The world economy is set to collapse

Sep 11, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

We are delighted with all the back talk we got from our Diary on the "living wage." The responses were lively...and entertaining. We laughed. We cried.

Many people thought that we had given priests too much money and prostitutes not enough. We could go either way on that.

Still, we got no complaints from prostitutes themselves but many from doctors. They wrote in too to tell us how hard they worked and how outraged they would be if they earned less than nurses. They may not have noticed how far our tongue had reached into our cheek. But what fun it is setting other peoples' wages!

We even got a letter from a former resident of communist Yugoslavia who had actually participated on a board charged with setting salaries for different job classifications. He was so disgusted by it he immigrated to the US.

Finally, one reader probably spoke for thousands saying:

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"This is the most idiotic article in the history of articles."

We are too modest to believe it. But if it is so, it is certainly an achievement! After all, even Larry Summers and Paul Krugman write articles. So do doctors! It is hard to believe that we could top them all.

But enough of this. We have to turn to other things...

Such as the collapse of the whole world economy!

Yes, it seems to be coming. Our friend, Hense Ellis summarized:

    A new global recession has begun. The collapse in commodity prices and the slump in the emerging market economies will inevitably lead to a sharp drop in global investment and a new surge in unemployment. Moreover, the recent stock market selloff is making matters much worse by creating a negative wealth effect that will cause consumption to fall.
Another friend, economist Richard Duncan, adds detail:
  • China's economy is slowing rapidly.
  • India's economy is more fragile than generally understood.
  • The plunge in commodity prices is taking a heavy toll.
  • The sharp drop in emerging market currencies is destabilizing.
  • The slump in global trade is a blow to corporate profits.
  • Excess industrial capacity is worsening.
  • Credit quality is deteriorating rapidly.
  • Credit availability has begun to dry up and will become much tighter.
Duncan also has a theory about why these things are happening - a lack of "excess liquidity." This excess liquidity usually manifests itself, more familiarly, as ‘debt.' It is the credit put into the system and not absorbed by the Main Street economy. At least that is a simple way to think of it.

Yesterday, we showed how this liquidity bubbled up in the mortgage finance market. As money was easier to come by - thanks to low rates and rampant securitization of mortgage debt - people bought more houses at higher and higher prices. This pushed up the value of the collateral - houses - which enabled people to borrow even more and the industry to build more and sell them to more marginal (subprime) buyers. Debt and equity raced each other higher and higher until both collapsed in '07-'08. House prices fell. And housing debt along with it. And today, thanks largely to the Fed's bubble, homeownership levels are back to where they were nearly half a century ago.

Now, we see the same phenomenon happening in other sectors. Student debt, auto debt, and corporate debt are all headed for trouble.

And the bigger picture is that the pumps just aren't working the way they used to. The growth of the last 20 or 30 years came largely - maybe entirely - from expanding credit. Banks lent. Consumers, business, and government borrowed. Many of the orders went to developing markets, where costs were lower. This left these economies and their central banks with lots of foreign cash, which reinvested in US assets. Mike Dolan at Reuters:

    According to the International Monetary Fund, the dollar value of foreign currency reserves held by all developing nations ballooned by almost $7 trillion in just one decade to a peak of some $8.05 trillion by the middle of last year.

    While China was the main driver, accounting for about half of that increase, its economic boom created a commodity supercycle that flooded the coffers of resource-rich nations from across Asia to Russia, Brazil and the Gulf.

    As the vast bulk of this hard cash was banked in U.S. Treasury and other low risk, rich-country bonds, they were at least one critical factor in the halving of U.S. Treasury and other Group of Seven government borrowing costs over the same period.

You see? More and more borrowing in the US ended up as foreign currency reserves (usually dollars) in the hands of foreign central banks. What could they do with it? Buy more US government debt. Drive down US borrowing costs. And make it possible to increase debt further!

So you could track the whole growth binge by looking at foreign currency reserves. As they went up, more and more people were borrowing and more and more money was available for investment.

But woe, woe, woe...for now those reserves seem to have peaked out. Dolan:

    Emerging market forex reserves fell by about half a trillion dollars between mid-2014 and the end of the first quarter of 2015, IMF data shows, and this is likely far from the end.

    Deutsche Bank estimated on Tuesday the high water-mark of almost two decades of reserve accumulation had now been reached and central banks will by the end of next year dump as much as $1.5 trillion to counter capital outflows.

Of course, as we told you yesterday, we don't know anything. And even as to that we have our doubts. But it appears that the end of this cycle is in sight.

Watch out.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "The world economy is set to collapse"

swaminathan

Sep 19, 2015

sudden market crash is just to drown gullible investors.

Market operators are the kings and real investors should

learn the tricks of operators if they want to earn.

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Mangal

Sep 15, 2015

world economy is all set to getting collapsed as 1)world 2nd largest economy China is slowing rapidly. 2) By devaluation yuan china is threating the world economy as well as spoiled its economy also as law of diminishing return will be forced chinese manufacturer to stop production .3) Indian bankers will no longer increase the NPA and our RBI governer should not reduce the interest rate as Indian core economy is not at all in a position to gear up the production from chinese threating.4) Total NPA of indian banking industries is involved in core industries. Sunami in world economy is not too far and it will be happened within one year.

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Mitesh

Sep 14, 2015

If FED doesn't raise interest rate now this is going to happen is 100 % sure. Can gold be the real Saviour? needs to be seen all the commodities have collapsed except gold. gold also to some extent has corrected. The governments are the real culprits as during high inflation they do not act. Thanks to RBI governor who thinks of common people. India is already in recession with already all the commodities collapsing. But has the benefit gone to common man the answer is no most of the benefits has gone to government in form of excise and the companies who are mending their balance sheets by being opportunistic

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Mustaq

Sep 12, 2015

A sudden market crash would happen any time from coming Monday. Global economy is in a complete mess. Markets would witness great amount volatility which was not seen before. 2015 and 2016 will a problematic years for the entire world. Central banks of each countries are responsible for this. The above views are my opinion and does not constitute any thing.

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