Global Economic Crisis

The U.S. Federal Reserve, cut interest rates 50 basis points in a recent bid to calm markets driven by fear from the COVID-19 outbreak. That move, followed by other central banks, has utterly failed, as equity markets collapse and oil prices plummet. Discrete moves by central bankers, lacking synchronized coordination, reflect growing panic by policy makers. They seem to fail in understating that the global fear over the coronavirus pandemic is not paranoia, but built on real consequent of a health menace that is metastasizing globally, leaving economic paralysis and demand destruction in its wake.

One of the most direct economic consequences of COVID-19 is the utter collapse in oil prices. The failure by OPEC to agree on a production cut has led to Saudi Arabia initiating a price war, further demolishing benchmark oil prices. This will have a domino effect, crippling economies worldwide dependent on oil revenue.

A manifestation of the crippling global economic crisis underway is the drop in U.S. Treasury yields, with even 30-year bonds dropping below one percent and 10-year yields sinking.

All these signs of fiscal and monetary panic give growing signs that a massive global economic crisis is now in its early stages, with the possibility it will rival the 2008 global financial crisis in its severity.

Until now, the last time the U.S. Treasury 10-year bond yield dipped below 2-year bonds was in 2007. That event foretold the 2007-08 global economic and financial crisis. This inverted curve has been uncanny in its predictive ability to foretell a near-time arrival of a major recession. Now, in August 2019, we again have an inverted yield curve.

Investors worldwide know the significance of this development. Stock markets, including the Dow Jones, are plummeting by big figures. Is this an overreaction, or a rational response to impending fiscal and economic danger.

The inverted yield curve should not be viewed in isolation. Rather, it should be seen in the context of the escalating trade war between the world’s two largest economies, the growing risk of a hard Brexit, and economic stagnation in Europe.

The warning chimes are growing louder.