With all the upset in the world markets in recent days, there's an important question that must be answered: are we seeing the start of a world recession? If so, will this be a new kind of recession?
Let's start with some facts.
1. The economies of some developed countries (like Canada) are already officially in recession.
2. The European and Japanese economies are stagnant at best.
3. The US economy is still growing at roughly 2%. The "recovery" that president Obama always seems to tout has never been robust. It continues to limp along. The latest employment figures show 5.1% unemployment, but when the underemployment figures are calculated, the rate is still more than 10%. That means that over 10% of the American population is either unemployed or working only part time because full time work is unavailable.
4. The one bright spot in the global economy over the last seven years has been China, but that is ending. The official Chinese economic statistics still show 7% growth, but there are few who believe that number. At the moment, the real question is whether or not China's economy is even still growing or if it is in a recession. The crazy gyrations in the Chinese stock market (which make Wall Street look placid) are a better indicator of big problems in China. So too are the moves by the Chinese to devalue their currency in a desperate effort to bring their economy back to life. Because of all the distortions in the Chinese economy resulting from years of over investment in unnecessary items (like the empty apartment buildings across that country), there will have to be a period during which all those excesses are wrung out of the economy. We could be looking at a long Chinese recession.
5. The developing countries are watching their economies get smashed. Countries that produce oil can no longer depend on revenues from that resource to pay the bills. The world price of oil is less than one-third of what it was at its highest. Even after the price drop, there is still excess supply in world markets. The same is true of resources like iron ore, copper, coal and other materials. As Chinese demand has fallen dramatically, there has been no increase of demand from other developed economies to take up the slack. The result has been that commodity prices have fallen off a cliff. A good indicator of the extent of this problem is that the cost to charter ships to carry the raw materials have fallen something in the area of 90% from their high. No one needs the ships since the volume of trade in materials has fallen to such a great extent.
6. The last important fact is that a great many countries are loaded down with debt. It is not just Greece that borrowed and borrowed and borrowed. Certainly, the USA has heavy debt. So too do many of the other developed countries. The developing nations have even higher levels of debt.
If one puts all these facts together, one faces the possibility that we may be looking at a coming recession accompanied by deflation. The last time the USA had serious deflation was the start of the Great Depression in the early 1930s. As demand fell for all sorts of items, the prices of those items came down. Those price cuts rippled through the economy with wages quickly following prices down. The one thing that didn't change with the price declines, however, was debt. Someone who owed $1000 in 1928 still had the same debt five years later; however, because of deflation those dollars were harder to earn. Imagine what happens to the world if we have deflation to go together with the massive amounts of debt that various nations now have.
After the Depression, it took World War II to get deflation to end and economic growth to return. Europe and much of Asia had to be rebuilt, an effort that demanded major quantities of resources. In the USA, years of building demand for homes, autos and consumer goods were released in 1946 and the swell of demand led to ongoing rapid growth and inflation.
Our current problem is that if we are seeing the start of deflation, we certainly don't want to see something like war to reverse that process.
Let's start with some facts.
1. The economies of some developed countries (like Canada) are already officially in recession.
2. The European and Japanese economies are stagnant at best.
3. The US economy is still growing at roughly 2%. The "recovery" that president Obama always seems to tout has never been robust. It continues to limp along. The latest employment figures show 5.1% unemployment, but when the underemployment figures are calculated, the rate is still more than 10%. That means that over 10% of the American population is either unemployed or working only part time because full time work is unavailable.
4. The one bright spot in the global economy over the last seven years has been China, but that is ending. The official Chinese economic statistics still show 7% growth, but there are few who believe that number. At the moment, the real question is whether or not China's economy is even still growing or if it is in a recession. The crazy gyrations in the Chinese stock market (which make Wall Street look placid) are a better indicator of big problems in China. So too are the moves by the Chinese to devalue their currency in a desperate effort to bring their economy back to life. Because of all the distortions in the Chinese economy resulting from years of over investment in unnecessary items (like the empty apartment buildings across that country), there will have to be a period during which all those excesses are wrung out of the economy. We could be looking at a long Chinese recession.
5. The developing countries are watching their economies get smashed. Countries that produce oil can no longer depend on revenues from that resource to pay the bills. The world price of oil is less than one-third of what it was at its highest. Even after the price drop, there is still excess supply in world markets. The same is true of resources like iron ore, copper, coal and other materials. As Chinese demand has fallen dramatically, there has been no increase of demand from other developed economies to take up the slack. The result has been that commodity prices have fallen off a cliff. A good indicator of the extent of this problem is that the cost to charter ships to carry the raw materials have fallen something in the area of 90% from their high. No one needs the ships since the volume of trade in materials has fallen to such a great extent.
6. The last important fact is that a great many countries are loaded down with debt. It is not just Greece that borrowed and borrowed and borrowed. Certainly, the USA has heavy debt. So too do many of the other developed countries. The developing nations have even higher levels of debt.
If one puts all these facts together, one faces the possibility that we may be looking at a coming recession accompanied by deflation. The last time the USA had serious deflation was the start of the Great Depression in the early 1930s. As demand fell for all sorts of items, the prices of those items came down. Those price cuts rippled through the economy with wages quickly following prices down. The one thing that didn't change with the price declines, however, was debt. Someone who owed $1000 in 1928 still had the same debt five years later; however, because of deflation those dollars were harder to earn. Imagine what happens to the world if we have deflation to go together with the massive amounts of debt that various nations now have.
After the Depression, it took World War II to get deflation to end and economic growth to return. Europe and much of Asia had to be rebuilt, an effort that demanded major quantities of resources. In the USA, years of building demand for homes, autos and consumer goods were released in 1946 and the swell of demand led to ongoing rapid growth and inflation.
Our current problem is that if we are seeing the start of deflation, we certainly don't want to see something like war to reverse that process.
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