Guest Post by Andy Xie
The G20 working group meeting in Shanghai didn’t come up with any constructive proposals for reviving the global economy and, instead, complained that the recent market turmoil didn’t reflect the “underlying fundamentals of the global economy”. The oil price has declined by 70 per cent since June 2014, while the Brazilian real has halved, and the Russian rouble is down by 60 per cent. The global economy is on the cusp of another recession, and these important people blamed it all on some sort of psychological problem of the people.
Over the past two decades, the global economy has been blessed with the entry and participation of 800 million hard-working Chinese, plus the information revolution. The pie should have increased enough in size to make most people happier. Yet, the opposite has happened. The world has gone from one crisis to another. People are complaining everywhere. This is due to mismanagement by the very people who attend the G20 meetings, the Davos boondoggle, and so many other global meetings that waste taxpayers’ money and put inept leaders in the limelight.
One major complaint that people have is that the system is rigged – that is, the rising income concentration is not due to free market competition, but a rigged system that favours the politically powerful. This is largely true. The new billionaires over the past two decades have come mostly from finance and property. Few made it the way Steve Jobs or Bill Gates did, creating something that makes people more productive.
The most important factor in the rigged system is monetary policy being used to pump up financial markets in the name of stimulating growth for people’s benefit. This is essentially the trickle-down wealth effect, that is, making some people in the financial food chain rich while the spillover gives people a few crumbs. Yet, instead of crumbs, the wealth effect has pumped up property prices in Manhattan, London and Hong Kong, as well as the price of modern art. Essentially, the wealth effect has stayed within the small circle of the wealthy. And these people show up at Davos to congratulate policymakers on their “successes”.
Wasting resources is an equally important factor in making the global economy weak and prone to crisis. After the 2008 financial crisis, the US government and Federal Reserve spent trillions of dollars to bail out the people who created the crisis. Instead of facing bankruptcy and jail, these people have become richer than ever. Predictably, they have used their resources to rig the system further.
After 2008, when Beijing launched a massive investment push, the global ruling elite all praised China for saving the global economy. China has increased credit by over US$20 trillion to finance the construction of factories and homes. However, investment does not guarantee final demand. The process of building up a factory creates demand. But, when it is completed, it needs to sell its goods to someone. What China did was build even more factories to keep this factory occupied. This Ponzi scheme couldn’t last long. We are just seeing the beginning of its devastating consequences.
China’s overinvestment has pumped up commodity prices, which has led to another Ponzi scheme. As major central banks cut interest rates to zero, credit demand didn’t respond in general, as businesses didn’t see growing demand from people who were suffering income erosion. The commodity boom justified credit demand for the time being. Trillions of dollars were poured into the energy sector, and trillions more into other commodity industries. Businesses in emerging economies that were pumped up by rising commodity prices borrowed US$9 trillion. This mountain of debt is floating on a commodity Ponzi scheme that is floating on China’s investment Ponzi scheme. Its bursting is just the beginning. Its impact on the global financial system could be bigger than the 2008 financial crisis.
In addition to the bursting of the global commodity bubble, China’s overcapacity bubble will kill global capital expenditure for many years to come. Even though Chinese investment isn’t growing like before, investment at half of gross domestic product is still adding overcapacity by over US$1 trillion per year – the problem is getting bigger.
All indications are that China wants to export the overcapacity. And why not? China overinvested to bail out the global economy. It shouldn’t pay the whole price for the mistake.
China’s strategy would lead to de-industrialisation in most of the world, in particular middle-income emerging economies. Weak capital expenditure would lead to weak employment and labour income. The resulting bankruptcies may further weaken the global credit system.
The global economy is facing years of stagnation, deflation and financial crises. The current economic managers will resort to the same tricks of pumping up the financial markets with liquidity, to no avail. In the meantime, political instability will spread around the world. It will take a long time for the right leaders to emerge.
Initially, populists will win. Their policies, unfortunately, will focus on protectionism and rolling back the World Trade Organisation system. That will lead to further economic turmoil in the global economy. Protectionism may suddenly jump-start inflation that will quickly become hyperinflation, which would certainly lead to violent revolutions.
The world is on the cusp of a prolonged period of stagnation and instability. Our ruling elite is blaming it on people seeing things. Their strategy is to change people’s psychology. Unfortunately for them, the world is catching fire and that fire will eventually reach their Davos chalets.
Andy Xie is an independent economist
The global economy was a ponzi from the git. The basic idea was, steal the wealth of the white countries, redistribute it worldwide, and watch everybody take that head start, and grow, grow, grow. At least that’s how they sold it. The reality was more like take the knowledge and resources away from their rightful owners and place them somewhere they would be much easier to steal. News flash. The civilized world is about to become a much smaller place. I read idiots all the time seeking a place to bug out. The rest of the world knows, the US and Canada are that place
They are responsible for printing the hundreds of trillions of dollars from thin air that made themselves billionaires by creating bubble jobs that grew the people that are now gone with the wind. What do we do when the profligate son comes home but we have lost the farm to NYC Banksters?
“Their policies, unfortunately, will focus on protectionism and rolling back the World Trade Organisation system. ”
Unfortunately?
Entering into self-destructively bad ‘free trade’ agreements must and will stop. I do not care at all what the consequences for the rest of the world are. They are not my problem.
I am actively hoping that the people behind ‘free trade’ are utterly destroyed in what comes next.
The last part of the book 2016 explained it all very well. Our standard of living is going down so all those countries we took advantage of,Can go up.(Obama kind of thinking)
I read an article over at Endzog blog that made a good effort to explain world economics and why there would be no economic collapse until the Central Banking elites choose there to be .They are waiting until they are sure there will be no opposition to their one world plans.Massive third world immigration is part of that plan. Thoroughly destabilize the western nations by destroying their European social cohesion so no group can challenge their elite plans.In other words immigration is being used as a weapon of war.
Bet you’ll never look at a foreigner the same way .They are being sent here to destroy you.I can’t wait until these fucking white liberal progressives realize they have been had .But by then it will probably be to late for all of us.
awful events on the horizon…prepare
bb Here in West Europe it is past too late