Twenty years ago this week Russia devalued, defaulted and suffered a catastrophic bank run. The chaos opened the door for Vladimir Putin, who emerged from the financial bedlam to drag Russia back from the brink.
In mid-August 1998, people in Moscow could not understand how the small crisis in Thailand of 1997 could engulf a country such as Russia that did hardly any trade with faraway Thailand. How could these countries be related?
In commercial terms they were linked by the umbilical cord of international finance. And what happens when there is too much debt in the international financial system and too much interrelated borrowing? The entire edifice becomes fragile and susceptible to contagion, as crises jump from country to country.
In my time working in financial markets, I saw such viral destruction happening three times in only five years: Mexico in 1994, Asia in 1997, then Russia and eastern Europe in 1998.
Could the same disruption be happening again, as currencies and stock markets in emerging markets slump? And, if so, what will be the political consequences? Remember when Putin was named prime minister of Russia, people thought he would be the next in a line of temporary, ineffectual apparatchiks who had feebly carried out orders under President Boris Yeltsin.
The epicentre of today’s crisis is Turkey. Its currency has lost more than a quarter of its value in the past two months, and it is in the eye of the storm. It is one of the biggest power brokers in the Middle East, home to the second-largest standing army in Nato, and its president wants to tear up the last century of constitutional secularism.
Turkey is no Thailand. It is a hugely significant regional player. Is it a “one off’ or the harbinger of international financial contagion?
Before trying to answer that, it is worth considering that the 1997-1998 crisis was ultimately stabilised by an outward-looking US Federal Reserve that cut interest rates, easing global liquidity conditions and making it easier for some countries to pay their debts. The International Monetary Fund was active in extending loans to countries that had run out of credit, and the Clinton administration was extremely internationalist.
Today, global politics is in an entirely different mood. Nativist governments are in power in the US, the UK and Italy. Large parts of the Middle East – from Yemen to Iraq and Syria, functioning societies in 1998 – are destroyed and violent. The US is threatening sanctions against Turkey and Iran.
Populist politics reigns and its roots are deep. Trump won 45.9 per cent of the US vote, with the support of 62,985,106 people. In France, Marine Le Pen may have been well beaten in the presidential run-off, but she still managed to claim 33.9 per cent of the electorate or 10,637,120 votes.
In Italy, the populists have the backing of well over 16 million voters – just over half of the electorate. In Germany, the AfD has gone from no seats in the Bundestag to the third largest with 12 per cent of the vote. Even in tolerant Sweden, the Swedish Democrats might actually emerge as the biggest party after the election in two weeks’ time.
All over central Europe nativist parties are in power. And rather than extending help, the Trump administration is ratcheting up tariffs and threatening trade wars.
This is hardly the best backdrop for a co-ordinated international response to a financial crisis.
In contrast to 1998 or indeed 2008, the Federal Reserve is now raising interest rates, driving up the dollar, and the rising dollar is the trigger for these crises. The emerging markets have been borrowing heavily since 2008 but as these debts are incurred in many cases in dollars, when the dollar rises and US interest rates go up, the emerging country has to generate more and more revenue to pay down the same amount of debt.
Worldwide debt in 2008 was 200 per cent of global GDP; today it is 240 per cent. Debts have risen most sharply in the emerging markets, and in China in particular, where total debt has risen by a staggering 110 per cent of GDP to 260 per cent of GDP between 2010 and 2018.
This brings us to the main change in the global economy since the previous crises 20 years ago: China. The US economy emerged in the 1880s and 1890s to become pre-eminent by 1920; the Chinese economy is on a similar trajectory.
Like the US, this path will not be without its financial and economic upheavals.
China holds the key to whether this current financial crisis is limited or becomes more significant. Since 2008, China has been expanding, borrowing to grow, and, on its upward surge, investing hugely. Internally, debts have been rising and, like Ireland in our credit-inspired boom, the growth rates themselves tell you very little about what is actually going on.
If the growth rates are generated simply by more and more credit, then we have a recipe for disaster, because the increase in GDP is rented, not earned. Since Trump announced his trade war with China, the Chinese currency has lost 7 per cent of its value. It’s worth remembering that the middle kingdom exports $500 billion to the land of the free. If China can’t sustain these exports, the knock-on to the internal, debt-laden economy will be profound.
Trump appears to be quite happy to risk an international financial meltdown in order to prove a point – and that point is “Don’t mess with America” – even though international trade has enriched the US for generations.
All the while, worried money flows into the US from emerging markets, pushing up the dollar further. And Europe is not immune to this.
European stock markets have been extremely weak compared with those in the US this year. Politically, the European Union is threatened by migration resulting from increased instability on its southeastern border.
In terms of debt dynamics, Italy is vulnerable given its mix of slowing growth, high unemployment, populist government and large overhanging national debt. This makes it more exposed to the vagaries of worried investors.
At times like this, the world needs global leadership; this appears to the commodity in shortest supply.
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Those wicked Nativists are at it again: how very inconsiderate of them.
‘On the verge’, is it? I thought we were still wading through the last one!
Those evil selfish free thinking Americans not toeing the line. If Hillary had won they would to be answering to Brussels by now. Damn that Trump. #MAGA
It’s true in some countries like Italy nationalistic governments have been returned and in many other countries nationalist parties are on the rise. This phenomenon is often dismissed by media outlets as some back words form of nativism. Rather than address or debate the points of concern that caused people to vote for nationalistic parties media outlets friendly to the status quo just to make fun of them……… because that’s helpful. Another financial crisis will see droves more switch their alliances to more nationalistic parties. We are between a rock and a hard place here, traditionally Sinn Fein has been… Read more »
It looks like the option of posting links is now gone. Anyway, just wanted to say that there is my article on Michael D. in “The Burkean Journal”, yous can find it yourself
These emerging market countries as well as western governments and corporates, have gorged on cheap debt and dollars for quite some time. The 30 year bond bull is over and rates are moving higher, slowly at first but they will be volatile in time. The Turkish problem has very little to do with Trumps sanctions or populism. It’s a reversal in the policies of governments and central banks mainly the Fed! A sovereign event will likely be the catalyst for the unwinding of a decade of madness in financial engineering and asset inflation, but Trump and populism is a symptom… Read more »
“International trade has enriched Americans for generations” Today many Americans have been left economically behind and blame the rest of the world for their predicament.
Hi just a question,if the ecb are buying government bonds at negative rates and interest payments are at about six billion,what happens when the ecb offloads the bonds to the private sector,surely the cost of these bonds will increase thus higher interest rates and greater payments going forward,can the country afford this ,
China in debt? Pull the other one. What happened to the Chinese holdings of trillions of US bonds or what ever it is called that have accumulated since the US and Chinese rulers started their goods for paper trading system in 1972. You will have to flesh that one out a bit more for me David.TIA.
A New Devil’s Dictionary:
Nativist, n. A person who believes that citizens should have rights in law that are not available to foreigners or that illegal immigration is illegal.
A New Devil’s Dictionary:
Progressive, n: Someone who won’t admit to being a communist usually for fear of being properly treated as one.
A New Devil’s Dictionary:
Populist, n: A term used by politicians to describe opponents who beat them at the ballot box.
Sanctions, Tariffs, Trade wars. All contribute to uncertainty. This will raise interest rates. bonds loose value. Mortgages cost more. Interest on borrowings rise. Cheap money that funds corporate borrowing used to buy back shares (5 trillion dollars worth) will cost more. Stock prices will fall. Who will start the contagion. Turkey, Trump, Italy, Who knows. There are many black swans looking for a landing place.
A French presidential source has revealed:
“The [French] president’s deeply held conviction is that the rise in support for populist movements reinforces the need to promote progressive movements, and to draw up a roadmap for a more progressive European project.”
Three platitudes in one sentence – BS bingo!!!
“At times like this, the world needs global leadership; this appears to the commodity in shortest supply.”
Out of chaos comes order. Financial corruption leads to economic chaos which leads to social disruption which leads to discontent which leads to nativist candidates elected which leads to economic tariffs which leads to more economic disruption which leads to rising interest rates which leads to economic disruption which leads more disorder which leads to “law and order” which leads to authoritarian government which leads to a police state which leads to loss of freedoms which leads to serfdom and the control of people by an autocratic government. We are closer to this than we realize. https://thefreethoughtproject.com/battlefield-america-war-people/?utm_medium=pushnotify&utm_source=browser&utm_campaign=pushfeeds&utm_content=push It all starts… Read more »
David asked the question. Here is a valid qualified answer. Do not delay putting your house in order. Ignore the emotional outbursts of the naysayers and concentrate on the evidence at hand for your examination. “”It is the currency of Turkey and Venezuela, Brazil and Argentina that have fallen hard and fast with Asia to follow that is the pending Weapon of Mass Economic Destruction.”” “When” Is Now! Posted August 20th, 2018 at 2:58 PM (CST) by Jim Sinclair & filed under General Editorial. Please note this post was posted two days previous (August 20) for our subscribers. Bill My… Read more »
More Evidence The Economy Is Deteriorating
Just a moment. On the grounds that every crisis is “home started” There is a case for reflection. Our last crisis was lengthened by “over indulgent public pay and conditions” that ballooned our national debt over subsequent years. This pension that they want to force on the private sector while we are looking at a papal visit is very wrong. To maintain public sectors pensions they want the private sector to sort themselves out. This is anti-work and indulges “a public priveleged class” Political interference in “real economics” proves again and again to weaken wealth creation – Immature Irish politics… Read more »
Apropos of not much: trawling through the archives: In eighteen hundred and forty one I put my corduroy breeches on I put my corduroy breeches on To work upon the railway… I was wearing corduroy britches, diggin ditches, dodgin’ switches, pullin’ hitches while I was workin’ on the railway In eighteen hundred and forty two I left the old world for the new Bad cess to the luck that brought me through To work upon the railway I was wearing corduroy britches, diggin ditches, dodgin’ switches, pullin’ hitches while I was workin’ on the railway In eighteen hundred and forty… Read more »
The quiet coup to remove Donald Trump has failed. Now is the exposure of the deep state but not by the MSM.
We will have a financial crisis if Trump is impeached. We will have a financial crisis if Trump is not impeached. BUT There will be a solution if Trump is not impeached as he will out the deep state and restore honest money.
Yes Adam , I am a dreamer, but better that than being a no hoper!! :-)
“”Aug 7, 2018 | 35 Comments A city of contrasts and deep divisions, Johannesburg is vibrant, beating with the tell-tale dynamism of a massive conglomeration going places. There is a sense of urgency, relentlessness and possibility. It is sprawling, dangerous and chaotic, yet bursting at the seams with optimism.”” https://needtoknow.news/2018/08/south-africa-officially-begins-program-seizing-white-owned-farms/ As a so called emerging market the communist government of South Africa may help kick off a financial crisis. Will it remain domestic or spread to the rest of Africa and beyond. I suppose seizing of the white peoples farms and giving land to destitute others is an example of… Read more »
Social media are a leading edge part of the deep state.
“”At times like this, the world needs global leadership; this appears to the commodity in shortest supply.”” Any national leader or ‘global leader’ who could actually benefit mankind is ridiculed, cast as incompetent and a fool who has lost his senses and then viciously attacked by the MSM then set upon with a myriad fake charges and threatened with impeachment. And you wonder why they are in short supply. It happens every time. Most people are so imbued with the fake news and propaganda that they participate virulently in the destruction of such a leader. A profit is without honour… Read more »
One form of protection from a financial crisis
“”Currency boards have existed in some 70 countries. The first was installed in the British Indian Ocean colony of Mauritius in 1849. No currency board has failed. Yes, no failures.””
Steve H. Hanke | Professor | Economist | Author | Currency Expert | White House Alum. Steve Hanke is a professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute.
Here is an analysis of a looming financial crisis from the perspective of debt fuled buy backs of major corporation shares. Then look at the result of a debt based economy and the looming crisis. Ignore, if you wish, the last paragraph about what the PM’s may do but look carefully at the rest.
Take in the early Sunday release of the conversation of Bill Holter and Jim Sinclair. The great reset is forecast to arrive by mid 2019. Listen here for the promo at 38 minutes.
“”Renowned gold and financial experts Jim Sinclair and Bill Holter of JSMineset.com will be the guests for the Early Sunday Release. They have a special warning about what is coming for the economy and financial debt reset that they say has already started and CANNOT be stopped.””
Maybe this digital version of the medieval fair system of barter and credit using bills of exchange will transform the international financing system and save us from the looming crisis. Neither crypto currency or precious metals are used here. https://ellenbrown.com/2018/08/23/how-chinas-mobile-ecosystems-are-making-banks-obsolete/ “”Giant Chinese tech companies have bypassed credit cards and banks to create their own low-cost digital payment systems. The US credit card system siphons off excessive amounts of money from merchants, who must raise their prices to cover this charge. In a typical $100 credit card purchase, only $97.25 goes to the seller. The rest goes to banks and processors.… Read more »
HOW DEEP IS THE SWAMP?
[…] We may be on verge of a global financial crisis | David McWilliams http://www.davidmcwilliams.ie/we-may-be-on-verge-of-a-global-financial-crisis/ […]
DMW – “If the growth rates are generated simply by more and more credit, then we have a recipe for disaster, because the increase in GDP is rented, not earned.” What happens if the stand still resource affordability is justified by more and more credit, then surely this is a recipe for ponzi disaster, because the sustainable affordability is rented. To maintain the high cost public services in Ireland between 2008 and 2016 Ireland increased the 50bn national debt by 170% (85bn). From 50bn to 135bn. Result = Ireland ( under Simon Harris) has the worst value for money health… Read more »
By Olaf Storbeck
Financial Times, London
Monday, August 27, 2018
FRANKFURT, Germany — To many observers in Frankfurt a tie-up between Deutsche Bank and Commerzbank is not seen as a question of if, but when.
“Lumping together two sick men doesn’t create a healthy one,” said a person familiar with the thoughts of an influential Deutsche shareholder.”
This is a sarcastic headline in reality.
“Renowned gold and financial expert Jim Sinclair and financial writer Bill Holter are sounding the alarm now on global financial markets starting to burn down and implode. Sinclair and Holter are business partners at the popular financial website JSMineset.com. Sinclair explains, “‘When’ is the question we are asked constantly by our viewers and readers. . . . ‘When’ is a period of time all of this comes to fruition, meaning the date. . . .‘When’ is now. . . . This is the beginning of something few expect. This has very little to no precedent in history. . ”
[…] McWilliams, D 2018. We may be on the verge of a global financial crisis retrieved from http://www.davidmcwilliams.ie/we-may-be-on-verge-of-a-global-financial-crisis/ […]
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