The World Economy Is Heading For Recession

Grand Potentate

Supporter of Possible Sexual Deviants
This is a fantastic Ian Welsh piece, but I wanted to give it its own thread so we could flesh it out a bit more. Lots of great ideas and concepts within.

World Economy Heading for Recession | Ian Welsh

World Economy Heading for Recession
2015 April 5

That seems most likely to me. China has been stalling out for some time, Japan’s “stimulus” didn’t work, Europe has been suffering under austerity for years (despite some minor good news), the other emerging economies are doing badly, the petro-states have been hammered by the drop in oil prices and now the US job market has fallen off a cliff after a few months of excellent results.

Those results were driven almost entirely by the drop in oil prices, but were unsustainable with most of the rest of the world economy in the doldrums. Low oil prices should be generally good for everyone but oilarchies, but their effect is muted (in comparison to past decades) by the oligarchical and oligopolistic nature of our economy. Put simply, there are too many barriers to entry for new businesses to arise and even lower oil prices don’t put enough money into ordinary people’s hands to create enough new demand for long enough.

In an economy where individual sectors tend to be controlled by a few companies, and where those companies are already awash with money, more money means little; those with pricing power will simply take it away and add it to the stockpiles of money they already aren’t using for anything productive.

The standard solution to the situation we’re in now would either be to implement very high corporate and individual marginal taxation (if private actors won’t spend, take the money from them) and/or to break up oligopolies and/or to heavily regulate them so that they aren’t sopping up all the excess cash in the economy. (Why are app stores still allowed to take 30%, for instance?)

Since we refuse to do any of those things, and since we only print money to give to rich people and corporations (thus pooling money at the top, doing little for widespread demand), the western economy (which includes Japan) remains stagnant. You may get a few good months here and there, but that’s all you’re going to get.

Labor Force Participation Rate Graph

Let’s discuss some individual countries and regions. First, take a look at the above labor force participation rate graph. It shows the number of people either looking for work or who have work. Can you tell that there were a few good months? That’s how good the American economy is after your few good months. It didn’t really improve much, it just went horizontal.

You need a few years of such job results to make a difference. And that’s before we get to the fact that most of those jobs were low-paying and that all of the gains of the last economic cycle have gone to the top three to five percent of the population (depending on how you slice it). And the top 1% has done better than 3%, the top .1% better than the top 1% and so on. This is your economy on unconventional monetary policy.

Japanese monetary base and inflation to early 2015

Ah, unconventional monetary policy. In Japan they call it “Abenomics.” The idea was to get inflation going in the Japanese economy–get the Japanese to spend and bring Japan out of its 30 year slump. The chart to the right shows how well it has worked.

But don’t think that money has been “wasted!” Abenomics may have done nothing for ordinary people, but it’s helped a lot of rich people become richer. That money went somewhere. In Japan’s case, a ton of it will have gone overseas, with foreigners borrowing for low costs in Japan and then speculating with that money elsewhere for higher gains (or so they hope).

Unconventional monetary policy is, and always has been, about giving money to the rich, wealthy, and corporations. At first, it was about bailing them out after the financial collapse. Now, it’s just about giving them money, lots of money, in a way that the hoi-polloi can’t access.

This brings us to Europe and austerity. Austerity is a wonderful thing, if you’re rich. Public assets are put on the selling-block which you normally could never buy and they are put there for cheap. You get to own more of the economy, your relative wealth increases. While it’s true that one might be richer in a generally prosperous economy, you must remember, this isn’t about absolute wealth. It’s about relative wealth. Better to be somewhat poorer and able to lord it over everyone else, than be richer in a world where the peons don’t have to kowtow to your every whim or don’t have to live miserable, want-filled lives. If the price is a lot more poverty, that doesn’t affect you in any meaningful way.

Not all peons suffer, of course. A lot of Germans do very well in the current regime. As the South of Europe suffers under austerity, they’re doing great. The worse the southern economies are, the better for Germany, since it reduces the price of the Euro, increasing German exports. If everyone in the Euro area was doing well, Germans wouldn’t be doing nearly so well. If the price is suicides, widespread poverty, homelessness, and so on, that’s certainly a price Germans are willing for Italians, Spanish, Greeks and Portuguese to pay.

Meanwhile in Canada, there is a housing bubble which kept on going from the point where the US bubble collapsed. Better, inflated prices are guaranteed by the Federal government, so when the bubble bursts, it can cause maximum damage to public finances. With oil prices falling, and with Canada now a petro-state (as I noted almost a decade ago) due to deliberate government policy, those housing prices are looking less and less sustainable.

In the UK, we also have London’s housing bubble (which is to say, the majority of the actual economy of the UK, if you want to call a housing bubble and financial services an economy, which UK politicians do). This shouldn’t be a surprise, since the UK hired Canada’s ex-central banker to come to the UK and do what he did to Canada: Blow a nice big bubble. The UK hardly has any other economy besides real estate and financial ponzi schemes, so we’ll see how that works out for them.

In general, understand this: The world bailed out bankers and brokers and traders and they went back to doing what they were doing before. Blowing bubbles. There’s sub-prime out the wazoo, there are stock market bubbles, there are real-estate bubbles in various places (they just tend to be more localized now, but they’re still huge).

The economy will NEVER be good for everyone until this is changed, but that doesn’t precisely mean this is unsustainable. The elite’s had one fundamental realization and it was this:

“We can print as much money as we want and as long as we make sure it doesn’t get into ordinary people’s hands it won’t blow up the economy.”

Many people expected that unconventional monetary policy would cause general inflation. It hasn’t because the money stayed in the hands of a very few people and major corporations. It did cause massive inflation in the things rich people buy, but not general inflation.

So the rich, and the politicians and central bankers they own, aren’t worried about the various bubbles because they handled them in 2007 and 2008, and they’re sure they can handle them the same way if they burst again. These bubbles may never all burst at the same time again, because if they show signs of doing so, the elites can always just have the central banks print money and buy up assets before they even become distressed.

As long as there is no actual price discovery (and how can there be), there is no real threat to the only part of the economy that matters: The economy of the people with enough money buying up politicians.

Everyone is addicted to this game, even China, which has printed unbelievable amounts of money (more than Japan, America and Europe combined) and has used it to create vast amounts of unused and unusable housing and other boondoggles. China, granted, wants much of the benefits to get to ordinary people (because the Chinese are still willing to riot extremely violently and the Communist party’s leadership knows their lives are on the line), but they’re still playing the late-capitalist game of credit pumping, rather than the mercantilist game which built the Chinese economy. That makes sense, in a way. As China’s customer-economies stagnate, it becomes harder and harder to create widespread growth for the most populous country in the world through simple exports.

The correct strategy would be to start decoupling and move to a domestic market, and in a sense, the Chinese have tried that, but they’ve bungled it on boondoggles. Capitalism of the variety we do today is terrible at redistribution and redistribution is what the Chinese economy needs, in a huge way, in order to boost widespread demand.

So that, my friends, is your world economy on austerity and unconventional monetary policy. As I predicted right after Obama put out his worthless “stimulus” program in early 2008, for most people, the economy will not recover for at least a generation. It will only recover then if the population is willing and able to rebel, peacefully or violently. If not, we are in for decades of stagnation and decline, exacerbated by the absolute certainty of catastrophic climate change.

And so it goes…
Thruth Thruth you'll enjoy this:

Why Canada's economy is headed off the cliff

Why Canada’s economy is headed off the cliff
BY Vikram Mansharamani March 27, 2015 at 2:41 PM EDT

Canada is in the midst of an unprecedented housing boom that seems likely to bust. I was recently in Canada and noticed a schizophrenic oscillation between housing exuberance and oil-price despair. What did it mean for the Canadian economy’s outlook? Upon returning to the U.S., I did some research. What I found leads me to the conclusion that Canada is now among the most vulnerable large economies in the world. Here’s why.

First, household credit. The seemingly conservative Canadian population has been voraciously consuming debt at a breakneck pace. Total household debt (C$1.82 trillion) now exceeds GDP (C$1.6 trillion), approximately C$1.3 trillion of which was for residential mortgages. Further, household debt is now greater than 160 percent of disposable income – meaning it would take about 20 months for a family to pay off its debt if interest rates were 0 percent and they spent 100 percent of their disposable income to do so. Uh oh! The consumer clearly seems stretched, so much so that McKinsey recently suggested Canadian financial instability driven by a rapid consumer slowdown was not unlikely. By the way, that’s exactly what happened here in the United States when the debt music stopped and there weren’t enough consumer chairs to go around.

Second, housing prices. Home prices continue their basically uninterrupted rise that began in the mid-late 1990s. Unlike the United States real estate markets, which have corrected, Canadian prices continue to rise. Detached single-family homes in Toronto now average more than C$1 million and Vancouver is now deemed the second least affordable city in the world – thanks to Chinese buyers (who are themselves facing a slower economy). Take a look at the following chart of U.S. and Canadian housing prices in real terms since 1990.


Graph courtesy of the author.

It’s interesting to note that the data in this chart is updated through the summer of 2014, and we know that prices have risen since then. In fact, the Bank of Canada even suggested in December that housing prices were overvalued by as much as 30 percent. The IMF has also sounded warnings. Yet despite these alarm bells, there seems to be a widespread fear that prices will continue rising indefinitely, creating a “get in or miss it” mentality that is unlikely to be sustainable.

Third, crude oil. The impact of lower oil prices is rippling through the economy at breakneck speed. Since 2011, Alberta, the oil-rich home of the oil sands, was responsible for more than 50 percent of all jobs created in Canada. It has been the locomotive of job creation pulling Canada forward, but it is now in reverse. Employment growth has stopped in Alberta and is now shrinking. According to construction industry association BuildForce, Alberta is likely to see sustained job losses for the next three years at a minimum. Further, because Alberta drew workers from all over the country, any provincial slowdown will have national ramifications on unemployment and consumer confidence. Fewer jobs in Alberta actually translates into less income throughout Canada. Yikes!

In this Looney Tune, it seems our Crazy Canadian Coyote has run off the cliff, his feet are still moving, but he has yet to look down.
Finally, craziness. Yup, not sure how to better categorize what I’m about to say. Here’s the situation, as told to me by Seth Daniels of JKD Capital, one of the most astute Canada-watchers I know. Daniels told me that there is now a booming private mortgage market in which ordinary citizens are borrowing from their home equity lines to lend money to desperate borrowers. Specifically, he noted “a homeowner acts as a subprime lender by drawing his home equity line at ~3%, and lends it to a subprime borrower at 8-12% for one year.”

I honestly didn’t believe him when he first mentioned this to me, but I then confirmed it myself. In fact, if you’re a Canadian and interested, here’s a sales pitch from one vendor. It’s only a matter of time before this shadow mortgage banking market slows, and the ramifications are likely to be enormous as defaults skyrocket, housing prices plummet, and consumer spending rapidly slows.

Net net, the ending of the Canadian credit binge, combined with an oil-driven economic slowdown, is likely to crush consumer sentiment. In this Looney Tune, it seems our Crazy Canadian Coyote has run off the cliff, his feet are still moving, but he has yet to look down. He’s suspended in air, and it’s only a matter of time until gravity exerts its force.
I should probably shoot myself now after reading these.
corrections must happen. the poors will take the hit. industry on both sides of the border are loving the $1 usd = $1.24 cdn. the fed can't raise the prime lending rate significantly. despite what is said we are a piddling world economy. job security in the oil patch already sucks. saskatchewan, although oil is big here we gots potash & uranium, plus wheat. ontario where Arnathor Arnathor is will become even more have-not. the fed wants a .77 cent dollar anyway.
Why can't we just start jailing these fucking oligarchs?
Of all the fucking lawyers out there you are telling me there is not one, or better yet many who would start indicting these fucks en masse?
Pfft, non-violence is not the answer.
Gerald Celente says it well "when people lose everything and have nothing left to lose, they lost it." I will not lose a moment's sleep if/when bankster heads start rolling.
I find no fault with these articles, as a libertarian type. The government has slapped the invisible hand of free market competition and mucked up a self-regulating system. There is no need for financial policy whatsoever. As PJ O'Rourke mentions, it's like repainting the marks on your bathroom scale to keep from gaining weight. Money and goods have a certain value and no amount of chicanery will truly change this.
because the Chinese are still willing to riot extremely violently
Bingo, our government does not fear the people, as they should. I take some blame, as I'm not violently protesting either. Also, this is where Occupy Wall Street immediately failed. The initial idea was to make life literally physically uncomfortable for a certain group, and they quickly acquiesced to symbolic nothingness, gated away from their targets.
move to a domestic market
Isolation now. Stop the race to the bottom.
Recession? We just barely crawled out of the last one that started in 2008. We had...what..18 months of increasing wages, mobility to move around to new jobs, and happy economic news this time around? The only beacon of light is the one economy that arguably suffered the most - the United States. No clue how the UK is managing their growing economy.

Japan's finished. Even if they invented the cure for ageing or fusion they don't even have the demographics to build a robust economy. I hope no one is seriously relying on the third largest economy to survive. China's heading towards the same demographic cliff, but is taking a pause because they'd rather clean up their corruption before the 1.05 billion people who aren't Communist party members realize they've been bamboozled and revolt. The prospect of one worker having to support nine pensioners in two decades (I'm making this up but the one child policy is going to come back to haunt them) will cause backlash. India and Brazil are mired in scandal. India in particular is a powder keg about to explode - if Modi wants progress, he'll put his own hardliners in and alienate that dozens of ethnic and religious groups there. Never mind the misogyny.
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