Summary

  • Today, it appears that every significant sector of the global economy is susceptible to a severe economic crisis.
  • Perhaps the most pressing reason for concern is the state of the European economy.
  • The appropriateness of the Federal Reserve’s current policy of raising interest rates and reducing market liquidity at a rate rarely seen before must be seriously questioned in light of all these global economic issues.
  • financial tornado across a world map and one-to-zero binary codes

Queen Elizabeth notoriously chastised the economics profession for failing to forewarn her of a severe global economic and financial market catastrophe in late 2008, at the beginning of the Great Economic Recession. Should the globe have another economic and financial market disaster the following year, the economics profession will once again face harsh criticism for having been so complacent about the global economic picture. But in contrast to 2008, when significant economic flaws were primarily restricted to the US housing and credit markets, today’s key global economic sectors appear to be vulnerable to a significant economic disaster.

Perhaps the most pressing reason for concern is the state of the European economy. As a result of Vladimir Putin cutting off Russian natural gas exports to Europe, Europe is currently experiencing an energy crisis comparable to that of the 1970s. Furthermore, Italy is once more experiencing severe economic and political problems that could lead to another outbreak of the European sovereign debt crisis. It doesn’t help matters that a populist anti-European party could form the next government in Italy after the upcoming legislative elections.

The German economy may shrink by more than 4% if Putin follows through on his threat to prevent Europe from receiving Russian gas supplies, according to the International Monetary Fund. The projected economic harm from a once-in-a-century drought, decades-high inflation, and a sudden slowdown in China’s economy would be added to that.

However, if the European sovereign debt crisis were to recur, it would be more severe than the Greek sovereign debt crisis of 2010, which rattled global financial markets. After all, it would suddenly be focused on Italy, whose economy is roughly ten times larger than Greece’s.

China appears to be in the midst of a perfect economic storm, but Europe is experiencing its own economic issues. Given that China has the second-biggest economy in the world, was previously the world’s primary driver of economic growth, and is currently the greatest consumer of commodities that are traded worldwide, this must be of grave concern.

It appears that China’s real estate and credit market bubble is now finally bursting, as seen by the debt default of Evergrande (OTCPK:EGRNF) and roughly 20 other Chinese property firms. This is concerning because housing accounts for over 70% of Chinese household wealth and the Chinese real estate market represents about 30% of the Chinese GDP.

President Xi’s zero-tolerance COVID policy, which has involved securing important Chinese cities like Shanghai and Beijing, has exacerbated China’s economic problems. Furthermore, it does not help that President Xi is still waging an economic battle with China’s top tech firms and that ties with the United States regarding Taiwan are at an all-time low. China is also currently going through a severe economic drought.

So it should come as no surprise that the Chinese economy grew by just 0.4% from a year earlier in the second quarter, far behind the government’s 5.5% growth objective.

We could be on the verge of another emerging market debt catastrophe, the World Bank keeps warning us, as if Europe and China’s economic troubles weren’t cause enough for alarm. The bank’s warning is all the more pertinent now, when falling global commodity prices are being brought on by a Chinese economic slowdown and increasing US interest rates are rapidly draining cash from emerging market countries.

The appropriateness of the Federal Reserve’s current policy of raising interest rates and reducing market liquidity at a rate rarely seen before must be seriously questioned in light of all these global economic issues.

Higher US interest rates are making the inflation issue in the rest of the globe worse by driving up the value of the dollar. Because of this, the rest of the globe is left with little choice but to apply the brakes on its monetary policy during a period of slow economic growth. Higher US interest rates are increasing the likelihood of another developing market debt crisis by encouraging capital repatriation. The Fed is currently draining market liquidity at a rate of $95 billion per month due to its refusal to roll over its maturing bond holdings, further exacerbating the problems already present in the global equities and credit markets.

The Great Economic Recession of 2008–2009 should have taught us that there can be significant spillover effects from US economic crises to the rest of the global economy. This ought to increase the Federal Reserve’s awareness of the grave problems currently plaguing the rest of the global economy. Similar to how our financial woes in 2008 led to a global economic downturn, current financial difficulties could have a similar effect on our economy and financial markets.

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