The World is in Very Serious Trouble, All 3 Big Economic Engines Slowing

One of the great things about a diverse world economy is that historically when one area of the world cools, often others heat up. For all the gloom that has gripped the United States and other parts of the West since 2008, there has always been the idea that China, the beast of the East, was trucking right along and would in the end pull the world out of the ditch. This hope is quickly vanishing.

As we have written before, China is the ultimate crony capitalist state. Though on the surface these days a quasi-market economy, China is not a free society. Information does not flow as it should and is needed and as such China is now seeing cracks as only a managed economy can deliver.

Accounting standards are suspect. Banking in general is suspect. Property rights are selectively enforced at best. And now the integrity of the political structure of the country at the highest levels is suspect. Recently there were rumors of an attempted coup in Beijing. According to the excellent report from Stratfor below, these rumors are only rumors. But clearly something is afoot.

Such political movement is almost surely related to the massive slowing of the Chinese economy. Things are falling apart and it appears pretty quickly. Long term China is still a growth story but it is becoming increasingly clear that the dragon has not actually weathered the economic storm which has lashed other economies, it has just been the last major economy to feel the gales.

Witness the city of Ordos, one of China’s ghost cities. I’ve posted this video before but it is so breathtaking it deserves another look. Imagine a giant city, brand new, with absolutely no one in it. These are the pyramids Keynes advised governments to build during economic downturns. And in the Chinese hinterlands, as soon as they are built, they crumble.

China is unwinding and there is no telling where this will go. If it is a particularly hard landing, which it looks like it will be, what does this do to the Chinese psyche? For 2 generations Chinese people have experienced a constant upward economic trend. What happens when some of this trend is retraced? This is an important question which needs to be thought about from an economic and political policy perspective.

So that’s one economic engine. What’s going on in Europe?

Disaster, that’s the best word for it.

Take a look at this interview with the head of the British Chamber of Commerce regarding the new “stimulus” which is on its way from the Bank of England. There is way too much fear on the faces of the newscasters for a morning chat show.

What’s worse is that the interviewee knows that the effort from the BoE isn’t going to work and is calling for direct lending from the government itself directly to business, like they have in Italy. Solved the problem there right? Why not do the same thing in Britain?

And check out our buddy Nigel Farage as he again dresses down European Parliament.

So the second world economic engine is on fire. Great.

So what of America, the last of the big 3 economic engines?

Well, David Stockman, a favorite around here has some thoughts on the situation.

He thinks we are likely to see a “permanent state of recession” going forward.

In the same interview which can be seen in its entirety HERE, Stockman asserts;

“The issue today is preservation of capital. It is not earning a return. Any attempt at earning a return puts an investor in harm’s way. The Fed has completely rigged these financial markets.”

The interviewer then says, that some believe that “2008 was just a warm up.”

Stockman says that he agrees.

Fantastic.

He explains that none of the problems which came to a head in 2008 have been dealt with, governments and central banks have just delayed the reckoning, and by delaying the reckoning have made the situation much worse. For instance Stockman explains that for all the stories in the financial press of companies sitting on piles of cash:

“The business sector has 11 trillion worth of debt, and 2.5 trillion worth of cash, and the Wall Street guys want you to look at the 2.5 worth of cash, trillion, and ignore the massive debt that’s tottering out there.”

He also explains that the American consumer has hardly deleveraged at all during the recession and as such still remains dangerously exposed to a downturn (from our current depths.)

So economic engine number 3 is in horrendous shape also.

We now have a situation where the entire world economy is slowing all at one time. There are pockets which are better than other areas, Canada and Australia come to mind, but the clock is ticking for them too because both countries are tied closely to China and have ridden the commodity boom spurred by the Asian giant.

And if all this were not enough we now have jockeying between Russia and the United States in Syria. There is a Russian aircraft carrier battle group stationed just off the coast of the country. We have a group in very close proximity.

Generally speaking it’s good to have carriers separate from one another and that corner of the Mediterranean Sea is not very big. Aircraft carriers like lions need big territories and they aren’t usually friendly when they stumble onto one another.

Let’s hope that this situation remains cool along with heads. Any real action between Russia and the US in Syria would be a disaster and would likely trigger all sorts of nasty ramifications in the region and potentially beyond. How would you like $200 oil as the world heads into a depression? No thanks.

This article from Reuters sums up the situation at this moment from the Western perspective well.

Whew. There’s a lot going on. Plenty of doom and gloom. Sorry about that. Call me captain buzzkill if you want, I probably deserve it. However as gloomy as the scene is there is always room for optimism. Maybe the world will finally turn its back once and for all on the Keynesian nonsense which has taken us to this point. Unfortunately (buzzkill coming again) policy makers are unlikely to do this until the world is in considerably more trouble than it is right now. And we are in some trouble.