The Menacing World Economy
In the summer of 1914, the few who had any sense of what was about to happen to the world had no idea how long it would take for their fuzzy contemplations to unfold.
The German Army had been preparing for a European war for some time, including a planned invasion of France detailed down to almost an hour-by-hour execution schedule.
What followed was four years of horrific bloodshed that killed 10 million and wounded 20 million more. Following that was a Spanish influenza epidemic that killed an estimated 50 million more. Following that was a global depression that ended with the German hyperinflation of 1923. If you lived in Germany, your life was literally on the edge of existence for almost eight years.
Soon after, a political movement emerged led by a man whose claim it was "To return Germany to greatness." After 20 years of trying to make good on his claim—in the middle of a global depression and World War II, which he started—this leader committed suicide in 1945.
After 31 years, Germany finally emerges from the summer of 1914 a country split in two and missing about 30 percent of its best and brightest.
Today there are quite a few people with fuzzy contemplations of an economic future that is currently unfolding before our eyes. The contemplators have no idea how long future economic events attached to these fuzzy contemplations will take.
One thing is for sure, however, in the past five years there has been a growing sense of foreboding about the world’s economic future. Is the summer of 2016 going to be a moment in time that presents itself as a hinge of history just like the summer of 1914?
A few key features of the global economic landscape are very visible for those who want to look:
• All the world’s central banks are operating on a fiat money standard. This means that central bank reserves are being printed out of thin air. This overlaps with a 40-year consumption cycle that has been supported by a massive build in global debt. The Keynesian monetary experiment of the 1930s has morphed into a Ponzi money printing scheme used by almost every government.
• For over seven years major world central banks have conducted a zero interest rate monetary policy that has no precedent in financial history. Savers have been denied income from their savings. The result has been a historic transfer of wealth to global financial institutions from savers. Long-term investors such as pension funds and insurance companies have seen their investment cash flow collapse. Their only available response has been to reach for income in asset classes that represent substantial risk that normally would never be touched. The full consequence of this circumstance will be revealed during the next economic downturn.
• The global banking system has morphed from your grandfather’s banking system that existed to serve the financial needs of business and commerce, relying on prudent credit analysis, to a banking system that is more like a Las Vegas gambling casino where upwards of $650 trillion in financial derivative products have been created. These outstanding contracts represent almost six times the size of the world’s GDP. No one knows who exactly represents both sides of these paper obligations as there is no clearing house or exchange through which these obligations must flow in order to provide transparency.
• Governments everywhere continue to make promises that are not expected to be funded out of any dedicated tax revenue but will require massive additional future borrowing that will add to the overall expanding debt burden. These obligations are unfunded and some estimators calculate the total of these unfunded liabilities is between $100 and $200 trillion for the United States alone.
• An entire generation of American college graduates have been burdened with over a trillion dollars in student loan debt. Many have paid for college degrees for which there is no demand and therefore no future earnings potential needed to pay off their debt. As a result, marriage plans have been postponed and all the related economic benefits of family formation have been put on hold.
• Most western democracies function with a handicap of extreme political polarization. One extreme or the other comes to power and pushes an agenda that is not influenced by a middle ground. Meaningful solutions to real problems are almost impossible to achieve. Political dialogue everywhere has become harsh and frequently void of substance. This process has been driven by the bankruptcy of journalism and the current rapid expansion of social media.
The above list of contemplations represents just a short list of considerations. Anyone could easily add to the list. Make no mistake, however, two current events point to an economic future that should be seriously contemplated: The U.S. stock market has launched into the year 2016 with the worst beginning-of-the-year performance on record and the price of a barrel of oil has just fallen to slightly below $30.
The price of oil is now below the low price for oil in the 2008–09 downturn and the stock market is paying very close attention.
What all of this means is that the world is looking at a very serious situation in 2016.
–Fred A. Kingery is a self-employed, private-equity investor in domestic and international financial markets and a guest commentator for The Center for Vision & Values at Grove City College.
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