World Economy Slowing
The world economy has become intricately connected. We’ve been discussing signs of an economic collapse and will continue today to see how other nations’ problems affect our economy. Gone are the days where we can look at our own economy in a vacuum without considering the effects that other countries’ economies have on ours. We are all interconnected now and a decision in one place has far reaching consequences. We’ll look at a couple major world situations and how they will impact our economy.
Europe has had many of the exact same problems that we have. They have been spending without a care in the world and have ratcheted up severe debts and deficits just as we have. They realized their problems much sooner than America has realized our own and have begun to implement “austerity measures”. This means that they are cutting back on spending. It will be interesting to see how this plays out in the coming years because people don’t like having their benefits cut and many European countries love to go on strike and in other ways demand that others give them free stuff. So it might not work out quite as well in practice as in theory.
However, the governments recognize that they are on the precipice and are cutting back spending. This means less money goes into the world economy and economic activity suffers. Therefore they are able to buy fewer goods from other countries of the world. This affects US exports (as does the weakening Euro).
China’s economy is slowing radically. They have experienced their own bubble in real estate and the government has taken actions to stop this by changing banking and tax rules. This has slowed the Chinese economy greatly and is already affecting the world economy because they have slowed their imports.
Another big problem that China has is that their #1 Export partner is Europe. Because Europe is hurting financially and because the Euro has weakened (and thus made the formerly cheap Chinese goods expensive), Chinese industry is suffering.
As China suffers economically, they buy less from us. As you can see the world economy is all interconnected and the whole thing has reached a boil and now must simmer down. This is bad news for the US Economy.
It’s not fun to think about, but you can see that all signs point towards a dramatic downturn in our economy. We did not even talk about the possible effects that a new war &/or dramatically increasing oil prices could have on the economy. Both of these seem likely today and will be equally devastating.
Although our economy is not in good shape today, it will continue to get worse causing asset values to drop. This makes for a very precarious investing environment! It also could lead right into an even more difficult situation…Hyperinflation. We’ll begin to focus on that potential scenario next.
Photo credit: Nelson Art