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Economic Forecast 2014: Strong Headwinds Face Global Economy

My “Economic Forecast 2014” starts with Russia. The first breezes of coming turbulence are already blowing in on the U.S. as a storm I’ll name “the Russian Rampage” hits Crimea and Russia braces for the the U.S. response. Foreign-owned U.S. bonds held in custody of the Federal Reserve took their largest drop on record last week. No one in the media seems to know who is selling out, but I would speculate the selloff is because one of the United State’s largest debt financiers is trying to get out of U.S. bonds. That would be Russia … trying to untie assets from the U.S. before the impending sanctions over Russia’s impending annexation of Crimea kick in.

Those sanctions could freeze Russian assets held in the U.S. Russia also has the falling Ruble to be concerned about and may be selling U.S. bonds to buy rubles and prop up the ruble’s value. At same time, the rest of the world is likely trying to get its assets out of Russia before the big freeze hits as many businesses fear Russia will nationalize foreign assets kept within the country. (See “Fire Sale of U.S. Treasuries“.)

Russia wants Crimea badly and would not start down such a path if it were not committed to this course for the longterm. Clearly the Olympic Games were all about Russia’s glory days and intended to stir national pride. Putin intends to be seen as a great leader who restores that glory, and Russia’s leaders have a legacy of being willing to see their people struggle economically in order to reach an idea. So, there is not a chance in the world that Putin will make himself look weak by caving into Western demands over something as trifling as economic sanctions when he has the prize nearly in the palm of his hand. Sanctions will, therefore, be increased by the West, and Putin will retaliate by applying his own sanctions against the West.

Putin also has some credibility to his argument:

1) Crimea voted by more than a 95% majority to succeed from Ukraine and join Russia. Say what you want about faulty Russian elections held under gun point, but everyone knows the sizable majority of people in Crimea are Russian speaking. Even if  you ran perfectly fair elections, the majority would come out in favor of joining Russia, and that is a democratic process. Putin will not ignore so many millions of Crimeans calling out to him to let them join Russia.

2) The present government of Ukraine did not get installed by election, but by a coup. Again, say what you want about the corruption of the last leader of Ukraine, but he, at least, got there by election. The present coup may have been a popular uprising, but it was still insurrection against the elected government. All of which means that Putin, in the eyes of his own populace and the people of Crimea, stands on the right side of the argument morally and the right side of the law. Maybe not in our eyes, but certainly in theirs. Because his will be seen as a noble and strong position, national pride and the hope of becoming a superpower once again will embolden Russian citizens to bear up under sanctions in order to support the cause. They are a tough people, used to decades of tough economic times.

The situation in Crimea is a growing headwind to the global economy that isn’t fading away anytime soon. It raises fears throughout Eastern Europe that a new Soviet Union is rising from the ashes of the old. If we want to go down the path of creating economic crisis in Russia, Putin will do his best to make sure we all go there with him. The trade war has begun, and sanctions against Russia will be almost as damaging to Europe’s economy and even the U.S. economy as they are to Russia’s economy. The only way this is going away is if the U.S. backs down from sanctions, making Obama look weak when he already looks weak in many eyes over Syria and over Iran.

 

The Economic Forecast 2014 calls for a storms in the east

As Russia rumbles over Ukraine, trying to reinflate the old Soviet empire, China, which has been building up its military for several years as if it intends some great action, is now acting. It’s being more aggressive in the South China Sea, making waves that could readily wash over islands that have long been under contention between China and Japan. Japanese ships and Chinese ships are just about bumping into each other. A single misjudgment in navigation could start a war.

At the same time, China is trying to bring its C130-size economy in for a soft landing. While others have been saying for the past two years that the Chinese economy is going to crash, I’ve been saying it won’t … and it hasn’t. But it is going to land because China wants its economic growth to settle down, and that will be a dead weight on the world economy. Chinese stocks are falling from the sky as people get ready for the big bird to plunk down. (See “Markets Hold Breath and Chinese Shadow Banking Grinds to a Halt.”)

On the other side of the storm brewing in the China Sea stands Japan, whose economy is  faltering again. Abenomics (the ultimate in quantitative easing) has reached the reality of diminishing returns that was practically predictable. Abe’s wild stimulus money is stimulating no more. The shine has worn off the coin, and Japan has nowhere left to go. Abe has pushed economic stimulus as hard as he could — probably harder than the world has ever seen — yet Japan’s economy remains still sunk in the mud. Now on the horizon, taxes are set to rise. Japan’s economy has not looked this dire since the 2011 tsunami.

 

An Iranium Reaction is also in the economic forecast for 2014

By the end of summer, Iran’s calm before the storm — guaranteed to last that long by a short-term deal with the West — will come to an end. The season change will be upon us with all its turbulence of hot air in the Middle East meeting cold blasts out of the West. If it is smart, the West will recognize Iran is just stalling. I suspect Iran is giving up a little enrichment right now to buy time for weapon development.

Will the West give Iran more time at Israel’s expense, as Europe’s chief negotiator has already recommended? That I don’t know. Europe’s ability to be duped by wishful thinking with Iran is unfathomable, but things should be looking pretty shaky with Iran by fall, and one has to wonder if Israel is as willing to hold out in hope as Europe and America are. Israel’s Minister of Defense, Moshe Ya’alon, has taken a strong line against Israeli military action against Iran over the past few years, but this past week he sharply criticized the weakness of the United States and stated that Israel cannot rely on the U.S. to do the job. He said that Israel can now only rely on itself. So, will there be patience on Israel’s part to extend talks in the fall? The answer in Ya’alon’s words, “The US at a certain stage began negotiating with [Iran], and unfortunately in the Persian bazaar the Iranians were better…. We (Israelis) have to look out for ourselves.” (The Times of Israel)

Now that the U.S. is embroiled in direct confrontation with Russia, Iran’s hand has gotten stronger, as Russia will be disinclined to cooperate with the West in any kind of sanctions against Iran once it finds itself the recipient of Western sanctions. Moreover, as sanctions bite into Russia economically, contracts for Russia to build nuclear facilities in Iran will look that much better.

 

Conclusions for my Economic Forecast 2014

China is coming in for its landing, but that’s not likely to be a major factor, just a dead weight. Russia is going berserk , causing money to rush out of it. China and Russia have been the largest backers of U.S. debt, but it is unlikely either are inclined to buy U.S. bonds right now. Both are more than likely getting out of U.S. bonds, and that will make things shakier for the U.S. China’s been getting out for some time. (Also a tale told here in rational speculation before it appeared in the news elsewhere.) Russia will do its best to diminish the U.S. dollars as the world’s international trade currency.

Tensions in China and Japan are certain to grow, increasing feelings of instability, which never lend themselves toward economic stability.

I’m not predicting economic collapse in 2014 any more than I did last year. Some well-known talking heads did for 2013, especially related to China, and I said they’d be wrong. Marc Faber, Nouriel Roubini, and Jim Rogers all predicted that 2013 would bring a great crash, and I said that I did not think that was likely. While I’m not forecasting calamity in my 2014 economic predictions, it certainly looks like a stormy fall ahead of us as these pressures start to build against the global economy.

 

I’ll bet this blog when it comes to my Economic Predictions 2014

There is one caveat when I say I am not predicting calamity in 2014. My predictions are based on the global trends that are currently in play, against which minutia like job statistics and corporate profits will have little sway. Those mega forces by themselves will put the global economy under great stress. My only caveat is that every year brings unexpected disasters and difficulties. If only the forces that can now be seen and felt are the ones at work, then the economy will grow worse but not crash. If something unexpectedly bad — such as war with Iran — bursts into the picture, then the economy could easily crash.

What I am  certain of and willing to bet this blog on is that the economy will not do better this year — so certain, that I will quit writing this blog if I’m wrong on that prediction. While one can never know what unexpected force might hit and make things worse, I am certain that there is no force positive enough to have the capacity to lift this dinosaur economy back to its feet. Nothing the Fed does will keep it upright. Nothing Europe does will supplant the problems that are brewing in Europe in large part because of Russia but also because Europe has not fixed its banking problems that came out the Great Recession. I have read many pundits who are saying the economy will improve in 2014, but there is absolutely nothing going to lift this economy up any longer. It’s moribund.

We had three years in a row that started out positive and upbeat in the spring. The dancers and singers of the new economy all raised their hands and sang of “economic recovery.” I did not. I said those years would get worse, and they did. After a warm spring, the economy cooled off most of the rest of the year. This year, we are off to a dead start with jobs stalling out, but that does not mean the year will be the opposite of past years by starting bad and then turning better. No. If the last few years started out fairly good and then got somewhat bad, this year can only do worse because of the major forces blowing in against it while there is nothing fundamentally fixed in our economy. It is more debt-ridden than ever and floating on a huge stock bubble created by quantitative easing, so more perilous than ever because the Q.E. is now slated to end. That means the artificial life support is coming off in 2014 just as global economic pressures are piling back up.