China is slowing down; almost all developing countries have been hit by a credit crunch; and the developed economies are on the cusp of the next decadal crash
You know how it is with busesIJ You wait ages for one, far longer than seems reasonable — and then three arrive all at once. Financial crises are a bit like that too. The financial crisis everybody in the business has really been waiting for is a ‘hard landing’ of the Chinese economy, which is one of the two motors of the global economy. (The other is still the United States.) Everybody thought it was bound to come eventually — well, everybody who was not too heavily invested in the Chinese market — and it now appears to be here, although the Chinese Government is still denying it.
The second crisis, less widely anticipated, is a credit crunch that is sabotaging economic growth in almost all the developing countries except India. In many cases, currencies have fallen to historic lows against the US dollar, making it harder for the developing countries to repay the dollars they borrowed. Moreover, it's getting harder for them to earn dollars from their exports because commodity prices have collapsed.
And a third crisis is looming in the developed economies of Europe, North America and Japan, which can see another recession looming on the horizon before they have even fully recovered from the effects of the banking crash of 2007-2008. And it's hard to pull out of a new recession when your interest rates are still down near zero because of the last one.
These crises are all arriving at once because they are all connected. When the huge misdeeds and mistakes of American and European banks caused the Great Recession of 2008, China avoided the low growth and high unemployment that hurt Western countries by flooding its economy with cheap credit. But that only postponed the pain. Between 2007 and 2014, the total debt in China increased four-fold.
The Chinese Government is more terrified of mass unemployment than anything else. It believes, probably correctly, that the Communist regime's survival depends on delivering continuously rising living standards. So the Chinese economy went on booming for another six years, but the ‘solution’ was fraudulent and now it's over.
Since the crash on the Chinese stock markets began last month, the Government has done everything it can to stop it. It has dropped interest rates repeatedly, it has devalued the currency, it has ordered state institutions to invest more — nothing has worked. Chinese exports have fallen eight per cent in the past year, and even the regime admits that the economy is growing at the lowest rate in three decades. Nobody outside the regime knows for certain, but it may scarcely be growing at all. The ‘hard landing’ is now close to inevitable.
Now for the second crisis. While China's artificial boom was rolling along, its appetite for commodities of every sort, from iron to soya beans, was insatiable. So, commodity prices went up. The other emerging market economies grew fast by selling China the commodities it needed; they attracted large amounts of Western investment because of their rapid growth; and they borrowed freely because Western interest rates were at rock-bottom.
As for the third crisis in the West, the problems that caused the crash of 2007-2008 have not really been addressed, just papered over. What limited growth there has been in Western economies is due almost entirely to absurdly low interest rates and quantitative easing (Governments printing money).
The average time between recessions in the West is seven to 10 years, so one is due around now anyway. The likeliest trigger for that is a collapse of demand in China and other emerging economies, which is now practically certain.