There’s no question that the world economy has been shaky at best since the crash of 2008.
Yet, politicians, central banks, et al., have, since then, regularly announced that “things are picking up.” One year, we hear an announcement of “green shoots.” The next year, we hear an announcement of “shovel-ready jobs.”
And yet, year after year, we witness the continued economic slump. Few dare call it a depression, but, if a depression can be defined as “a period of time in which most people’s standard of living drops significantly,” a depression it is.
Many people are surprised that no amount of stimulus and low interest rates have resulted in creating more jobs or more productivity. Were they a bit more cognizant of the simple, understandable principles of classical economics (as opposed to the complex theoretical principles of Keynesian invention), they’d recognise that, when debt reaches the level that it cannot be repaid, a major re-set of some sort must take place.
The major economies of the world have reached and exceeded that point and the debt problem is no mere anomaly that can be papered over. It is, instead, systemic. There must be a major forgiveness of debt, a default, or an economic collapse, or some combination of the three.
And so, those who recognise the inevitability of such an event have been storing their nuts away in preparation for an economic winter.
Those of us who warned of the 2008 crash in advance had been regarded as economic “Chicken Littles.” After the crash, we were largely resented as having made a “lucky guess.” Following that time, a moderate amount of credence has been allowed us, as we’ve recommended investments in real estate and precious metals (outside of those jurisdictions that are most at risk). However, since the Great Gold Correction (2011-2015), that begrudging credence has worn away and been replaced with renewed contempt.
To the naysayers, the 2001-2011 gold boom has been relegated to the investment dustbin and, to most punters, gold is clearly “over.”
Just as importantly, the most significant events of the “Greater Depression” that we had been predicting have clearly not yet come to pass. They’re still ahead of us. And, in this, we must confess that those of us who made this prediction did unquestionably believe that it would have taken place by now. We were wrong.
Or at least we were wrong on the timing, but most of us still believe, more than ever, in the inevitability of a collapse (again, this is true because the problem is systemic, not symptomatic).
All of the above is a preface of the coming of October, a month which, historically, has seen more than its fair share of negative economic events.
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This time around, there are warning signs aplenty that, sometime around October of this year, we shall see a number of black swans on the wing, headed our way.
The greatest of these is that, once every five years, the International Monetary Fund (IMF) renews its membership structure (SDR quota, governors, and voting power.) This is significantly in question this year, as China vies for a larger chair at the table.
Although China surpassed the US in 2014 as the world’s largest manufacturing economy, it still has less than one-quarter of the voting power of the US and even has less than France or Germany. To say the IMF has been dragging its feet on a rebalancing of IMF member voting would be an understatement.
In fairness, China should expect to be allotted significantly greater voting power in October. But we are discussing the IMF, which has never been known for fairness. It has, indeed, been infamous for its duplicity and self-serving inclinations (having been created at Bretton Woods in 1944 to allow the US hegemony over the world economy, its primary purpose is to assure US dominance).
Still, it would be difficult to imagine how the IMF could avoid a shift in its voting (diminishing the US and increasing China). Anything the IMF did at this point to derail the re-balance would be highly suspect.
And yet, that’s exactly what the IMF has done. It has publicly questioned whether 2015 is the right year for the review. However, even it is worried enough about its presumptuousness that, rather than announce a delay, it has announced the consideration of a delay. It has run the possible delay up the flagpole to see whether it will fly or be torn down.
Clearly the IMF feels it’s on shaky ground with its proposal. And it should be. In recent years, it has arrogantly pushed China away from the IMF table time after time, so the Chinese have taken matters into their own hands. They’ve created their own international development bank, their own worldwide cable communication system, and even their own SWIFT system.
Very soon, they’ll have the ability to run their own worldwide economic system, independent of the US/EU/IMF system. Early on, many of the world’s governments recognised the future opportunities that this would bring to the world. First, Russia and the countries of Southeast Asia signed on, then South America, Africa, and, finally, some EU countries reached agreements with China.
The IMF is in a jam, no member country more so than the US. If, in October, it allows China greater voting power, it will cast in stone China’s increased economic influence over the world. However, if the IMF chooses to put off China another year, China may move ahead with its own economic system.
Buying Time
There can be no doubt that the IMF is hoping to buy time. The question is whether it merely wishes to buy time to delay the inevitable, or whether it feels it has a card up its sleeve that it might be able to play, should it gain another year.
If the US is arrogant (as it generally is), it’ll employ its customary bravado and, in so doing, may well cause the Chinese to play hardball and dump some of their US Treasuries and/or dollars.
In considering the above, the US/IMF may feel that China is in the throes of a major correction at present and cannot retaliate without feeling the pain itself. They’d be correct. And so, the Chinese, known for being patient and choosing their moment carefully, may choose to swallow the IMF delay quietly, then, when they’ve dumped some of their baggage and possibly rebounded in 2016, make an even firmer stand than they could now make. For that reason, US arrogance now would create a very short-lived gain, and a very foolish one.
So, what does this mean to the investor? It suggests that, once again in history, October promises to be a month when great economic change may well take place. When dramatic change looms, it’s best to keep your powder dry, whilst keeping an eye open for opportunities as soon as events reveal the future. Until then, nut–gathering serves to provide an insurance policy against unpleasant economic surprises.
