By Trevor Law
Everything is getting all topsy turvy! Right now we are getting a lot of economic news that isn’t quite making the front pages. You see some of the biggest stories of the DECADE are happening right now and no one seems to be giving them the attention they deserve. Here are three things changing the global economy and that are affecting you right now!
1. The Chinese economy is imploding!
Right now China is having several very, very, very big problems and they have no freaking idea how to solve them. First they have been overproducing for years. There are whole apartment complexes, heck even whole cities, that are just completely empty. However the average Chinese person has been totally fine with this because the government has been guaranteeing in both word and action that good times will keep on rolling. The Chinese economy has been driving global growth for the past decade, at some points growing at a mind boggling 9% a quarter. To put this into perspective in 2014 the U.S. grew at an average quarterly rate of 3.9% and economists nearly drank themselves to death they were so happy.
Now though consumer confidence is shaky because Chinese investors have started pulling money out of the major stock exchanges in China. This has led to several sell offs an Chinese markets losing a staggering 30% of market value since May. In response China devalued their currency to the shock and surprise of global markets. What this means is that everyone else’s money is now much more valuable, encouraging people to buy more of China’s stuff. It also makes it much more unattractive for the Chinese people to put their money in savings, encouraging them to invest. The thing is … no one thinks it’s a good idea. Many economists think this will simply encourage the average Chinese citizen to invest their savings at a time when markets are falling, and that devaluing their currency will provoke trade wars with the major global powers. It is an attempt to buy time for Chinese leaders to fix the problems, but it will most likely just make things worse. In short, it looks very likely the world’s second biggest economy is about to stagnate in a big big way and no one can do anything to stop it.
2. Oil markets are cratering!
As you may have noticed your gas tank as become cheaper to fill up lately and this is because, and wait for it … THE WORLD IS PRODUCING A MILLION BARRELS OF OIL A DAY THAT NO ONE IS BUYING! You read that right, a million. Last year oil markets started to fall, but an odd thing happened. Normally when the prices of a product go down people will stop supplying it to stabilize the price, the thing is everyone just kept chugging right along. This happened for several reasons the first being the Saudi’s have more guts than they know what to do with, and are sitting on 700 billion in cash reserves. The Saudi’s have refused to cut prices and the public reason is they are trying to take market share from the U.S. Shale oil boom in, that has cut into Saudi profits big time and they would like to see it end. Shale oil is expensive to get out of the ground so cheap oil should have killed it, but U.S. oil producers and not going into that quiet good night. They shut down the most expensive wells, and stopped drilling new ones. This has allowed them to cut costs and keep right on producing at the same production level but at a cheaper cost. The other reason the Saudi’s wanted to make oil markets crater is purely political. Saudi Arabia is not a big fan of Russian and Iranian policy in the middle east and so by gutting oil markets they hope to destabilize these two groups, who get much of their revenue from oil. In Saudi Arabia’s mind all they have to do is wait out the damage they do to their business and political rivals, and then go back to supplying the world’s oil. The impact to the U.S. isn’t all good. Shale oil is big business in states like Texas and they are reeling from this. While this will most likely be a net gain for the U.S. keep in mind the U.S. economy is a big machine and it takes a while for everything to even out.
3. This could blow back on the US, HARD.
For most of the 20th century the United States was the biggest economic driver in the world. It made up around 20% of the entire world’s GDP and where the United States led the world followed. After the financial collapse in 2008 this position was shaken pretty badly. To make matters worse Europe was dealing with a huge debt crises that threatened to pull the world into a deeper recession. To top it all off the financial crisis was a huge windfall for nations like Brazil, India, and China. With the US currency being so low and their stock markets in free fall money rushed from the US to these nations. Unfortunately for them things have reversed. The US dollar is at an all time high and this is killing the interest rates of debt US bankers have on foreign investors. Its a huge problem and its part of the reason these states are slowing down, but what is their loss is the US’s gain. Money is flowing into the US because of both a strong currency and low interest rates. This isn’t without risk and there’s still some worry of US bonds being undercut and causing people to rush from them but for the most part the US economy is driving global growth right now. That is as much good news as bad news, since US growth has been weak and the Chinese economy could very well bring on a global recession. At the very least it will cause major shocks to Wall Street.
In a lot of ways this is almost a return to pre crisis norms. The US economy is driving global growth and this is partially being fueled by cheap commodities and cheap debt giving good returns because of the high currency value of the dollar. In short we are sitting on a knife’s edge and while the US will handle it better than most economies it is no guarantee that it will escape it unscathed.
In an early version of this article I quoted inaccurate numbers for U.S. growth. It has since been corrected.