Get Ready for the Next Crisis

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di Finanza Operativa 17 Agosto 2015 | 13:00

di Walter Snyder, Swiss Financial Consulting

It seems that the present situation in some respects is merely a continuation of the usual economic ups and downs while there are other indications that a crisis is soon to befall the global community. Stocks prices have been going up in the US and the EU, interest rates are historically low, sovereign debt is unduly high in the so-called developed world, the sluggish US recovery carries on its weary way, unemployment is high in the EU, geopolitical disorders continue in Ukraine, Syria, Iraq, Libya, Afghanistan and other localities prone to violence.

The Fed has long been threatening to start raising interest rates, and September looks likely to mark the beginning of something while commodity prices have fallen drastically with China slowing down. Japan is firing up its nuclear reactors while Russia battles with recession-caused sanctions. Investors are flocking out of gold and looking for higher ROI without appearing to be unduly concerned about the problems of US fracking companies and their wobbly finances. The low oil price has even driven Saudi Arabia onto the bond market to meet current expenses.

So why worry? Some investors may still remember the panic of 2007 and the unpleasant year of 2008 while others may believe in the cyclical nature of economics and start preparing to deal with the oncoming crisis. The recent minor devaluation of the renminbi and consequent weakness are indications that Chinese economic growth is slowing down.

What is particularly irksome is that the so-called “Chinese devaluation” is considered by many commentators in a negative way despite the fact that the PBoC spent several billion dollars of its foreign reserves to keep the renminbi pegged to the US dollar, which has appreciated 10% year on year. Why do commentators not criticize the US for having its currency appreciate when sovereign debt is over 100% of GDP and the yearly current account balance has a deficit of over 400 billion.

Given the low inflation rates in most countries and not considering the sad case of Venezuela, one wonders whether deflation is going to continue, especially with commodity prices falling more and more. The fall of the renminbi means China will be exporting more deflation. Yet share prices are still too high in China and the US, so it seems that inflation has found its way into equities.

The conclusion is that the global economy is extremely fragile, and something is going to break. The Greek solution is to borrow more than one can possibly pay back and then ask for tabulae rasae while Americans ride high on the dollar.

 

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