This column is known for incessantly ranting about global economic imbalances, which have efficaciously led to extreme polarization between and within countries. We believe this global economic regime also promotes destructive exploitative patterns in the realm of the natural. For example, July 2015 was the hottest month on record, globally speaking, etc., etc.! Aspects of the gross economic imbalances were manifested in a mild global crisis, euphemistically called; ‘the financial crisis’ of 2007. Since then, instead of trying to solve the protracted problems of the world system, the useless palliative ‘kicking the can down’, was perniciously employed. But the can has now hit a massive boulder. Moreover, the can itself, from rolling down for quite a while, has accumulated too much dirt/mud and has become too heavy to roll. Is this it?
Stocks are crashing in 23 nations around the world. China is changing; it has allowed the Yuan/Renminbi to be more flexible (read devaluation, to shore up export, which has gone down by about 9% recently.) The Chinese stock market has also gone down by almost 30% since its recent peak. China is now the largest importer of commodities as well as the number one exporter of goods in the world. When exports decline imports follow (imports are down around 8%.) As a result, commodity-exporting countries including the BRS of the BRICS are facing problems. These countries gobbled up dollar denominated debts when the going was good (commodity boom) and interest rate was almost zero (ZIRP=zero interest rate policy). Today they are having difficulties serving their debts. Their currencies relative to the dollar are going down south, very rapidly. Currently emerging countries in South America and Asia are facing another debt crisis not very different from the early 1980s and late 1990s (recall the 1997 Asian financial crisis)! Oil is in free fall impacting all exporting countries. Even Norway and Saudi Arabia have started tapping their sovereign wealth fund to support their widening budget deficits, balance of payment deficits, etc.
Debt is another of the major structural weaknesses of the current global system. Today literally no economy grows without accruing massive debt, in one form of another. Capital formation not coming from savings will ultimately prove worse than phony. Credit fuelled activities only encourage mal-investments across the world, and this doesn’t exclude very poor countries like Ethiopia! The problem with debt is; when economic growth stagnates or even declines, the already incurred debt remains the same, exasperating existing payment difficulties (absent inflation/hyper inflation). Just ask the Greeks! The other side of the debt coin is; the indebted cannot continue their usual shopping sprees! When consumption declines in the rich countries, (70% of GDP in OECD is consumption) economic decline follows, it comes with the territory. By extension, demand for commodities that go into the making of stuff will also decline; this is the vicious circle that is currently afflicting the unquestioned dogma of the perpetual growth model of the modern world system.
The culprit behind almost all the malaise of the global economic system is ‘fractional reserve banking.’ This is a system where banks perpetually create debt via credit (phony money), not only to make the usual ‘run-of-the-mill’ profit, but also to confiscate real wealth from the unsuspecting sheeple, (human mass) including entrepreneurs! The more banks in an economy, the more the created debt (via credit), and the more the mal-investment. In the current system, unless banks create debt, they cannot exist, let alone make profit. Another consequence of this banking regime is; it abolishes the important concept of ‘price discovery’! Because of rampant money creation (out of thin air, via credit and ultimately debt) the value of goods/services become illusionary. The whole world now operates in a fictitious money regime. Money created out of thin air abuses earned income/wealth and discourages honest economic activities! Prudent money cannot exist in such an economic scenario.
Prudent or sound money can come about only when banks lend money from their deposits. In this case, prices are solid, i.e., they are one and the same with clearing prices. In a sound money system there is no such thing as ‘mark to market’ when the going is good and ‘mark to fantasy’ when the going is bad! Moreover, entrepreneurs are on solid ground and can operate rationally and logically. In our fictitious world of ‘fractional reserve banking’, a company’s share price or price to earning ratio (P/E) can jump up and down by an astonishing percentage, within hours and for no good reason (logical or rational). This happens because there is no prudent/honest money in circulation and there is no real price discovery. Everything is speculation with phony money, mostly accessed by those connected to the financial spigot, compliment of crony capitalism! Unfortunately, such a situation also obtains in the poorer countries of the world, like ours. Here is a chipping away of the system’s legitimacy by an inside operator; ‘The job of finance is to provide capital to companies. We do it to the tune of USD 250 billion a year in IPOs (initial public offering) and secondary offerings. What else do we do? We encourage investors to trade about USD 32 trillion a year (twice the GDP of USA). So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middlemen. It is a waste of resources.’ John Bogle, founder of ‘the Vanguard Fund’!
Here are few more comments and bold predictions, by those who are very much in the know, in regards to our question; ‘Is this it?’ Richard Russell believes that the bear market that is coming will tear up the economic system. Tom McClellan says that we are heading for an “ugly decline.’ Harry Dent recently stated that we are just “weeks away” from a “global financial collapse“. The famous trend analyst, Gerald Celente says “the global economy has collapsed” and is “predicting that we are going to see a global stock market crash before the end of the year“. Larry Edelson insists that he is “100% confident” that a global financial crisis will be triggered “within the next few months”. Jeff Berwick, the editor of the ‘Dollar Vigilante’, says that there is ‘enough going on in September to have me incredibly curious and concerned about what’s going to happen’. Egon von Greyerz recently explained that he fears ‘this coming September – October all hell will break loose in the world economy and markets’. We are heading for ‘the most historic wealth destruction ever’. Even the mainstream media is issuing ominous warnings now. Just a few days ago, one of the most important newspapers in the entire world published a major story about the coming crisis under this headline: ‘Doomsday clock for global market crash strikes one minute to midnight as central banks lose control’, The Telegraph. ‘Bond King’ Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel. ‘I hope it does not go to $40, because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.’
‘The prevailing world economy is like an ocean liner without life boats on board.’ This is quite a rare and honest admission by a banker from one of the largest banks in the world-HSBC. Here is a more comprehensive indictment of the prevailing global order: “You can ignore reality, but you cannot ignore the consequences of ignoring reality.” Ayn Rand. Good Day!