Are We Headed For A Global Depression?

The US current account deficit for two decades played a central role in fueling economic, corporate and monetary growth in export-driven countries around the world. If the US could continue to expand its current account deficits and imports, the global economy would continue to grow and prosper. Unfortunately, America has reached it’s consumption and debt burden limits. Two decades of global prosperity will soon reverse into a decade of deflationary Depression.

WHY THE PARTY WILL END?

As shown in the graph at my blog at zempower.com/archives/490, since 2004 the US current account deficits have exceeded $800 billion per year or over 6% of annual GDP. Think of this as America sending a subsidy check for $800 billion dollars to the rest of the world. The subsidy receivers accept the money and through the bank money multiplier effect (read my other blogs for this explanation) it multiplies 500% to 1000% plus.

The US current account deficit has created asset bubbles and over investment in countries such as Japan, China, Taiwan, South Korea, Singapore, the Philippines, Malaysia, Germany, Mexico, the former USSR, and the Middle East. A correction in the US current account deficit will cause systematic bank crises and deflation in the above mentioned nations. Because a fall of the dollar will start this New Paradigm Depression, the central banks of these trading partners have mass printed their currencies or purchased US denominated assets such as US Treasury Bonds to keep the dollar from crashing.

When the Dot.com bubble crashed in 2001, it was a minor correction for the US current account deficit, yet world exports still shrank by 4%. Exports from Taiwan, Japan, Korea, Singapore, Malaysia, and the Philippines all dropped by double digits. China’s exports shrank by 9%. The UK, Netherlands, France, Mexico, Spain, Australia, Russia, Indonesia, and Thailand all saw negative drops in exports. As a result of these export declines, the stock markets of these nations also crashed. From January 2000 to August 2002, Japan’s stock market dropped by over 50% and Germany, France, Brazil, India, and the Netherlands dropped by over 40%.

If you look again at the graph at my blog at zempower.com/archives/490, you’ll see that the US account deficit was only $400 – $500 million prior to the 2001 correction. It’s actually gotten worse! In response to the 2001 correction, governments pumped fiscal and monetary stimulus into their economies and deteriorated their fiscal budgets. During market corrections, tax revenues fall and the costs of government stimulus programs, safety nets and bank bailouts rise. As explained in my blog about the Great Depression, two of its primary causes were the sovereign debt crises of the 1920s and a massive correction in global trade imbalances (that started in 1914). In 2011, we see glaring similarities in both the fiscal deficits of the 1920s and global trade imbalances of the 1920s. It’s not too hard to forecast a coming Depression.

For those that know me, I am not a gloom and doom prophet predicting the Apocalypse. However, I strongly believe that being informed about the global economy will be crucial for surviving the upheaval ahead.

By: Zempower

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