LONDON – You know how it is with buses? 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, now 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 their currencies have fallen to historic lows against the dollar, making it harder for them 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, and between 2007 and 2014 total debt in China increased fourfold.
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.
The huge amount of cheap credit sloshing around the Chinese economy mostly went into building unnecessary infrastructure, and above all into housing. That did preserve employment, but property values soared and a huge “housing bubble” was created. There was nobody to buy all those houses and apartments, and there are now brand-new “ghost towns” all over China, so property values are falling fast.
Since the crash on the Chinese stock markets began last month, the government has done everything it could to stop it. It has dropped interest rates repeatedly, it has devalued the currency, it has ordered state institutions to invest more — and nothing has worked.
Chinese exports have fallen 8 percent 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 soy 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.
The collapse of Chinese demand ends this party too. From Brazil to Turkey to South Africa to Indonesia, exports are falling, the value of the local currencies is tumbling, and foreign investors are fleeing. Capital flight from the 19 largest emerging market economies has reached almost one trillion dollars in the past 13 months, and the outflow is still accelerating.
And 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 in the other emerging economies, which is now practically certain. And when it hits the West, neither of the traditional tools for pulling out of a recession will be available. Interest rates are already near zero, and the money supply has already been expanded massively.
It would be rash to talk about a long-lasting global depression in the style of the 1930s, because a lot has changed since then. But it is certainly safe to say that the global economy is heading into a perfect storm.
Gwynne Dyer is an independent journalist and military historian based in London whose articles are published worldwide.