Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

War is the province of uncertainty. When the ruler of Russia made the fateful decision to invade Ukraine, by all accounts he expected a blitzkrieg that would overrun the country in a matter of days. Now, one and a half years into a vicious war with no end in sight, the chickens are coming home to roost in terms of economics.

Apologists for Putin claimed that the sanctions imposed on Russia were not working, and pointed to the appreciation of the national currency, the rouble, as evidence. In the first months of the war, the rouble did indeed gain value, but for reasons largely ignored by pro-Putin aficionados. In the first place, the cut-off of Western exports to Russia, combined with initially strong oil sales abroad, did improve Moscow’s balance of payments for a period of time, at least on paper. Then there was the monetary tightening engaged in by Russia’s central bank.

The governor of the Russian central bank is Elvira Nabiullina. She is a Yale-trained economist and is widely regarded as an excellent central banker. According to some media reports at the time of Putin’s decision to attack Ukraine, Nabiullina was opposed to the invasion and submitted her resignation, but Putin refused to accept it. Besides being one of the very few women in a senior government position in the Russian Federation, Nabiullina is respected as highly professional by her foreign colleagues. In the wake of the invasion and the swift decline in value of the rouble, she undertook a massive increase in monetary tightening, raising interest rates for a period to as high as 20 percent. This halted the decline of the rouble, and brought about its subsequent appreciation. As the currency stabilized, Nabiullina gradually lowered interest rates.

However, the Russian central bank cannot control macroeconomic trends unleashed by the war. Western countries that were once major customers for Russia’s energy exports have, in a surprisingly short period of time, largely weaned themselves away from Russian oil and natural gas. To replace lost markets, Moscow has been forced to sell its energy exports to other countries, especially China and India, at a large discount. This has eroded revenue earned from Russia’s major export commodity. In addition, the war has added tens of billions of dollars in unanticipated annual military expenditures, while tightening the supply of labor due to army mobilization and the decision by hundreds of thousands of Russians, the majority being young men, to flee the country. Finally, the sanctions have reduced Moscow’s access to large sums of capital, including foreign currency reserves. All these steps have cumulatively had a negative impact on the Kremlin’s finances.

The government’s budget deficit is exploding, and the large current account surplus that existed in the early months of the invasion has been severely diminished. All these developments have eroded the value of the rouble, which dropped in value from around 70 to the U.S. dollar at the beginning of the year to about 100 to the dollar in August.

Predictably, the ultra-nationalist media and blogger community attacked Nabiullina, blaming the central bank for the collapse of the rouble. In part under pressure from the government, the central bank has sharply increased interest rates from 8.5 % to 12 percent, an increase of 350 basis points. This most recent act of monetary tightening has brought a modest appreciation in the rouble that is likely to be temporary. The fact is that Putin’s war has unleashed a torrent of negative macroeconomic trends. While Russia’s large energy and agricultural sector renders it immune to total economic collapse, the nation is likely to experience increasingly sluggish and even negative economic growth, combined with high inflation that will erode the already meager disposable income typical for the vast majority of Russians. This increasingly dire economic trend does not bode well for Russia’s future political stability.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

One of the leading credit rating agencies, Fitch, had lowered its assessment of credit worthiness of the U.S. from the top level of AAA to AA plus. Though only a notch lower than the top level, the new rating by Fitch may be the start of a disturbing trajectory for American sovereign debt.

The explanation given by Fitch for lowering its rating on U.S. Government debt has been what it views as the deterioration of governance in the USA over a period spanning two decades. The evidence of this is apparent to any observer of political discourse and activity in the U.S. and raises questions about the long-term stability of the American political system. The economic and financial repercussions of those internal developments will now have a steep cost, as Fitch is likely to be followed by other rating agencies.

While U.S. Treasury Secretary Yellen has been joined by leading analysts in decrying the move by Fitch, it is clear that this rating agency is looking far beyond current economic data, which on paper makes the Amerasian economy appear strong, especially compared with other major economies. It must be noted that the U.S government functions on a a sea of red ink. It must constantly borrow vast sums of money to function. What has made that vast debt edifice functional has been credit access tied to the lowest possible borrowing costs. The decision by Fitch is an indication that the costs of sovereign borrowing by the U.S. will escalate. This opens up the possibility of a long-term sovereign debt crisis in the U.S., which would have devastating consequences far beyond\d America’s shores.

In 2022 the U.S. federal government deficit was 1.4 trillion dollars, representing 5.5 % of GDP. Total federal spending was 6.3 trillion dollars, with revenue of only 4.9 trillion dollars. Interest paid on the national debt that same fiscal year was 476 billion dollars, presenting a whopping 35 % increase over the prior year. Now, with the first crack in America’s AAA credit worthiness having occurred, substantial increases in annual debt servicing costs are to be expected, eating up a growing percentage of the federal government’s fiscal capacity.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Today the California based First Republic Bank was seized by the FDIC (Federal Deposit Insurance Corp.). It had 229 billion dollars in assets, making its demise the second largest bank failure in US banking history. Only a month ago, the number two spot was held by another California based banking institution, Silicon Valley Bank.

The FDIC worked out an agreement whereby First Republic’s assets will be taken over by JP Morgan Chase. In return, the FDIC will pay out about 13 billion to cover losses. Under the agreement worked out by the regulator, all of First Republic’s 84 locations in 8 states will reopen as branches of JP Morgan,

With the collapse of First Republic, the FDIC has had to grapple with three major bank failures in just over a month. This is further evidence that a banking crisis is underway in the United States, it is accelerating and is reflective of deep seated financial and economic weakness in the national and global economy.

It should be recalled that the Great Depression, which began with the stock market crash of 1929, became far worse and spread globally when a major Austrian bank, Creditanstalt, collapsed in 1931. The collapse of 3 American banks during the past month, including the second and third largest banking failures in American history, is the canary in the coal mine as the Global Economic Crisis worsens.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The collapse of SVB (Silicon Valley Bank) has sent shock waves throughout the financial world. It has also aroused a morbid sense of deja vu harkening back to 2008, when the global banking system seized up, leading to the Global Financial Crisis. With 175 billion dollars on deposit as of December 2022, SVB was the largest regional bank in Silicon Valley, playing an important role in financing the hi-tech sector.

The highly speculative model employed by SVB (high level of unrealized losses accentuated by Fed rate hikes)) led to its failure, being forced to close after a run on deposits. Unable to engineer a quick sale of SVB, the Biden administration, in a fit of panic which may be justified, took extraordinary measures. About 85 percent of deposits at SVB were not insured by FDIC, which has a cap of $250,000 . The Treasury Department decided to ignore the cap and guarantee that all deposits at the failed bank would be covered. It added, as strictly PR, that U.S. taxpayers should not worry, as they would not cover the cost, leading to the question of who will.

The SVB deposit resolution had barely been announced when New York state regulators shut down Signature Bank, which had 80 billion dollars on deposit and was involved in speculative assets, in particular cryptocurrency..

Both these bank failures, occurring withing days of each other, took the financial world by surprise. The risk of contagion is real, explaining why entities such as the U.S. Treasury are taking extraordinary policy measures.

One likely casualty of these bank failures is the war on inflation being waged tardily by the U.S. Federal Reserve. Only days earlier the Fed had convinced the markets that another rate hike of up to fifty basis points was on the way. Now this seems doubtful, and if more bank failures occur the Fed may even go in reverse. This means that in addition to the danger of a banking collapse, an alarming acceleration in inflation is a serious possibility.

I have recently read MEGATHREATS, a new book by renowned economist Nouriel Roubini. If this book were fiction, it would be a chilling horror thriller. However, what makes this book far scarier than a horror novel is that it is non-fiction; a deep dive into ten threatening trends and developments, each one of these evolving threats, which the author categorizes as a mega threat, in itself a force that imperils human society. Taken together, as they are interconnected in the author’s analysis, they represent a ten-by-ten matrix, as Roubini has pointed out.

Nouriel Roubini came to public note before the onset of the 2007-09 Global Financial Crisis when he warned about a looming financial disaster triggered by subprime mortgages. For that prognostication, Roubini was dismissively dubbed “Dr. Doom.” History proved that Roubini, who prefers to describe himself as “Dr. Realist,” to have been unerringly prescient in his dire financial and economic forecast.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

In MEGATHREATS, Roubini begins with economic and financial trends that threaten a severe and enduring stagflationary recession for the global economy. He points out that central banks and sovereigns have created what is described as the “mother of all debt crises,” creating debt to GDP levels in advanced economies and China that are far in excess of what occurred during the last great stagflationary recession during the 1970s. Unsustainable debt ratios, combined with negative demographic trends and ill-conceived policies portend a dark and uncertain future for the global economy. Added to this is currency instability, including the weaponization of the U.S. dollar which will likely debilitate its standing as the global reserve currency. Roubini also looks at the phenomenon of cryptocurrencies, which he has long excoriated as being illusionary.

The matrix in MEGATHREATS encompasses other developments that feed into the economic malaise that Roubini convincingly prognosticates on. The emerging cold war between China and the U.S., exacerbated by other revisionist powers, increases geopolitical instability and fractures global supply chains. These developments further add to inflationary pressures which, in the context of negative supply shocks, augments the severity of the coming stagflationary crisis.

Among the other mega threats Roubini explores is the likely impact of climate change, rendering many coastal areas, including in the United States, uninhabitable. Furthermore, the author sees climate change exacerbating the conditions in which pandemics such as Covid will become far more common. The author also discusses the transformative impact of artificial intelligence or AI and machine learning, which will likely lead to the elimination of vast numbers of human jobs, not only unskilled but also highly skilled, as technological means displace humans.

Nouriel Roubini presents to the reader an ominous but convincing case for a dangerously dystopian and unstable future for human societies globally. Does the author offer any hope humanity can avoid the dire future he lays out with such clarity? He does, principally in the area of technological advancement that could lead to much higher than trend economic growth, which would resolve issues such as sustainability of the massive debt to GDP levels that have been accumulated in advanced economies. However, the tone of the author’s conclusions indicates he is not excessively optimistic that the right policies and developments will occur in an effective timeframe.

Without a doubt, MEGATHREATS is the most important book thus far written in the 21st century. It is a penetrating look into the dystopia that lies ahead, supplanting the long period of relative stability that occurred after the Second World War. The author is not a modern-day Cassandra offering prophecies conjured from a crystal ball; he is one of the most impressive intellectual minds of our era, offering deep analytical insights into the dark global malaise that is unfolding. As he states in the book’s epilogue, “the snooze button invites catastrophe.”

MEGATHREATS should be required reading for every policymaker on the planet.

The unfolding Global Economic Crisis has stricken most economies, large and small, with the bitter twins of high inflation and recession. This phenomenon of stagflation, amid the destabilizing war between Russia and Ukraine and broken supply chains resulting from both war and Covid restrictions, is spreading like wildfire. Record levels of inflation are occurring in virtually every developed economy, including the United States. However, it is in the United Kingdom that the most disastrous repercussions are unfolding.

After Boris Johnson was forced to resign as British prime minister, he was succeeded by Liz Truss. Her hand-picked Chancellor of the Exchequer, Kwasi Kwarteng, released a proposed budget that immediately sent the British pound plummeting, sovereign bond rates soaring and fear and loathing manifesting in all leading UK financial circles. This is amid annual inflation exceeding double digits and an ongoing retraction within the UK economy.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The key component of Kwarteng’s budget package was major tax cuts targeting high net-worth taxpayers, to be financed by substantial borrowing despite the British government already facing large budget deficits. The whole ill-conceived package was an example of political ideology triumphing over economic reality. The markets swiftly provided a painful response, making the proposed budget untenable.

Truss has now fired her financial minster, a desperate move to save her weeks-old prime minister tenure by making Kwarteng the scapegoat. Already there is talk of a palace coup to remove Truss by desperate members of her Conservative Party. All this is another example of incompetent politicians doing everything possible to make a very bad economic crisis into an unmitigated global catastrophe.

The U.S. Bureau of Labor Statistics reported that the CPI for August exceeded the consensus expectation, registering a figure of 8.3 %. Though slightly lower than the June figure of 9.1%. a dive into the details reveals disturbing trends.

The modest reduction in the CPI for August was almost entirely driven by a pullback in oil and gas prices, a phenomenon driven by market forces. However, other core components of the CPI accelerated their inflationary trend. Food prices registered a sharp rise of 11.4 %, the largest level of inflation in this critical category in 43 years.

The continued high level of inflation in the United States is being replicated globally. In the UK the official rate of inflation exceeded double digits and has only slightly receded to above 9% due to fuel price retrenchment, as in the U.S. Virtually every other economy on the globe is experiencing levels of price inflation not previously witnessed in decades.

The most recent data in the U.S. will compel the Federal Reserve to continue to significantly increase interest rates. Other central banks will follow in lockstep. All these moves will instill a fiscal drag on the global economy, further increasing the likelihood of a global recession. All trends remain on track for global stagflation and the worst world economic crisis since the 1930s.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Jerome Powell, Federal Reserve chairman and Fed officials unanimously agreed to hike rates by three quarters  of one percent (75 basis points), bringing rates to between 2.25 and 2.5 %. This is still very low considering the last report from the U.S. Labor Department, which tabulated inflation in the United States at 9.1%. The Fed in effect admitted this by indicating further hikes are likely.

Having missed  the train repeatedly by claiming inflation was only transitory, Powell and his minions are compelled to bring up rates in desperation as inflation domestically and internationally spirals almost out of control. This is where America’s central bank faces a conundrum. As weak economic data points to a recession in the U.S. economy, there is a growing chorus urging restraint by the Fed,  as higher rates will further  enable recessionary forces. Bu they are too late.

Yes, higher Fed rates will create a fiscal drag on the domestic economy. But having been so wrong in its previously unjustified lack of concern about inflation, failure to bring rates much higher will not prevent a recession; it will merely guarantee stagflation-a recession with high inflation.

For the Fed rate hikes to have any effect, they will need to go much higher, at the very least  in excess of 5 %. Unfortunately, current global inflationary pressures are not only derived by  demand . There is a supply shock, independent from demand forces and unimpeded by rate hikes enacted by central banks. The supply shock was initially brought on by Covid lookdowns, which created supply bottlenecks. Now, added to this is the Russia-Ukraine war and the resulting sanctions and blockades. These forces are unpredictable but will likely be enduring. This ensures that the coming recession will be  both severe and sustained, concomitant with elevated inflation. In  essence, a stagflationary depression is threatening the global economy, and all central banks, including the Federal Reserve, can do no more than nibble at the edges.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The U.S. Labor Department   released its latest CPI  data On July 13, indicating that in the previous month inflation in the United States had surged to 9.1 %. This is the highest rate for inflation in the U.S. in more than four decades and harkens back to the stagflation that ravaged the American and global economy during the presidency of Jimmy Carter.

The elevated rate of inflation defied the prediction of many economists who have largely engaged in wishful thinking rather than macroeconomic analysis. With inflation not only remaining high but continuing to accelerate, it is very likely that inflation the United States is about to enter double-digit territory, if it has not already done so.

It is very likely that organized labor will soon make demands during collective bargaining for wage increases  vastly higher than what has occurred in several decades. That in turn will unleash powerful new inflationary pressure, adding to what is already impacting price instability, including supply chain bottlenecks aggravated by Covid-induced lockdowns and geopolitical tensions.

There are some economists and investors who have been hoping  that the Federal Reserve would defy economic logic and greatly moderate its planned rate increases. However, with inflation surging at unprecedented rates, and the sovereign powerless to arrest its momentum with its feeble fiscal interventions, it is almost certain that the Fed will have no choice but to rapidly raise rates, abandoning once and for all it s near zero rate policy. The next rate increase may very well be 75 basis points.

The latest data and the likely policy response from the Federal Reserve further solidifies the likelihood of prolonged global economic stagflation, and more likely than not, a global economic depression.

The U.S. Federal Reserve  on June 15 upped its key interest rate by three quarters of a percent, its largest increase since 1994. When Fed chairman Jerome Powell  announced the policy decision, he had a look of panic  as he boasted that America’s central bank remained committed to its historical mission of price stability. Yet only a short time ago this same Powell boasted that the emergence of high inflation in the U.S. economy was merely transitory.

Powell’s misstep replicated an earlier misread of economic trends by a Fed chairman. In the early stages of the 2007-09 Global Financial Crisis that nearly took down the global economy, then Fed chairman Ben Bernanke boasted that there was no prospect of a recession. How wrong he was.

When inflationary trends began spiraling out of control, leading economist Mohamed El-Erian warned that inflation was not transitory, and unless the Federal Reserve and other major central banks rapidly phased out their Covid-induced loose monetary policies including essentially zero interest rates, inflation would spiral, meaning future efforts to control it would likely lead to a far worse economic recession.’

Despite Powell’s feeble attempts to reassure markets and consumers, the rate increase of 75 basis points came on the wake of Labor Department data indicating that inflation in the U.S. stood at 8.6 % and was accelerating. Only far higher rate increases will slow its momentum, and with supply chain bottlenecks  complicated by geopolitical tensions including a full-scale war in Eastern Europe, nothing short of a severe recession bordering on a depression will dampen economic activity to a level that arrests the powerful inflationary forces now ravaging the global economy. These forces have been nourished by the Fed’s  policies for years, yet now Powell is attempting  to convince the world that this same Federal Reserve will engineer and end to inflation with a soft landing, avoiding a long and severe recession. At this point, the Fed lacks any credibility  to sustain such reassurance.

Sheldon Filger-blogger for GlobalEconomicCrisis.com