Reassessing the global financial status quo
The shift of wealth from the West to the East will be a long-term facet of the global economy, says Julian Phillips.
Posted: Friday , 16 Nov 2012
JOHANNESBURG (Gold Forecaster) -
As we get closer to the end of 2012 we start to look forward to 2013 and beyond. Hopes and dreams must always be tempered by the stark spotlight of today’s realities. Nothing can happen unless it is based on today’s present world structures, events and leaders in politics, and money. The first major point we have to recognize is the structures we see around us, within which everything is bound together, along with the current leaders and their will for the future –these things will shape the years ahead.
Much as we might hunger for reform in so many areas, we must be pragmatic in looking forward. The world is not pure –far from it— so it is realistic to look at what is here today that will shape tomorrow. Looking at the future through these leader’s eyes gives us a clear perspective.
Underlying the developed world society is the state of the family, which underpins the state of the nation. This in turn describes the state of national and global cohesion within world structures. For instance, by contrasting the progress of China’s economy with that of the developed world, we get a focused picture of the economic and monetary capabilities of civilization in the two blocs.
If you doubt what we have said, look back to the start of the credit crunch in 2007 and see that it has been over five years since it began. The problems that exploded on us then –have they been resolved? Has the political system been reformed? Is the developed world showing a clear direction forward or is it a mélange of contradicting power bases, in dispute with one another. Has the financial system been reformed? Or is it reliant on a series of rescue operations attempting to hold together structures that have failed so far to provide what we are looking for in our future? Are the fundamental structures of government and finance working cohesively to provide solutions that will lead the developed world to a growing future? It does seem that political parties keep promising a solution to our problems (with little to no details) and manage to avoid letting us see that the problems we face are a consequence of past actions by the same dominant structures.
Do we have a strong workable monetary system to take us into the future? No we don’t. Are the powerless, ordinary people more confident in their future? No they are not. What we see is a growing discontent among the bulk of mankind that their future is so uncertain. That discontent breeds instability and uncertainty, a state that has not lessened in the last seven years. As the developed world points down to more economic underperformance, this rising tide of discontent threatens to worsen substantially. It is against this backdrop that we look at the future.
We still have the political gridlock that has rendered the leaders of the U.S. powerless to lead, let alone reform over the last few years. No attempts to really promote growth and jobs have come out of Washington. The emphasis in the political and financial world has been to save the buckling banking and monetary system from Depression. Hats off to the Fed because they have succeeded in doing that, but little more! The hopes inside the U.S. have been to see no further decline and to hope that the tenacity and resolve of the consumer will lift the U.S. out of its doldrums. Perhaps one should ask, “Are politicians qualified to provide economic growth or simply lessen the burden government puts on the productive facet of a nation?” The last five years –when growth has been so badly needed—has not seen that happen. What convinces us that next year things will change for the better? And reality demands specifics, not just vague, hopeful generalities.
The use of quantitative easing has boosted the money supply enormously and will keep on doing so until growth takes off, growth that is not just well-established but sustainable. If this does not happen and growth remains below inflation and population growth, then the bloated money supply will turn back on the system and create monetary inflation while the economy is shrinking. Combine that with shrinking confidence at that time and the mercurial impact of the two factors joining each other, and this may well go beyond a simple recession and lead to a massive drop in the dollar’s buying power. It could easily then swing out of control.
A failure to resolve the ‘debt-ceiling’ crisis and the ‘fiscal cliff’ could ignite that state of affairs. So we enter 2013 with that economic backdrop. Political gridlock, which will last until the election of Congress and the House of Representatives, will continue to render government inadequate to handle the current crises. The consequences could be dire. It’s well-known that the leading institutions of the U.S. are going through planning for a possible dollar collapse, the possible scenario of having to withdraw military personnel from outside the U.S., and the pay of government employees being insufficient to provide for their families. These are very real scenarios for the future that must be addressed ahead of them happening.
So 2013 appears to promise more of the same as the last five years in the U.S. and its economy except that conditions have become more fragile. The economy appears to have a small element of growth and by way of hope, does not seem to be headed into a slump. This is contingent on the politicians not mucking it up at the start of 2013.
The inadequacy of the political structure of the Eurozone has been evident for all to see in the last few years when the ‘credit crunch’ morphed into the Eurozone Sovereign Debt crisis. It has been with us for far longer than anybody expected and has succeeded in highlighting the weakness of the bloc’s diverse national bases. The leadership performance of the Eurozone’s politicians has been underwhelming and continues to place partisan interests over those of the E.U. We see no reason why that should change. But the reinforcing of that failure in 2013 and beyond is against a disenchanted population that is increasingly inclined to social unrest as their financial and employment situation worsens.
We believe that the recession now underway in the Eurozone will feed on itself and worsen in 2013.
The situation in the Mediterranean nations on the south side of the Eurozone seems to be worsening and removing hope in the process:
- We expect Greece will leave the Eurozone in the next 12 months.
- The weaknesses being seen in Spain are not going away and will worsen in line with the ongoing recession there too. Spain is expected to find requests for a further bailout irresistible.
- Italy is beginning to spiral down to potentially need help too. This would bring the entire E.U. into question.
Once this happens, the contagion effect will worsen for other members, including Germany, which relies on the Eurozone for 40% of its exports.
How will the euro fare under these conditions? Undoubtedly it will fare poorly. As a currency passing its twelfth year in existence, never has it looked more tenuous as it does now.
Are the Eurozone’s leaders up to the task of turning the Eurozone economies around? A look at their performance over the last few years does not point to this. Expect that as the recession bites, the value of the euro will decline and what faces the U.S. will happen in the Eurozone, only to a greater degree.
Asia/China & the Arrival of the Global Yuan
The controlled nature of China and its people’s love of regimentation and cooperation has been the prime cause of China’s rapid development. Its reliance on cheap labor to date developed not only its export markets but its own expertise in all facets of economic life. The target of double digit growth remains plausible there, but the threat of social unrest at the uneven distribution of wealth as it develops is a worry to the government. This is particularly true when the financial playing fields were relatively flat two decades ago. Its population of 1.3 billion people in itself is a huge number. Even if 1 billion people do well out of its growth, then that leaves 300 million still waiting for an exit from poverty. This is close to the size of the population of the entire U.S.
But, even China must see its economy reach a self-sustainable, internalized dependency level, before it can be confident of its future. To achieve that it has to become less reliant on its export markets and outside investments, unless they support the needs of its structure. The thought that it will contribute to the developed world’s growth is somewhat fatuous when we see it manufacturing goods cheaper, but of the same quality and slowly removing its reliance on imported goods, except of a basic nature. Given time, it will be manufacturing everything as well as and cheaper than the developed world can. This makes the shift of wealth from the West to the East a long-term facet of the global economy.