Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

There are two parallel economic universes that currently exist. There is that of the central bankers, who still largely maintain that the rapid inflation growth affecting the world’s commodities, finished goods and services is merely “transitory.” The monetary policymakers are joined by their counterparts in the fiscal and political realm, who are engineering massive deficit spending , justified by the need to “fight” Covid, while pretending that there is no economic or financial crisis, merely temporary bumps in the road.

Then there is the real economic arena, with red lights blaring and klaxons blasting away as the probability of a global economic implosion grows ever stronger.

When the 2007-09 Global Financial Crisis first arose, the chairman of the U.S. Federal Reserve, Ben Bernanke, boasted that there would be no recession. How wrong he was.

He and his counterparts within the Fed did not comprehend the complex interconnection between sub-prime mortgage backed securities and the global financial system, exacerbated by a then ill-understood financial instrument, derivatives. Thus when sub-prime mortgages in the U.S. went bust, their collapse took down much of the global financial system.

Now, in 2021, the global financial system has vastly greater complexity, interconnections and vulnerabilities than existed during the last major economic and financial crisis. For one thing, it is not just what happens one major economy. Now there are two.

China is on par with the United States as a critical global economic player. China today is experiencing major financial dangers, especially in the real estate sector. The present crisis afflicting Evergrande, China’s second largest developer of real estate, is a harbinger of the precarious state of debt-financed commercial and residential property activity in that country. Bad economic outcomes in China will be added to those in the United States, creating a financial tsunami affect far in excess of what occurred in 2007-09.

Then there are the economic ramifications of Covid and the reaction of monetary and fiscal policymakers. They shut down at various stages large segments of the global economy, back-filled the contraction that resulted with unprecedented levels of debt spending, which was augmented by central banks opening the spigots on massive liquidity infusions. The predictable result has been levels of inflation not experienced in major advanced economies since the 1970s. This has been further enabled by Covid-imposed disruptions in global supply chains.

Then there is an element that did not exist in 2007-09 as a significant financial factor; cryptocurrencies. They are opaque, in the case of Bitcoin the identity of its actual creator is unknown. They employ an archaic blockchain technology, and are a favorite currency vehicle for criminal enterprise, large and small. And yet, despite all that, cryptocurrencies have become a major force in global finance. Even In better times they displayed high levels of volatility. In the impending economic crisis. a severe collapse in cryptocurrency valuations will greatly add to  negative forces threatening all economies.

As the above makes clear, the current global economic order is characterized by an unprecedented level of complexity. Few economists, and virtually no sovereign fiscal or monetary policymakers, comprehend this complex economic reality that is about to come apart.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

For the past several months my blog has warned about the growing inflation threat to the global economy. That, and other economic distortions of a massive character, have made stagflation-inflation plus low or negative economic growth-an increasingly likely trend. Over that same period, central banks have nourished the flames of inflation, especially in the U.S.,  where theFederal Reserve has preached the erroneous gospel that inflation was only transitory, and therefore not a trend that should be of concern.

Reality has now caught up with the Fed.  At least some of the key players on the Federal Reserve have reluctantly agreed that inflationary pressures are real, and likely to be  a trend and not transitory. And then there is Larry Summers, former U.S. Treasury Secretary. He recently told Bloomberg News that the Federal Reserve’s policy errors are stoking inflation, making 1970s style stagflation inevitable. He told Bloomberg News, “we have a generation of central bankers who are defining themselves by their ‘wokeness.’…they’re defining themselves by how socially concerned they are.”

The causal factors for this surge of inflation are due to reactions by both sovereigns and their central banks to the Covid pandemic. Poorly conceived policy decisions have disrupted supply chains and labor markets. For example, in February of 2020 the percentage of eligible Americans in the active labor pool was 63.3%. By September of 2021 the labor participation rate had declined to 61.6%. With millions of workers absent from the labor pool and production and shipping of commodities and finished goods globally impeded, the resulting shortages have spiked prices of essential products, including food and energy.

As though government policy was not enough, central banks through profligate monetary policies have flooded a constricted global economy with unprecedented levels of liquidity. The result was fully predictable; turbocharged inflation. That is why housing prices in the U.S. have risen by more than 20% in the past year. They are projected to increase another 20% in the coming year, despite a weak economy. Simply put, the Federal Reserve, through artificially low interest rates and an out-of-control printing press, has encouraged speculators to buy up housing stock as investment properties, taking advantage of cheap money.

A stagflationary calamity looms just over the horizon. Unfortunately, policymakers and central bankers, especially in the United States, seem totally out of touch with reality, residing in a parallel universe while the global economy is on the edge of a cliff.