Global Economic Crisis

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.

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

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.

Canada’s Budgetary Officer, known as the PBO, recently  released a report that stated that unless major fiscal consolidation occurs in government spending, deficits at a high level are projected to continue until at least 2070. That is, high deficit spending is baked into the cake for the next half-century. That projection excluded likely future scenarios such as more pandemics, natural disasters and military conflict, not to mention internal issues. It is a dystopian prediction for government spending, and it is unsustainable.

The PBO projection for government spending is a mirror image that can be applied to every economy on the glove, in particular all the G7 countries.

No nation is as entrapped in high deficit spending to as a high degree as the United States. When the U.S. briefly went into budgetary surpluses in the latter years of the Clinton administration, the incoming George W. Bush presidency swiftly headed back into deficit spending due to the enactment of major tax reductions , particularly those affecting higher income earners. The rationale? The Vice President , Dick Cheney, told the GOP, supposedly the party of fiscal conservatism, that former president Ronald Reagan had “proved” that fiscal deficits “don’t matter.”

However, the low to mid single digit proportion of GDP reflected by the size of deficits has now morphed into  high single digits and even double digit fractions of national GDP since politicians throughout the world opened the spigot of sovereign debt spending, abetted by the near-zero interest policies of central banks, such as the U.S. Federal Reserve.

In the current fiscal year, the United States  federal government has generated  $3.1 trillion dollars in revenue and $5.3 trillion in spending, resulting in  a deficit of $2.2 trillion.  The current national debt has skyrocketed past $28 trillion. This figure represents  130 % of America’s GDP. By way of comparison, in 2001, only twenty years ago, the U.S. national debt was $5.8 trillion, and represented 55 % of GDP.

The trajectory regarding America’s-and many other nation’s-government spending  patterns are clearly and inalterably headed in the wrong direction. This cannot be sustained indefinitely. Already, inflation is raising its ugly head as a form of stealth taxation. At some point, probably when central bank are compelled by inflationary pressures to significantly raise interest rates, the whole illusory edifice will implode.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

He predicted the 2007-09 Global Financial Crisis with uncanny accuracy, even while experts including then Federal Reserve chairman Ben Bernanke were dismissive of him. He’s Nouriel Roubini, economics professor at NYU and a highly distinguished economist. Though his correct forecast of the 2007-09 financial implosion earned him the nickname of Dr. Doom, he prefers to think of himself as Dr. Realist. His latest exercise in realism makes chilling reading.

As the Covid pandemic erupted, Roubini was already warning that the world faced a global economic depression sometime during the course of the present decade. With unprecedented sovereign debt expansion during the past year  unleashed by governments under the guise of providing Covid relief, Professor Roubini has taken a fresh look at the data, and published his conclusions in a recent article that appeared in The Guardian.

“Conditions are ripe for repeat of 1970s stagflation and 2008 debt crisis,” reads the headline of Roubini’s article.  “Warning signs are there for global economy, and central banks will be left in impossible position,” he writes.

In essence, Roubini points out that current trends, which include not only the massive expansion  of sovereign debt but also contributing  factors such as the loss of independence by central banks coupled with the decoupling between the United States and China, leading to fragmentation of global supply chains, point to an unavoidable train wreck  for the global economy. It is a hellish forecast, which unfortunately has the ring of truth.  If Professor Roubini’s forecast is as accurate as was his previous warning of the impending Global Financial Crisis of 2007-09, the world stands on the verge of the Global Economic Crisis of the 21st century, a Great Depression 2.0 coupled with high inflation. And, as Roubini warns, central banks  will be powerless to stop it.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

An unprecedented wave of policy measures has enabled distortions that  are wreaking havoc in the global economy, creating accelerating dangers of a cataclysmic event. This can be in the form of a market crash, contagion from imploding asset bubbles or rise in fears of inflation leading to irrational money flows. A combination of all these forces in synchronicity can be the single event leading to a global depression.

The major factor in the global economy at present is the unprecedented wave of liquidity being unleashed by policy makers. That fact alone is what has driven the sharp rise in equity prices since the initial collapse in the wake of Covid-induced economic shutdowns. There is no other explanation for the massive rise in equity prices, even while the real economy is stagnant after a sharp decline  in the wake of the coronavirus pandemic. The divide between Main Street and Wall Street alongside the sharp rise in equities has never been wider. It is only due to the money printing of central banks and record levels of public debt caused by the fiscal policies of sovereigns that has brought about this phenomenon.

Alongside the sharp rise in equity prices has been the explosive price rise in Bitcoin. The emergence of crypto or digital currencies in general, and Bitcoin in particular, has brought about the most expansive speculative bubble in the modern financial era. Bitcoin is completely opaque; nobody even knows the true identity of the person who created this cyber currency. Yet, even Tesla among other companies has begun to invest substantially in this digital currency as a means of mitigating risk factors.

Meanwhile, bond yields have begun to rise, an indication of growing fears of inflation. That, and the continuing deluge of liquidity from the policymakers, has created perhaps the most distorted and unstable financial environments since the  period that preceded the Great Depression of the 1930s.

A growing consensus  among economists is that the second wave of Covid-19 has induced a repeat of the lockdowns  of economic activity that sent Q2 metrics into a tailspin. Though the lockdowns currently underway may not exactly match the draconian character of the earlier  shutdowns, they are becoming increasingly severe as the coronavirus infection rate in many European countries threatens to overwhelm their medical systems.

Though several  viable vaccines are on the horizon, it will likely not be until mid to late 2021 that they succeed in terminating the current pandemic. The current reality in terms of economic activity and Covid-19 makes it increasingly clear that the Eurozone, for the most part, will return to recession after the recovery in Q3. This means at least 2 consecutive quarters of negative growth from the Eurozone, in Q4 2020 and Q1 2021.

Inevitably, a double dip recession throughout the Eurozone will  have a significant negative impact on the region’s primary trading and economic partners, notably China and the United States. In addition, the projected double dip recession will further strain sovereign balance sheets, already burdened with unprecedented levels of debt for addressing the recession that occurred in Q2. Adding trillions of euros in public debt, and trillions more, to the balance sheet of the European Central  Bank, points to a growing sovereign debt crisis likely to impact just as the pandemic has receded.

The corporate media and social media complex, America’s new power center, has declared that former Vice President Biden is now President-elect Biden. Though Trump is pursuing a last ditch, scorched-earth policy of legal challenges, with no concession in sight, the odds are virtually certain that Biden will be inaugurated as the 46th president of the United States. What are the global economic implications  of this?

The Covid-19 pandemic has unshed in the worst economic downturn since the Great Depression of the 1930s.The  Q3 uptick is now likely to be followed by a double dip recession, as a second wave of coronavirus ravages a advanced economies, including the United States. Though the Biden policy team is committed to a more aggressive stance on combating Covid-19 and offering large fiscal stimulus packages. the economic prognosis is not bright.

Biden will enter the presidency with a divided electorate, including 70 million Trump voters, who are largely convinced that the election was a fraud, meaning the incoming presidency is illegitimate. Instead of the expected Blue Wave, the Democratic majority in the House of Representatives is reduced, and the GOP may very well retain control of the Senate. Divided government, and a divided people  will create instability in what is still the world’s largest economy,  possessing the strongest military power.  That does not portend well towards an economic recovery.

Continued economic shutdowns due to the pandemic, ineffective fiscal stimulus programs combined with growing sovereign debt along with the political and social instability in the U.S. lead to the conclusion that the trajectory towards an economic depression, already baked into the cake, will accelerate. It is likely to happen during the incoming administration’s four-year term.

With Europe and North America experiencing a virulent second wave of the coronavirus pandemic, lockdowns of the economy are being reintroduced by sovereigns on  an increasingly stringent basis. As an example, many regions in Spain are imposing enforced curfews.

The first wave of economic shutdowns  sparked the worst economic contraction in many developed countries since the Great Depression of the 1930s, greatly surpassing the Global Financial Crisis of 2007-2009 in severity. A return to at least semi-normal economic activity facilitated a sharp statistical bump in economic growth. Now, another major contraction looms on the horizon.

Depending on the duration of the current wave of Covid-19 induced shutdowns, a double dip recession  looks increasingly likely for many economies, both advanced and developing. A double-dip recession also raises the possibility that a global economic depression, already a strong possibility, becomes a virtual certainty.

For the first time in “living memory,” Asia’s economy overall will shrink by at least  1.6% this year, according to the International Monetary Fund. The last projection from the IMF  had a forecast of flat growth. The update shows that the IMF sees worsening data impacting all of Asia in the wake of the Covid-19 pandemic.

The IMF concedes that no region, including Asia, will be immune from the ruinous impact of the Coronavirus on the global economy.  Yet, though the IMF is predicting a global economic contraction of almost five percent in 2020, it is still forecasting  a V-shape recovery in 2021 in excess of positive five percent.

With Covid-19 running an unpredictable course, with signs of a second-wave already present, it is being excessively optimistic to hope for a speedy economic recovery. In fact, even the IMF states it will take years for the economies of Asia and other regions to fully  recover, in spite of rosy forecasts for 2021.