4 Signs the ECONOMY is CRACKING UP!

Few people understand the global economy and its (mis)management better than David Stockman — former director of the OMB under President Reagan, former US Representative, best-selling author of The Great Deformation, and veteran financier.

David is now loudly warning that events have entered the crack-up phase, which he predicts will be defined by the following 4 developments:

• Increasingly desperate moves by the world’s central banks
• Increased market volatility and losses
• Deflation in industrial and commodity prices
• Decreasing demand due to Peak Debt

As the crack-up phase gains momentum, he predicts an increasing number of “financial breaks” that will add to the unpredictability and instability of the environment for investors. Even ‘dancing close to the door’ sounds excessively risky at this point.

We’re in the crack-up phase. I think there are four big characteristics of that which are going to shape the way the economy and the markets unfold as we go forward.

You’re going to see increasing desperation and extreme central bank financial repression because they have gotten themselves painted so deep into the corner that they’re lost and desperate.

Almost week by week, we have another central bank – this week, it was Sweden – lowering their money market rates into negative territory. The Swiss Bank is already there, the Denmark Bank is there, the ECB is there on the deposit rate, the Bank of Japan’s there.

All of the central banks of the world now are desperately driving interest rates into negative territory. I believe that they’re lost; they’re in a race to the bottom whether they acknowledge it or not.

The central bank of China can’t sit still much longer when the reminbi has appreciated something like 30% against the Japanese yet because of the massive bubble of monetary expansion that’s being created there. So that’s the first thing going on.

Central banks out of control in a race to the bottom, sliding by the seat of their pants, making up really incoherent theories as they go. 

The second thing is increasing market disorder and volatility. In the last three months, the stock market has behaved like a drunken sailor. But it’s really just a bunch of robots and day traders that have traded chart points until somebody can figure out what is happening directionally in the world. It has nothing to do with information or incoming data about the real world.

Investment is now coming home to roost. It will be driving a huge deflation of commodity and industrial prices worldwide. You can see that in iron ore, now barely holding $60 from a peak of $200. Obviously, it’s seen in the whole oil patch.

The third thing is – look at the Baltic Dry Index. That is a measure, one, of faltering demand for shipments and, two, massive overbuilding of bulk carrier capacity as a result of this central bank driven boom that we’ve had in the last 10 to 20 years.

So that is going to be ripping through the financial system, the global economy, in ways that we’ve never before experienced… But clearly, it’s something that we haven’t seen in modern times or ever before – the degree of over investment, excess capacity, and everything from iron ore mines to dry vault carriers, aluminum plants, steel mills, and on down the line.

And then, finally, clearly, demand has run smack up against peak debt – I think that’s the right word for it. We had a tremendous study come out in the last week or so from McKinsey, who do a pretty good job of trying to calculate, track and total up the amount of credit outstanding, public and private, in the world. We’re now at the $200 Trillion threshold.

That’s up from only about $140 Trillion at the time of the crisis. So we’ve had a $60 Trillion expansion worldwide of debt just since 2008. During that same period, though, the GDP of the world saw a little more than $15 trillion from $55 or mid-$50s, roughly, to $70 Trillion.

So we’ve generated, because of central bank money printing and all of this unprecedented monetary stimulus, we’ve generated something like $60 Trillion of new debt in the world and have barely gotten $15-17 Trillion of new GDP for all of that effort. 

Now I’d only wrap this up by calling attention to the fact that within that global total of $200 Trillion, the numbers from China are even more startling. At the time of the crisis, let’s go back to 2000, China had $2 Trillion of credit outstanding. It’s now $28 Trillion.

So we’ve had just massive 14X growth in 14 years. There’s nothing like that in recorded history, nor is there any plausible reason to believe that an economy, which is basically under a command-and-control system that is run from the top down to the party cadres, could possibly create $26 Trillion in new debt in that period of time without massive inefficiencies in waste and mistakes everywhere within the systems, especially since they have no markets.

“Danger ahead. Mayhem has happened.” And the unwinding of this and the resolution of this is not going to be pretty.

Edited excerpts from Peak Prosperity