I believe the global economy stands on the brink of meltdown. The immediate trigger of this collapse is the European Debt Crisis, but the build up to this catastrophe has been building for years and decades.
Three of the major drivers of Global economic growth: the US, Europe, and mainland China , are all on the verge of economic slowdown, if not outright collapse. Usually, if one region of the globe is contracting other regions are growing and able to take up the economic ‘slack’. For the first time in modern history, all regions are slowing at once. This is uncharted economic territory.
I will look individually at how each region got into the economic malaise it is in and what some consequences may be.
Greece is the poster child for Europe’s economic problems, but they are not alone. Europeans have lived beyond their financial means for decades and now the bill is coming due.
A immediate result will be Greece getting ejected from the Euro Currency group of nations– or they leave on their own. Greece will be plunged in economic chaos. I do not believe a Greek exit can be "managed" by the rest of the Euro Zone. A Greek exit will result in the eventual death of the Euro Currency and a return to national currencies. It will be a hot, ugly fall and a very cold and bleak winter in Europe.
The death of the Euro Currency will plunge all of Europe into economic turmoil. This turmoil could possibly last for years as all the financial, legal, political and other questions regarding a break up get worked out. I believe the break up of the USSR gives some ideas about Europe’s future. I think that a return to military governments in some European countries that have undergone it in the past (Spain and Portugal) are possible.
About the only good news is that European defense spending is low. Unlike the 1930s , there is a slim possibility of open military conflict breaking out across Europe. However, when the BEST outcome is a low chance of nation-state warfare this shows what a mess Europe could become.
China sits on the edge of a housing bubble that will make the US housing bubble of a few years ago seem tiny.
China has grown into a global economic power by becoming a factory to the world. When the US went into recession in 2008, China kept their factories humming by launching a stimulus program costing trillions of Yuan.
This stimulus led to massive government waste (think "bridges to nowhere" on a massive scale) Entire CITIES were built just to keep workers employed. All that spending during those years led to high rates of inflation across the board.
The one thing that keeps the Chinese communist leadership awake at night is the thought of the Chinese people standing up against them and questioning their authority (Tiananmen Square is a a perfect example of this). Domestic stability is the first, second , and third priorities of the communist leadership. High inflation can and does cause instability (look at 1920s Weimar Germany and modern Zimbabwe as examples) Add high inflation with a bursting housing bubble and it leads up to economic disaster on a epic scale.
This could get ugly because Communists (regardless of nationality) have never been shy about spilling the blood of any opponents who get in their way. The PRC leadership will do whatever it takes to stay on top and in charge. I believe that "whatever it takes" could include invasions of Russian Siberia and\or Taiwan-Republic of China. Citizens tend to overlook economic problems when their country is at war. If China were to engage in a invasion of Siberia, this could result in the potential loss of tens of millions of lives since the Russian Federation does not possess the conventional military means to stop a invasion (not enough well trained infantry with substandard equipment having to cover too large a land area). They would be forced to rely on nuclear weapons to stop Chinese aggression.
Look at the recent rise in nationalistic sentiment spurred by the central government over the Diaoyu/Senkaku islands issue with Japan. I believe this is a better indicator of the true state of the mainland Chinese economy, regardless of whatever their ‘Official’ economic statistics say
The US economy still hasn’t fully recovered from the housing crisis that started in 2008. Like Europe, The US has lived beyond it’s financial means for decades. Government spending (at all levels) is out of control.
I believe that America’s future hangs in the balance. we will not know which path we will head down until the November 2012 election. I think that if President Obama wins a second term, America can forget about being the world’s sole superpower. It will mean political death to the Democratic Party to engage in any entitlement reform/cutbacks, so I believe that issue is off the table if the Democrats win on Election Day
Even if Mitt Romney is our next President, America’s economic future still has plenty of potholes ahead. Entitlement spending (Social Security & Medicare/Medicaid) are consuming larger and larger amounts of all federal government spending with no end in sight. These entitlements need to be bought under control if America is to have any chance in the future. Like Europe, America needs to have a cultural shift.The mentality of dependency on the government to provide one with a certain standard of life needs to end. Every individual, and the individual alone, should determine a person’s economic success. It must not be the role of government to determine this.
Social Security was never intended (even at it’s inception) to be a American’s primary money source in retirement. It was viewed as ‘one leg of a retirement stool’ with the other ‘legs’ being a company pension and a individual’s personal savings/investments. However, today, Social Security is the primary source of income during a person’s retirement.
The Social Security trust fund is heading towards collapse. This will mean many retirees will have a GREATLY diminished lifestyle going forward.
Like Europe, the time for easy painless solutions to these looming financial problems has come to a end. Either entitlement spending gets reformed or we all go off the fiscal cliff together.
The level of governmental spending needed to support the huge increase in the size of government over the last few years is also something that cannot continue at it’s present rate. Government faces the prospect of collapsing under the weight of spending needed to prop it up.
Some of the consequences that will result from all of this will come in many forms. Here are some possibilities I see:
* Self-sufficiency will be a ever growing trend as people realize that government can’t afford to support them anymore. The Federal government needs to get out of a lot of things. For example, the Feds need to get out of financing home mortgages. The quasi-governmental agencies ‘Freddie Mac’ (FHLMC) and ‘Fannie Mae’ (FNMA) need to be wound down and killed. Their backstopping of sub-prime mortgages is the main reason for the housing crash of 2008. I work part time in a Real Estate office. I know that killing off these entities will destroy the housing market, but they have become bottomless money pits loaded with unrecoverable toxic assets and I see no other choice.
* Brain drain and capital flight from weaker European nations to financially stronger ones. This is already happening as people pull their savings out of banks in Greece, Spain, Portugal and move it to German banks,
Funds may even totally leave all European financial institutions and go overseas to less risky parts of the globe. Right now, pretty much any Greek with the means to do so is packing up and moving out of Greece, Some Irish and Spanish are not far behind in doing the same.
* An increase in desire for regional government and in nationalism. In the last couple months the Catalans are increasingly wanting to get away from Madrid. The Venetians don’t want to pay taxes to Rome anymore, and the Scots would rather answer to Edinburgh instead of London.
This can also be seen in a rise of nationalistic political parties, such as Golden Dawn and Syriza in Greece, the True Finns in Finland, Jobbik in Hungary, and Front National in France, among others. There is even a possibility of the military seizing control, maybe in Spain and Greece, which have both known military rule in modern times. It looks like the Swiss are preparing for some major economic and political pain across Europe.
* Here in the USA, government at all levels (federal, state, local) will have to be cut dramatically. Excessive and unaffordable public pension obligations at the state level are killing some states (California and my Illinois are prime examples). Going ahead, these states will only have two options: cut their public employees pensions, or cut other state spending to free up the pension money. This will involve pain either way, but the time for painless options went out the door a while ago. I think Marc Faber’s ideas on cutting government a minimum of 50% is a good idea (however, I would do it over months, not in three days!)
I also believe there will be a wave of municipal defaults. Several cities in California have already filed for ’Chapter 9′ bankruptcy protection. Filing for bankruptcy can lead to a variety of problems.
There will be more of this across the nation.
The path ahead for the global economy is shaky. Decades of over promising and overspending has bought all of us to the edge of the precipice. The needed cuts and changes will be painful, possibly even leading to outbreaks of violence, and even war. However, no changes in policy will lead to outright economic collapse. About the only certainty will be a decrease in lifestyle and a increase in hardship. Living could become a even greater struggle for a lot of people globally.
I truly wish the economic picture wasn’t so bleak, but I see limited options ahead for us. I can be reached at firstname.lastname@example.org if you wish to contact me. Thank You for your time.