to put that bong down for a while.

      Good summary of what has been happening worldwide lately, economy-wise.

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      Sep 1, 2015 at 5:00am

      Qualitative easing gets an undeserved bad rap. Doomsayers yell, "inflation, inflation, inflation!!" for the last seven years, but when you ask them "has there been any inflation more than ordinary?". Crickets chirping. All this fear mongering over qualitative easing is because government are basically pissed off the central banks are following Keynesian monetary policy because it *actually* works unlike the monstrosities by Reagan, Thatcher, numerous PC and Fiberal governments in Canada, and under Clinton.

      And if you're poor and afraid of inflation, you're an idiot. In fact, many Mediterranean would on purposely cause rapid currency devaluation i.e. inflation specifically to help the poor in countries like Greece/Spain/Italy where the rich simply refused to pay their income taxes, I mean, at all! Devalue your currency every decade or so, the heavily indebted poor prosper because the effect rate of their mortgage in real dollar terms drops to about a tenth of what it used to be, and the grubbing tax cheats at the top see their hoards of wealth shrink significantly in real dollar terms. So in summary inflation sucks only for the rich, for the poor it in effect erases most of their debt. The fact that Greece didn't crack down on their scum bag tax cheat billionaires while entering a common currency to take away the option for currency devaluation is the *real* cause of the mess there now. Keynes was right, still is right, and always will be right.

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