Global Economy Shows Increasing Signs of Fragility: From Wall Street to Berlin, the Warning Lights are Flashing
In the past few days the equity markets, in particular the Dow Jones index, have displayed wild gyrations. One day stocks fall sharply, followed by a near equal climb the following day, only to shortly afterwards swing down sharply again. The sentiment-driven swings on the world’s bourses display extreme nervousness by investors. Increasingly, they are beginning to catch on that the “recovery” was no secular recovery following the global economic and financial crisis of 2008, but a short-lived stabilization. Now, reality is catching up fast.
For the past few months, there have been indications of stagnation in the world’s fourth largest economy, Germany, which has been the sole force holding together the debt-ridden Eurozone. Now comes the August figures on German exports: a decline of 5.8 percent (http://www.dw.de/german-exports-take-a-deep-dive-in-august/a-17983575), the worst contraction in Germany’s critical export sector since January of 2009, at the worst point of the global economic crisis.
The German export contraction is merely a hint of what is happening globally. Trade growth is slowing, inhibiting the ability of sovereigns to finance their massive structural deficits and cope with record high levels of unemployment. The geopolitical situation is very bad and getting worse, pointing to further erosion in economic confidence. It may be that the global economy is only one major crisis away from another catastrophe, as in 2008. And the sources of that next crisis are everywhere around us: the Islamic State war in the heart of the Middle East; looming tension with Iran over the nuclear issue; border tensions between India and Pakistan; a territorial dispute in the Far East that pits China against Japan and Vietnam. Then there is the Ukraine crisis, pitting Russia against most of Europe and the United States. On top of the geopolitical flashpoints, there is now the emerging global health crisis involving the Ebola virus. Any one of these flash points can trigger a “Black Swan” event that could plunge all major economies into a severe recession.
While all those negative indicators envelope our world, central banks across the globe are giving increasing signs that sooner rather than later the policy of essentially zero-interest rates will have to be reversed, as the distorting effects of artificially low rates cannot be maintained in perpetuity. Yet, it has been largely those low rates, in combination with the unleashing of a flood of liquidity, that are largely responsible for the limited economic growth that has occurred since 2008, along with the recovery of the world’s stock markets from their worst losses incurred during the onset of the crisis.
The mood swings on Wall Street and elsewhere appear to be the tracing of a fiscal and economic electrocardiograph, delineating that not all is well with the global economy, and the warning signals are flashing red. Underlying and reinforcing those fears is the knowledge within the financial community that sovereigns expended so much of their capital in coping with the last worldwide economic crisis, there is little left for policymakers to react with when the next big financial and economic tsunami strikes the global economy.
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