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We Are Now in a Global Economic Crisis

First comes global economic crisis where major economic issues are bursting into flames around the world. Then comes total economic collapse, where the damage is a done deal and we live in the rubble. Right now, in September, 2015, the world is in the economic crisis stage — some parts of the planet more so than others; but we’re all in it together in this day of globalization.

Consider the fires that are breaking out economically around the world right now and how quickly some of the flames have shot up, and you will see that it is a crisis and it is global in scale.

 

China’s stock market ignites the global economic crisis

 

Now that China’s stock market has burst into flames, it has turned out that the giant talking heads on television were wrong. The US is not immune to China. The China conflagration became an immediate contagion throughout the world, leaving a huge black scar on the US stock market that is still burning. The plunge that ensued in the US was worse than we saw last October and as bad or worse than in August 2011. It’s the worst since the start of the Great Recession, and we don’t know yet how it will compare to that 2008-2009 plunge into the pit because it is not done playing out, but my prediction has consistently been that, regardless of how far down the stock market goes, the global economy will end up in the worst state we’ve ever known. (The reasons for that, I’ve shared all along.)

And that’s just the effects from far-off China to which the US was supposedly immune. Imagine how much worse US stock market damage will become if something goes terribly wrong in the US, as it did back in 2008. One more mortal stroke this fall, could send the US stock market reeling backward years in time into the pit of the Great Recession, as this recession would have been, had quantitative easing and zero-interest rates never happened. And that, too, is what I said would happen when the government first began its bailouts and again as it dropped interest rates and again as it started quantitative easing — that doing all these things to avoid what really needed to happen for recovery would make the eventual fall so much harder.

The Chinese stock market is not going to recover. It has been completely destroyed, and anyone who thinks the Chinese may still limit damage has his or her brain in neutral because there is nothing left to save. Many of China’s biggest investors were outlawed. A huge number of Chinese stocks were put in the stockade where they are no longer freely traded, which is to say they were taken off the market. The people who were running away with what was left of their wild speculative gains were also put in prison.

So, how is it possible for that market to revive? All China can do, at best, is open the market back up. If it does that, those stocks that were falling and taken off the market will likely continue their fall, harder and faster. Who is going to return to that market after seeing how the Chinese government took the whole market hostage in order to insist that it rise when it wanted to fall? Who is going to return to a market where you could end up a prisoner if you try to pull your money out of it in a hurry? Maybe the talking heads on TV who are wearing the rose-colored glasses are dumb enough to go back to that kind of market, but I never would. It reeks with the smell of death.

 

Reappearance of the housing market crisis

 

Canada is now officially in recession with housing prices being some of the most expensive in the world in the Vancouver area, making it ripe for a housing market crash like the US saw in 2007-2008.

US housing prices have started to fall again in New York City and Washington, DC, with almost half the homes for sale experiencing a reduction in price of 2% or more. The number of homes losing that much value or more in Los Angeles has risen 1000% from last year, going from 3% of the homes losing value to now 30%. Several other major US cities are seeing a rise in the number of homes that are selling at lower prices.

With homeownership rates having fallen to a 50-year low in the US since the Great Recession, the lowering of values has a sinking feeling that is uncomfortably similar to 2007 just before the housing market crash.

Thus, I see a fair possibility that economic losses from the stock market could suppress a housing market that has reached peak heights again and has already started settling on its own. That is a second crisis waiting in the wings as the stock-market crisis unfolds.

 

Nations in recession add up to a global economic crisis

 

Brazil is rapidly spiraling into an economic disaster. Most of South America is either in recession or moving in that direction. Russia is deep in recession due to Western sanctions. Ukraine is in recession due to Russia and due to its own internal problems. As mentioned, Canada is in recession, which is due to the fall in oil prices. Several Eur0pean countries are either in recession or on the brink of it. Norway is falling badly due to the drop in oil prices — it’s primary export.

Says David Stockman, Reagan’s budget advisor,

 

The world is heading into an unprecedented monetary deflation——with output and trade falling nearly everywhere. That implosion is already rumbling through Canada, Mexico, Brazil, Australia, South Korea, Malaysia, Indonesia, Russia, Japan, the Persian Gulf oil states and countless lesser economies in between.

 

What does a period of deflation actually look like?

Well, in Brazil it translates into the worst layoffs seen in decades. Retail sales have gone from a high of 11% growth each year to a decline now of -1%. Its happening because of the fall in the prices of natural resources — Brazil’s big export. Ah, but that’s Brazil, you say. Yes, but remember Brazil was seen as one of the more promising emerging-market economies in recent years, and now it is an economy in precipitous decline. Something has clearly turned around in the wrong direction.

What went wrong?

For several year now Brazil copied the United States. Its central bank, like the Federal Reserve, expanded its balance sheet by 1,000% and encouraged citizens to take on debt in order to buy more things to stimulate the economy, and now they, too have reached debt overload — that point in the law of diminishing returns where the cost of debt starts becoming greater than the benefits of economic expansion due to that debt.

Brazil is also being hit by the rise in the value of the US dollar, making its dollar-denominated national debts more expensive to feed. A

Most of all, Brazil has caught the Hong Kong flu. China was a big buyer of Brazil’s natural resources, but not any more. At least, not so much. China sneezed and Brazil caught a cold.

Moreover, during Brazil’s expansion years, hundreds of billions of dollars of US investment poured into Brazil as did a 4x increase in exports from the US to Brazil as Brazilians spent their growing wealth (and took out debt0. That means, as Brazil now unwinds, the US is tied to its unwind as surely as it was part of its initial wind-up. So, what happens to China, happens to Brazil, and then happens to the US. Dominoes.

And what is happening to Brazil is endemic of most of the emerging-market nations. So, there are many directions from which China’s Great Unwind will come back to US shores beyond the direct impacts.

One of the globe’s more established economies, South Korea, has seen its exports to China fall by almost 15% in August due to the disintegration of China’s stock market. Because China and South Korea are so closely tied (25% of South Korea’s overseas exports go to China), the fallout there is worse than other places; South Korea is not in bad shape, but its tightening. and its a country that followed the US plan of quantitative easing and that is a big trade partner for the US.

Then there is Australia, a large modern economy that is still comparably strong, but more than a quarter of its exports are to China. So, do the easy math and figure out where Australia’s export-driven economy is going now that China is unwinding from its days of profligate construction.

A global economic crisis is not about any one part of the world but about the shear number of nations around the world that are beginning to smolder as the cinders from China’s explosion rain down upon them. Some are already fully aflame. Others, like South Korean, are just smoking.

 

Japan’s place in the global economic crisis

 

Foreign money has started pouring out of the Nippon stock market at a faster rate than at any other time during the past decade, including the economic collapse of 2008-2009! This, too, is contagion from the conflagration that happened in China — the destruction of its stock market, the sharp fall of its currency (sharper that planned apparently), and the Great Unwind from its days of industrial over- expansion. What affects Japan will affect many nations with global economic ties to Japan, and that includes the US.

So, those who said the US was immune to problems in the Chinese stock market were pathetically short-sighted and dim-witted. They should have thought about the numerous knock-on effects China might have on stock markets and national economies that are less immune because of closer economic ties with China. Then they should have thought about what the aggregate effect from all of those smaller markets and economies might be to the US stock market and, finally, to the overall US economy.

That’s where my mind was going as I scoffed at their idea that the US was immune. A cascade of events like that seemed more than likely to me, as I wrote about in this blog; but the giant talking heads on television all missed it … or most of them did. If any got it right, I apparently missed them because I sure didn’t hear it.

Naturally, the idiot corral is still making such stupid proclamations, saying that what is happening in Japan’s stock market is just profit-taking — that people there are seeing the chance to “buy the dip,” sell when the market spikes back up and then buy at the bottom of the next dip.

Please stop and think about that. Please. Do yourself a favor. In Japan, the selloff has more to do with real economic ties to nearby China than with mere fear of contagion, and the problems with those ties are not going away for years. China has intentionally slowed its expansion because China was building too many ghost towns and bridges to nowhere. The if-you-build-it-they-will-c0me mentality didn’t work out as the mainland’s master planners hoped for. So … China has stopped building towns that never were, and that isn’t going to start back up again for decades because so many of the past buildings remain empty and boarded. Since trade with China is going to stay down for a long time, there will be a lot fewer Toyota trucks and forklifts heading to China, fewer Komatsu excavators, etc.

So, Brazil and a number of other emerging markets lose big on the sale of natural resources. Japan loses big on the sale of technology into what was once China’s gaping maw. The US loses in both ways from China and all directions.

 

Consider other voices now predicting a global economic collapse

 

While I started off nearly alone earlier this year in predicting a stock market crash and ensuing global economic collapse (other than the small chorus of permabears who always sing the economy’s requiem), more voices are now coming out and stating that this is an economic crisis of global proportions. If you don’t think we are already in a global economic crisis consider the people who are finally saying that we’re heading into a total collapse:

Gerald Celente, a frequent guest on The Oprah Winfrey Show, Good Morning America, and most of the major network news shows said in early August that he was expecting “a global stock market crash” before the end of the year. Celente predicted the ’87 stock market crash, the dot-com bubble burst, and the Great Recession.

He expressed this one as “panic on the streets from Wall Street to Shanghai and from the UK down to Brazil.” Celente predicted, “You are going to see one market after another begin to collapse…. You’re going to start seeing some big bankruptcies as well.”

Celente also said in early August that Canada was “not so far from a recession,” and Canada, just this past week, has been declared to be in recession. Celente asks why stories about junk bonds busting are not making the news as the oil industry and other energy junk bonds go bust. You’d think it wasn’t happening based on the silence. According to him, it is. (I don’t know. His word that it was happening on a significant scale is the first I’ve heard of it; but it is certainly something I’ve expected to see.)

Billionaire news publisher Rupert Murdock indicated where he feared the present stock market crash was going when he wrote two weeks ago,

 

All prices dropping not just shares. Timely correction or sign of major global crisis in near future?

 

Prior to the recent plunge in global stock markets, John Ficenec, columnist for The London Telegraph, wrote an article titled “Doomsday clock for global market crash strikes one minute to midnight as central banks lose control” in which he predicted,

 

Time is now rapidly running out. From China to Brazil, the central banks have lost control and at the same time the global economy is grinding to a halt. It is only a matter of time before stock markets collapse under the weight of their lofty expectations and record valuations.

 

Ficenic explains how the Chinese industrial boom drove up commodity prices all over the world and how its industrial slowdown creates a huge drop in prices, resulting in a loss of wealth for all nations. That means “the earnings growth that Western companies relied on for the last six to seven years will no longer be there.”

Paul Krugman is someone I rarely pay attention to, even though he is a Nobel-winning economist, because economists of his ilk have shown no ability to predict what is coming. However, when even those you disagree with — those who fervently believe the Obama administration has been engineering an economic recovery — start talking about the present events as being a global economic crisis, then you know the situation is every bit as bad as you think it is.

 

…China adopted an official policy of boosting stock prices, combining a stock-buying propaganda campaign with relaxed margin requirements, making it easier to buy stocks with borrowed money. The goal may have been to help out those state-owned enterprises, which could pay down debt by selling stock. But the consequence was an obvious bubble, which began deflating earlier this year.

This week China decided to let the value of its currency decline…. But Chinese authorities seem to have imagined that they could control the renminbi’s descent…. They appear to have been taken completely by surprise by the market’s predictable reaction; namely, the initial devaluation of the renminbi was … a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi’s value.

…The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach…. Do the country’s leaders really not understand why that won’t work? If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.

 

How interesting. China is doing what Krugman has constantly advocated for the US: it was pumping up asset prices in the stock market via stimulus measures. That kind of government intrusion into the market is something being bungled so badly by China that he fears it shows they have no idea what they’re doing and that it bodes ill for the whole world.

Douglas Elmendorf, who was recently the director of the Congressional Budget Office, says that thinking about what to do next, if things get out of control is “a very live question” right now in Washington.

 

“Policy makers are thinking about their backup, backup plans.”

 

Since their backup plans have been in play for years and are exhausted, now they’re thinking about what new and greater extremes they might have to go to if this crisis continues to worsen.

 

Near inevitablity that the present global economic crisis leads to complete economic collapse

One of the things that makes it clear to me that this global economic crisis is bad enough to turn into total economic collapse is that there is not a chance in the world China is going to speed back up. It is going slower by design. China drove up the price of natural resources and products everywhere by its huge expansion of demand during the Great Recession as it created worthless projects (along with worthwhile projects). What profitability global companies showed in the buy-up had a great deal to do with those higher prices.

Because stocks in the US, were already highly overvalued in terms of their own price-to-earnings ratio, this drop in earnings, which is inevitable when a giant like China lays down to rest, makes those top-heavy stocks even more top-heavy in price compared to each company’s earnings. Stocks had to be highly sensitive to that and go down; but that drop in earnings also means a drop in GDP, likely layoffs, etc.

Since Chinese industrial demand, quantitative easing, and zero-interest were the three forces that lifted the world out of the economic collapse of 2008, where is the lift going to come from now that all of those have ended or are in the process of ending?

A lot of people are saying they don’t think the Fed will raise interest rates now that things are looking shaky because of China. I think it will if statistics between now and the Fed’s September meeting look generally favorable and if things quiet down for a bit in the stock markets of the world and in China. The Fed will say, “See, we weathered even that. We’re doing fine.” The fact that they’re blind that way is, in my opinion, proven by the fact that they think they’ve created an economic recovery. They are seeing what they want to see.

The Fed also has a history of ending its stimulus the moment things start to look more normal, only to see everything fall apart because they pulled the life support too soon. The Fed also badly wants to prove its recovery program a success to its critics and to move back to more normalized markets. They know, too, that continuing to put that day off when they keep saying it is coming, roils markets with indecision and endless frustration. Many other nations are begging the Fed to get it over with and end the uncertainty in the markets.

The fact that many investors and talking heads are now saying, The Fed won’t raise interest rates because of the present market volatility, only means the first raise of interest rates will hit harder if they do. Another little jog from China right after the Fed announces its return to normalcy could easily release an avalanche. If not China, then Greece. If not Greece, then Ebola. Pick your scare. It doesn’t matter what the next trigger is. The point is that there are plenty of negative forces lined up and ready to yell ‘BANG!’ just as the market is poised to fall.

For the US, the following forces spell higher interest on our debt: Falling prices of oil mean fewer petro dollars in circulation, which means fewer banked in the form of US treasuries. Chinas unwind and cashing in of treasures to bail out its stock market and support its falling currency value means China’s sale of US treasuries that it already owns will compete with the United States sale of new bonds and treasury notes, meaning the US will need to pay higher interest both to find buyers to replace China as the former primary buyer and to compete against the larger supply of US treasuries on the market from other sources.

As the mainstream media is now reporting the kinds of events I promised would come this fall, which none of them were talking about a month ago, Henry Sender of CNBC writes,

 

The combination of future Fed tightening, less money in need of recycling in the hands of oil producers and the uncertain consequences of the swiftly changing circumstances in China is enough to turn most bulls into fearful bears.

 

Whether the Fed does or doesn’t raise interest rates, we’re already in a global economic crisis.

 

 

Here is another chart that reveals how the bull market that rose out of the Great Recession in 2008-2009 narrowed down to a close and particularly how it formed a rounded top after the October, 2014, plunge, just as I said it would right after it made its first rise out of that drop. From that point on, it began to fall out of its narrowing bull market top and bottom range and now has gone over the cliff just as I said it would:

 

EndOfBullMarket

 

 

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