The Gathering Global Economic Downturn

It is coming !

It does not require a lot of analysis !!

There are several strong indicators or events that everyone knows about. To study or understand fully the import of these indicators on the global economy, one does not need to be a trained economists. To tell the truth, economists have never really figured out economics – save a few of them who analyzed or forecasted correctly, like Dr Raghuram Rajan of the University of Chicago, who is currently the Governor of the Reserve Bank of India.

Economics is not all about just numbers. To start with, the Greek economic crisis is not about all the mountain of debt that we read about in the newspapers and the internet every morning. Simply put, it is all about the pride of a nation state which never liked to be at the fringes of Europe (geographically) or at the edge of the European Union (politically, socially and economically). Greece, considered to be a developed country, is actually a small nation of just 11 million inhabitants. How difficult it can be to manage the economy of such a country with a GDP of little over USD 230B – smaller than that of Singapore or Malaysia ? When Greece was pushed into an economic crisis in 2010, I am sure it swallowed national pride to take a bailout from the richer nations to the North – especially Germany. The foolish economic prescriptions of the IMF (International Monetary Fund) and ECB (the European Central Bank), imposing tough austerity measures on Greece have failed over the past 5 years. One has to just look at the history of IMF interventions around the world to see if their techniques of strangling countries have worked out successfully. We have the Malaysian example as a contra-success story when Malaysia rejected the IMF prescriptions outright and followed a different path to economic success after the 1997 – 98 crisis.

Then comes the China Stock Market implosion. Last week, the combined stock markets in China lost USD 3.5 Trillion (yes trillion) of investor wealth – a 40% wipe-out. The Chinese economy is unravelling, and the government prescriptions are not capitalistic to say the least. The Chinese government has been intervening in the stock markets, forcing unnatural behaviour from market participants. Fortunately, there is not much foreign participation in the domestic stock exchanges, saving some global troubles. However, the repercussions are being felt everywhere. If the giant China economy comes unstuck with decelerating growth, dropping stock markets, lower all-round domestic demand, reduced export volumes, closing off all avenues of external support mechanisms, you can imagine what would happen to the rest of the world. China has become a dominating global economic power, and if it goes down even by some 25% overall, there will be negative implications all around the world.

The third factor is the instability in the Middle East likely to be even more exacerbated by the Iran nuclear problem. The ISIS has already caused huge damage to Iraq and Syria. Egypt has had a series of challenges. Israel is not happy with Iran (and the U.S. for pushing through the nuclear deal). Saudi Arabia has a host of problems including a war with Yemen. Every other Middle Eastern country seems to be embroiled in some kind of trouble.

And, to cap it all, the Western nations and Russia are waging a battle of the minds. Russia is no longer a favorite of the European Union countries. The sabre-rattling by Russia at its borders and in the air by deploying its bombers, have unnerved the Western countries. Something might go wrong, and that would be the start of the Third World War.

Given all of the above, does any reasonable educated person think that all is well in the world ? I have not even listed the other global trouble spots, such as North Korea. If the above huge problems are not resolved, it is only reasonable to expect that the USD will appreciate, oil will appreciate, and gold will appreciate, and most of the other currencies will depreciate. Demand will drop all over the world. Discretionary spends will plummet.

Is economic trouble coming ? You bet. It has crossed the horizon and approaching. Watch out and make preparations.


Vijay Srinivasan

12th July 2015


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