The Perfect Storm began as an extratropical system, absorbed a tropical system (i.e., Hurricane Grace), and ended somewhat uneventfully as an unnamed hurricane. In the process it caused considerable damage on the US East Coast, and sank the fishing vessel Andrea Gail, with the loss of all hands.
We are now living through the early stages of the economic Perfect Storm Plus. The “Plus” is due to the near-simultaneous collapse of four great bubbles – China, Japan, North America and Europe. All are due to central bank monetization of government deficit spending, coupled with over-expansion of consumer and property credit. As Austrian economics teaches, there are only two paths out of these bubbles – stop the credit expansion and accept the resulting recession or depression, or continue to hyperinflation and the destruction of the currency.
The collapse of China began with the cascading failures of property developers, such as Evergrande, when President Xie’s “three red lines” reined in their ability to raise new debt. Then his idiotic “zero-Covid” policy drove a dagger into the beating heart of China’s economy, Shanghai. Then failures in a handful of smaller banks were mishandled by local governments which failed to honor deposit insurance guarantees, instead hiring toughs to beat up demonstrators. This has been followed by a wave of buyers refusing to continue mortgage payments on unfinished properties, especially where cash-starved developers have stopped working on them. A loss of confidence in the CCP government has resulted. It is attempting to stop the collapse with promises of more government funding, but so far success is elusive.
Japan is, so far, following the path of currency destruction. Even though Japan’s central bank now owns virtually all government debt and a very large chunk of the stock market, it continues its path of yield curve control – at zero. This has led to a downward slide in the yen as the US Fed has reacted to inflation, well a little bit anyway. Japan is short of natural resources and must import many commodities, especially energy as the Fukushima disaster has constrained the use of nuclear power. One could easily see a return of the yen to dollar valuations like the pre-1989 mid-200s, compared to 140 today and the 2012 high in the 70s. Needless to say, this would kick off serious inflation in Japan.
North America’s asset bubble, in property and financial assets of all kinds has finally been joined by rapidly inflating prices of consumable goods and services. While Alan Greenspan started the Fed’s monetization addiction around the turn of the century, rapid growth in outsourcing to China, India and numerous other countries kept consumer prices and wages under pressure. Finally the combination of supply chains ruptured by Covid and government payments that put large sums directly in the hands of consumers started to drive up prices, and also allowed large numbers of people to withdraw from the labor force. The coup de grace was Biden’s decision to follow the urging of the climate fanatics and cut off investment in future fossil fuel supply. Anecdotally, a farmer of 1,800 acres in Canada reports that his annual diesel fuel bill has doubled from $40K to $80K, and nitrogen fertilizer (made from natural gas) has gone from $270/tonne to $900/tonne. The Fed’s reaction has been a minor increase in interest rates. A recession is either already underway or set to begin anytime now.
Europe (including the UK) is a basket case. It shares many of the same problems as North America, but in addition climate fanatics and the Russian attack on the Ukraine have conspired to leave it desperately short of energy. EU inflation is running high (8.8%) but the real problem is yet to come. Germany continues to shut down its remaining nuclear plants, while Russia has just notified Germany that it is terminating natural gas deliveries. Germany lacks the terminals needed to import LNG.
A key component of the coming confluence of these storms is the climate mania. This mania is based on bad science, but socialist politicians and activists see an opportunity to disrupt the status quo.
Financial Reality 