Columbus

A somber mood hung over the G-20 summit in Cannes. Greece, the problem child dominated the headlines. Beyond the bold print a gloomier picture emerges. The economies around the world are in doldrums. Western economies pile up debt quicker than economic growth, a sure sign for trouble ahead. The combined public and private (households and companies) including the unfunded obligations from entitlement programs reach astronomical heights – over 370% of GDP in the US, similar ratios in other countries.

The emerging world doesn’t fare much butter. The worst culprit is China. Officially it is still strongly growing, albeit at below the rate that is required to keep a growing population at work. It holds enormous amounts of foreign currencies and bonds.  The true picture is rather different: The murky and shadowy lending market piled up debt unseen before. And nobody knows whether this ads up to the equivalent of one GDP or several GDPs. Inflation officially at around 7% is out of control. Even by offical figures the food prices rose 13.4% in September alone. The actual situation is much worse. Adding to the woes: The markets for Chinese products in the West are cooling. The best China can hope for is an economic slow down, but there is just a slim chance of this scenario happening.

Bleak prospects.

The world financial system is invariably steering towards the abyss. My bet: We will see a big reset within the next three to five years. Currencies will collapse, the world economy will come to a standstill, assets will be confiscated, and in the worst case heat will be let off through war. Say China and the US over Arab oil.

Afterwards we will restart.

Oh and it is by far not the first time that an economy gets a full reset. John Kenneth Galbraith retraces in his “A Short History of Financial Euphoria” more than six great bubbles starting with the Dutch Tulpomania and the French Banque Royale. Worth reading to prepare.

The Greeks are about to go bust; the international financial system about to go broke, a number of banks, and eventually some additional states, too. Too gloomy? We are about to see a number of very unorthodox arrangements to try to limit total abyss: Central banks taking over entire country debt books, nationalisation on a large scale of banks, legal frameworks that are suddenly completely rephrased (and partially omitted on the spot). May be we get at then end a New Deal.

Read more in German.