22 Dec 2014
After 18 years on the planet (and 13 of those in full-time education), I am rapidly coming to the conclusion that all I have are questions: questions about the world, questions about the economy and questions about the future.
The one thing I don’t seem to have is answers… only questions.
Questions like where will we be 5 years from now? And more importantly, what will the world look like then?
The Rapid Pace of Progress
The motor car was born in 1886 (thank you, Mr Benz) but it took over 20 years for it to begin to gain in popularity.
By contrast, personal computers took off a lot more rapidly in the 80s, and these days we see the birth of technologies which are little more than an idea one moment and which become an indispensable communications platform the next: despite its mammoth 1.35 billion membership, Facebook is just 10 years old and Twitter (with 500 million users) has only reached its eighth birthday – it isn’t even out of short pants yet.
Everything’s moving so fast – faster than it’s ever moved before – but while progress is usually seen as a good thing (at least by the people who gain from it), at its most basic level, progress is just change, pure and simple.
So I look around at the world and I wonder what will change – not in the course of my lifetime because I can’t even begin to imagine that far out – no, I just try to imagine what will change just a few short years from now.
Can I predict the future? Of course not. None of us can. But given our current starting point, I can imagine some of the things which might change and I can project myself into the future to get an idea of the way the world might look under certain circumstances.
Take America, for example:
- Thanks to quantitative easing, the US Federal debt has more than doubled since the 2008 financial crisis, and now stands in excess of $18 trillion.
- Many predicted massive inflation when each round of QE was announced, while others argued there would be no inflation and that QE was necessary to keep the wheels of the economy turning.
- Interestingly, now both sides claim to be right: whilst the spectre of deflation looms large in many areas, inflation is also apparent, particularly in massively inflated stock prices.
- However, dividing the gains in the S&P by the money printed by the Fed gives us a horizontal line, indicating that the increase in stock prices could be directly attributed to freshly-printed QE money which needed to find a home – the companies themselves didn’t become more profitable or more desirable, they just became more expensive.
- Now, with the QE taps turned off, we’re seeing continued strength in stocks and the market seems to be moving higher on faith alone, or on the belief that it will keep moving higher because “that’s just what it does…”.
- Isn’t that what happens in a bubble? Are we on the verge of a major correction in the US stock market?
- The aim of QE was to weaken the dollar but with the slowdown in China, weakness in the Aussie dollar, the collapse of the rouble, insane money-printing in Japan and the prospect of QE in Europe too, now the dollar is strengthening. That means the US will find it more difficult to export goods: a strong dollar is bad for the US economy.
- It’s also bad for emerging markets too of course: countries which have borrowed in dollars and whose economies will be hit hard by a strong dollar.
- And what about the crippling US debt? Surely the higher interest rates which are being forecast for 2015 would make it even more difficult for the US to reduce its $18 trillion debt, wouldn’t it? So shouldn’t we be expecting more QE?
- And what about cheap oil? Great for the consumer (in the short-term at least) but potentially devastating for the US energy industry if it continues, and some argue that deflation may be just around the corner…
Do you see what I mean about all the questions?
Moving on to Europe:
- The euro experiment began just 15 years ago with the idea that it would make trade between European nations easier.
- However, a single currency without a single fiscal policy was never going to work, and neither was inviting everyone and his dog to join the party, particularly if they lied about their financial position in order to take advantage of cheap loans.
- Since the financial crisis in 2008, we have seen banking collapses and bailouts in many European countries, and massive unemployment and austerity measures have lead to an exodus of young, educated workers from southern European countries, desperately seeking employment opportunities abroad.
- Last week Greece began voting to elect a new president, but the numbers fell woefully short of the 200 votes required. There will be two more rounds of voting before the end of the year, but if they still fail to elect a new president then that will force an election in early January.
- And in the case of an election (whether it’s in January or in May as was originally planned), the likelihood is that Alexis Tsipras and his Syriza party will come to power: he’s standing on the idea that there has been enough austerity and that the Troika (the ECB, the IMF and the Euro-zone countries) will have to accept new repayment plans, and if Greece simply refuses to pay, where will that leave heavily indebted countries like Spain, Italy and Portugal? The additional debt could push them even closer to the brink of collapse. How long till they too decide enough is enough?
- And if Greece leaves the euro, will that be enough on its own to de-stabilize the currency? The additional debt burden which the remaining European countries would have to bear may push them over the edge and lead them to consider if forcing austerity on their children and their grand-children is a good idea. Maybe a return to their old currencies, a sharp revaluation and a return to competitiveness would be preferable to generations of stagnation?
- Or maybe Germany will decide to call it a day first… it seems the German economy is the backstop for the whole euro experiment and they’re shelling out more and more to hold the whole thing together. How long before they decide they’ve had enough?
- So, is it really inconceivable that 5 years from now the European landscape will look very different? I don’t think so. I think you should stock up on euros now while you still have the chance: they’ll be nice souvenirs to show your grand-children.
What about Russia?
- Following the recent shenanigans in the Ukraine, Putin has been accused of annexing Crimea, but whilst the US may not like it, Putin is standing his ground – after all, they had a referendum and a 97% majority voted for mother Russia. That’s democracy in action!
- Following that, the west has imposed sanctions on Russia, we have seen the rouble hit hard, and there has also been a massive drop in the oil price.
- Now I’m in two minds about this – more questions. Oil is priced in dollars, so the fall in the rouble and the fall in the oil price would seem to cancel each other out. And Putin would seem to have a few aces up his sleeve: Russia recently signed a huge energy deal with China (meaning they are less reliant on the west) and if Vlad decided to turn off the taps, where would Europe go for the 30% shortfall in their oil supplies? You may think the European economies are anaemic at the moment, but if Mr P decides he’s going home and taking his ball with him, the entire region would be toast.
- Let’s just thank our lucky stars that there’s no suggestion Putin is anything other than a mild-mannered, level-headed leader who just wants everyone to get along nicely…
- Talking of power-hungry militarists who aren’t known for backing down from a fight, I noticed that Putin recently addressed the Russian people and told them to “prepare for hard times” – it doesn’t look like he’s thinking of throwing in the towel any time soon, does it?
- And recently he gave a 4-hour televised news conference in which he sought to quell fears about the economy, answering journalists’ questions and taking the opportunity to throw in a heavy dose of patriotism…
- Hmmm… a heavily embattled nation, reeling from rapid economic destruction caused by a falling currency and runaway inflation, combined with a militaristic leader at the head of a powerfully nationalistic people… am I the only one thinking this story sounds familiar? Am I the only one who hears war drums beating in the distance? I hope I’m wrong because I don’t look good in green.
And what about the East? What about Japan?
- Japan has had a stagnant economy for 20 years, but recent massive QE has pushed the stock market dramatically higher (just as it did in America).
- Some say it signals the death-knell for the Japanese economy (many of them on RealVision TV).
- Others argue that it worked for the US and it will work for Japan too.
- Japan’s birth-rate has dropped and the population is aging… that’s bad news for pensioners of course, and bad news for the reduced number of employees who will be bled dry by the state in order to fund public spending.
- On the other hand, automation could mean Japan becomes super-productive again and a smaller population would mean less unemployment compared to other rapidly mechanizing nations, so that has to be a good thing, doesn’t it? Not as far as China is concerned… a rapidly falling yen makes Japanese exports more competitive and if more and more goods are made by robots, that reduces costs still further. China and Japan aren’t the best of friends to start with, and this is something which could have a major impact in SE Asia and spark a trade war.
- But at least it wouldn’t lead to a real war. Because, for one thing, despite being the world’s third largest economy, Japan doesn’t have a military. Ahhh, no, that was last week’s news. Japan hasn’t officially had its own military since the end of the Second World War, but that nice man Mr Abe (he of Abenomics fame) has decided it’s time for that to change, and he wants to have it written into the constitution that Japan is no longer hampered by the restrictions of the past: he wants Japan’s self-defence forces to be allowed to go out and kick ass from time to time… only when absolutely necessary of course. Still, it’s a major policy shift which so far seems to have been brushed under the carpet while the media concentrates on the falling yen story. However, as we’re asking questions, could the advent of Japan’s first military capabilities in 70 years spell danger down the line?
And what about SE Asia’s major powerhouse?
- China needs to export in order to grow, but in a rapidly cooling world economy, where will those export sales and that growth come from?
- And with Japan, their major competitor, under-cutting prices due to innovations in robotics and automation, how long before that bubbles over into more than just trade friction? As I said before, there’s no love lost between the two and they still haven’t buried the hatchet over what happened during the war. How long till we see military conflict?
So Where Does That Leave Us?
So, where does all this leave us? What will the world look like five years from now? Or even 12 months?
Will the euro still be with us? Or will the experiment have failed, ushering in new currencies and a new era of European competitiveness? And how will they fare if Putin turns off the taps?
Will the US economy be booming or will the stock market crash? Is it really different this time?
Will the FED raise interest rates? And will the strong dollar lead to devastation in emerging markets? Or will QE-forever mean that we’ll finally see the inflation which the US needs so badly in order to inflate away the $18 trillion debt?
And if we do see inflation, will it be controlled or will it be the crazy kind of inflation which sends everyone scurrying for the exits and drives all the money into precious metals?
And what about SE Asia? Will Japan finally manage to reflate its economy after 20 years of devastation? Will Abe’s money-printing result in hyperinflation and lead to the destruction of the yen? Or will the combination of a new military policy, a weak currency and a competitive Japan threaten China’s bid for dominance create even more friction between the two countries?
It all sounds very unstable to me… whatever happens, I just hope it’s not war.
- 23rd Dec 2014: Russian tensions with Ukraine increase
- 23rd Dec 2014: 2nd Greek Presidential election vote fails
- 24th Dec 2014: French unemployment reaches new record high
- 29th Dec 2014: Greece fails to elect new president
- 7th Jan 2015: Italian unemployment reaches new high
- 14th Jan 2015: 50,000 servicemen mobilized in Ukraine
- 14th Jan 2015: Russia turns off the Ukraine gas taps
- 15th Jan 2015: Switzerland removes the franc / euro peg
- 22nd Jan 2015: Draghi orders €500bn+ QE to devalue the euro…
- 25th Jan 2015: Greek elections: Syriza / Tsipras tipped to win…
- Feb/March 2015: Greece tries to renegotiate its loans…
- Feb/March 2015: Troika refuses to renegotiate Greece’s debts
- ??? 2015: Greece defaults and exits the euro…? #Grexit
- ??? 2015: US deflationary spiral looms as cheap oil starts to bite…
- ??? 2015: Uncompetitive US energy firms start going bust…
- ??? 2015: Spain, Portugal, Italy and/or France also default…?
- ??? 2015/16: The euro collapses…
- ??? 2015/16: Turmoil on world stock markets…
- ??? 2015/16: Great Recession 2.0…?