The global economy is sick and getting sicker. No one would suspect this based on what is being reported in the mainstream media. The financial cheerleaders there would have you believe that all is well and getting better. It’s not. Here are the facts.
Yes, the US economy grew by 4.2% during the second quarter. But it shrank by 2.1% in the first quarter. If you go to the website of the Bureau of Economic Analysis you will find that, during the first half of the year, the economy grew by only $78 billion, or by 0.5%. That means the economy expanded by only 1% on an annualized basis. That is pathetically weak considering that during those six months, the government borrowed and spent $201 billion more than its income, while the Fed created $350 billion and injected it into the economy by acquiring financial assets. Nor does the economy appear particularly strong thus far in the third quarter. At the end of last week, it was reported that personal spending, which makes up 70% of the economy, contracted by 0.1% during July.
The US economy is weak. Most of the rest of the world is weaker. Japan’s economy has barely grown over the past 12 months despite money creation on a truly extraordinary scale by the Bank of Japan. Last week it was reported that economic growth in the Eurozone came to a near standstill during the second quarter, increasing just 0.2% compared with the first quarter and by just 0.7% compared with one year earlier. Quarter on quarter, the German and Italian economies both contracted by 0.2%, while the French economy was flat. Only the UK economy reported solid growth of 3.2% compared with one year earlier. Even still, the UK economy has only now just surpassed its pre-crisis peak size, which it reached in early 2008. The Eurozone unemployment rate is 11.5% and deflation is a growing threat. In August, prices rose by only 0.3% year on year.
As for the BRICS, three out of the five are in or near recession. During the second quarter (compared with one year earlier), Brazil’s economy shrank by 0.9%, while Russia’s expanded by only 0.8% and South Africa’s by only 1.0%. Judging by reported data, China’s economy is still booming at an annual rate of 7.5%. However, maintaining such high rates of growth through credit-fuelled, government-induced malinvestment may eventually come at the price of an all-out depression there in the not too distant future. Of all the BRICS, India appears to be in the strongest position, with 5.7% growth. However, it is very dependent on foreign capital, which may soon dry up.
Very low and falling government bond yields are also telling us that something is terribly wrong with the global economy. The yield on the 10-year Japanese government bond is 0.5%. Ten-year German government bond yields fell to a record low of 0.87% this week. US 10-year Treasury bonds now yield only 2.34%. Spain’s economy is in crisis, but the yield on 10-year Spanish government bonds is only 2.23%, 11 basis points less than US government bond yields. The Italian government can sell ten-year debt at a yield that is only slightly more, 2.45%. The world has never before seen such low interest rates.
Interest rates are low because the supply of money is greater than the demand for money. As I have written many times before, since we stopped backing money with gold, there is no longer any difference between money and credit. After the collapse of the quasi-gold standard Bretton Woods System, credit grew very rapidly for decades. That credit created a great global economic boom characterized by asset price inflation and an extraordinary expansion of industrial output. However, globalization depressed wages in the developed nations. Therefore, income and purchasing power did not keep pace with the expansion of output. Capacity across all industries became excessive relative to effective demand. Now, there are very few viable investment opportunities left. That is why the demand for money/credit is so weak and why interest rates are so low. The continuing decline in interest rates on government bonds is a clear sign that this situation is becoming worse.
The global economy is entering a new downturn. The end of the third round of Quantitative Easing in October is very likely to make matters worse.
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