As The World Wobbles
Asian markets which have recently rallied are still far below their former highs. Forty percent of the world’s economies, including most of Asia, find themselves in the politically destabilizing grip of gut-wrenching recessions (falling demand and output along with increasing unemployment for two or more successive quarters). Thousands of companies from Indonesia to Russia will never be able to repay their mountainous debts, and few have restructured themselves economically to be able to survive. Many pitfalls remain which could easily cause the Asian financial meltdown to continue spreading its wealth-evaporating tentacles around the earth.
From a world view, the worst is not yet over. All one has to remember is how the 1997 financial crisis appeared to be subsiding in the spring of 1998 only to take a severe turn for the worse last summer when U.S. stocks began their tumble.
The roller coaster ride continues, with many economists expecting the world economy to expand less than 1.5 percent in 1999, which, by past standards, counts as a global recession.
The Crisis Deepens
Japan makes up two thirds of Asia’s economy and has a 15 percent share of the world economy. However, as the second-largest economy in the world, Japan declined by 0.7 percent in fiscal 1997, followed by a further 1.8 percent decline in 1998.
Japan is failing to lead Asia out of its crisis. Prime Minister Keizo Obuchi has pledged an economic recovery drive, but instead, the government continues to back-pedal on earlier tax-break pledges intended to stimulate the Japanese economy.
Japan’s banking system has all but collapsed, and success or failure there will determine in large part the fate of its neighbors who are so dependent upon Tokyo as the region’s main economic engine. Yet, we see the increasing ravages of the crisis; Japanese banks now are being bailed out by public funds, and the government has taken over control of the Long Term Credit Bank of Japan.
For the first time ever, and in a startling sign of further devastation, the yield (or return on investment) on Japan’s six-month Treasury bills has now fallen into negative territory. What that means is that investors are too afraid to put their money in Japan’s fragile banks, so they are buying Japan’s short-term bonds at a loss. That means buying six-month Japanese Treasury bills at a price that is higher than the amount they will get back in six months. “People would rather give their money to the government [at a small loss] than give it to banks and get nothing back,” a chief economic strategist said in the November 6 Wall Street Journal (WSJ).
This fall to a negative interest rate has established a new low for the ailing Japanese financial system. Such a negative yield in bonds was also seen during the Great Depression of the 1930s when yields on U.S. government securities dramatically fell into negative territory amid worries over the stability of the U.S. banking system. Depression is the word for Japan, not recession.
One of the things to watch for in Japan is that if their currency, the yen, dramatically weakens again, it will likely trigger a new round of devaluations in neighboring nations’ currencies, especially China.
Next to Crash?
Despite claims to the contrary by China’s government, the Chinese economy is dramatically slowing and soon will result in 18 to 20 million unemployed. Such an event will have devastating consequences.
In 1993 China’s GDP (gross domestic product, which is the total of all goods and services sold) grew almost 14 percent. A slowdown from China’s much anticipated 8 percent increase in GDP for 1998 to the more realistic 5 percent growth predicted by The Economist in its October 24 issue will be equivalent to a recession in Chinese eyes. Such diminished growth in 1998 and the high unemployment which will result will most likely bring political and social chaos also. Not only does economic collapse in China spell trouble for Asia, but couple that with a power struggle among its leadership and add in the disturbingly nationalistic direction in which China will likely turn, and it also poses a great danger to the rest of the world.
A devaluation of China’s currency, the yuan (also called the renminbi), still seems probable, though the recent rise in the value of the Japanese yen may have postponed it. Many economists trace the present Asian financial crisis back to China’s currency devaluation in 1994 and fear that another drop in the yuan will set off more currency devaluations around the globe. As The Economist of September 26 said, “Much as the [Chinese] government swears blind that it will not devalue the currency, not all local and foreign holders of the yuan believe it.” China needs immediate growth, and that likely means increased sales revenue due to more competitive export prices brought on by a cheaper currency.
Because of their deepening economic crisis, China continues to be a major problem on the trade front. U.S. exports to China have fallen by 18 percent, while imports of Chinese products into the U.S. rose 5 percent to a record $6.8 billion in August.
The WSJ of November 6 reported that China’s massive investment trusts are teetering on the edge of bankruptcy and extinction. The October shutdown of Guangdong International Trust and Investment Corporation shook the economic world because of the “tip-of-the-iceberg” glimpse into the serious financial problems in China.
Many of these Chinese mega-trusts are now admitting their inability to repay their debts. “Uncertainty about those obligations is raising questions about the credit-worthiness of almost every Chinese borrower. That, in turn, could lead to a credit crunch at a time when China is struggling to maintain economic growth” (WSJ, Nov. 6). The graft and corruption in Chinese companies and in government, coupled with probably the weakest banking system in Asia, are bringing this giant nation to its knees as foreign capital flees to other less-risky investment areas.
But not only is China’s economy a problem. That country is already the subject of keen resentment due to its record on human rights, its treatment of Tibet, its missile technology sales to rogue nations, its bullying of Taiwan and its efforts to funnel money into U.S. politics.
Will China be the next major economic domino to fall? If so, you can be certain they will try to shift the blame to Japanese shoulders to avoid tainting the legacy of 50 years of communism.
Another attempt to protect a legacy is going on north of China. Ailing Russian President Boris Yeltsin is trying to distance himself from the unfolding mess of a collapsing economy as he hides in the Russian political graveyard on the Black Sea. Other former Soviet leaders like Nikita Khrushchev in 1964 have likewise gone to the Black Sea sanctuary to “retire,” or, in the case of Mikhail Gorbachev in 1991, to escape the coup attempt which led to Boris Yeltsin’s succession. When Yeltsin’s “legacy” is spoken of, the subject of the economy is never discussed.
As one Western diplomat put it in the November 9 Newsweek, “This is quickly becoming Primakov’s economy,” speaking of the newly appointed Prime Minister Yevgeny Primakov, who has become “the substitute president,” as the official Russian newspaper Izvestia described the presidential replacement after Mr. Yeltsin’s “soft resignation.”
In the face of a severely contracting economy, a disastrous wheat harvest—the worst in decades—and mounting social unrest—with 73 percent of the Russian people favoring impeachment due to unpaid back wages, increasing food shortages and possible mass-starvation during the approaching legendary Russian winter—it appears Mr. Yeltsin’s political instincts have led him off center stage.
It is no wonder that the president has fled. Primakov has been left with two choices: print money and risk hyperinflation, or impose a tough austerity program which will probably drive the Russian people into the streets in massive protests resulting in violence and political upheaval.
Even as great as the threat of a Russian economic collapse is to the world, even more so is the nightmare of illegal sales or theft of an estimated 15,000 tactical nuclear weapons, such as bombs, torpedoes and surface-to-air missiles, which are at risk because no proper inventory exists.
As Russian leaders continue negotiating with foreign banks and the International Monetary Fund (IMF) to restructure (allow very late payments on) Russia’s massive debts, about 600,000 civilian workers in high-security closed cities and factories are owed 800 billion rubles ($50 billion) in back wages according to the Union of Atomic Industry Workers.
Because Russian officials are now admitting they do not have the means to maintain their nuclear arsenal, security restrictions are being eased at some 20 nuclear-military industrial sites and hundreds of thousands of workers are leaving the areas with little control over what they take with them. According to The Christian Science Monitor of November 3, “The mafia could infiltrate when [the sites] open up, and make money stealing equipment or [nuclear] knowledge.”
Unfortunately, the worst is yet to come from the Russian financial crisis. Foreign banks and investors are bracing themselves for another wave of Russian debt defaults (non-payment of loans). Russia cannot pay its bills, and private creditors stand to lose as much as $100 billion. A credit rating agency was quoted in the September 11 WSJ as saying that the Russian debacle is potentially “the largest single credit loss ever suffered by the international banking community.” With that remark, the rating agency downgraded Russia’s credit rating to CCC, which is the lowest rating ever given to a country by that agency, with even financially imploded Indonesia being higher.
Brazil is a very large economy with a gross domestic product (GDP) of about $900 billion annually. While it is a smaller economy than China, it is larger than Russia, which had a pre-devaluation GDP of around $440 billion. The growing loss of sales to Brazil and other Latin America countries has not yet hit the U.S. trade deficit, and the crises in these countries appears to be the straw which may break the American camel’s back.
In spite of recent improvement in the Brazilian stock market, Latin America continues to unravel. After the main stock index in Brazil plunged 55 percent last July, it has rebounded but is still down 19 percent. There is increasing pressure for devaluation of Brazil’s currency, the real, which would devastate the entire region, triggering another bout of financial market contagion in Latin America. Likewise, currency problems continue in other countries, as the free-floating Mexican peso continues to hit new lows with no end in sight, and a likely devaluation looms in Venezuela which will have a big psychological impact, though that economy is small compared to Brazil.
Newly elected Brazilian President Fernando Henrique Cardoso’s recently announced economic recovery plan entails perhaps $30 billion from the IMF’s new world-welfare program to protect the Brazilian currency. This drastic budget-cutting program could quickly be shattered by political opposition in the Brazilian congress from newly elected state governors, because the plan calls for more sacrifice on the part of the people than the overspending government. Such opposition threatens to cause a rapid devaluation of Brazil’s currency, which would do considerable damage not only to world commerce, but also the credibility of the already-smarting IMF if its Brazilian plan fails.
To stop the hemorrhage of outflowing foreign capital, Brazil has raised interest rates to over 40 percent. But while that takes pressure off the currency, it makes Brazil’s debt burden far worse due to the increased cost of borrowing for the government and corporations. If rates ratchet higher, it will have a crippling effect on the economy.
Brazil may be the first test of the plan instituted at the end of October by the Group of Seven (G7), the world’s largest industrial nations. That plan promotes world financial stability through IMF loans to countries pursuing sound economic policies but which are under pressure from financial markets. As the November 2 Washington Post stated it, Brazil is a “firebreak, where the battle to keep the crisis from spreading to Latin America—and from there to the rest of the world—could be won or lost.”
Latin America, particularly Brazil, Venezuela and Mexico, is the key to how wide the U.S. trade deficit becomes. Mexico is America’s second-largest trading partner behind Canada. Overall, the U.S. ships about 16 percent of its exports to Latin America. So if Latin America goes “into the tank” economically, it is going to be virtually impossible for the U.S. to “remain an oasis of prosperity,” as Federal Reserve Chairman Alan Greenspan put it on September 4.
How Is America Doing?
In spite of an unexpectedly strong third-quarter increase of 3.3 percent in America’s GDP, the U.S. still appears likely to go into recession in 1999.
Many economists expect further interest rate cuts by the Federal Reserve Bank to be forthcoming in an attempt to stimulate the slowing American economy. Layoffs are rising, with recently released figures showing that 91,531 people lost their jobs in October, the highest in 33 months. So far in 1998, the layoffs total 522,987 through October, far above 1997’s full-year total of 434,350.
The unemployment rate was unchanged from September; however, the U.S. Labor Department said first-time claims for state jobless benefits increased the last week of October by 10,000 to 312,000, and job-creation has fallen from an expected monthly gain in October of 175,000 new jobs to only 116,000, giving further indication of a U.S. economic slowdown.
Business and consumer confidence has also weakened considerably, although consumer credit is still expanding annually by 7.9 percent. While this is misconstrued by some as consumer confidence, it appears more than anything to indicate the naïveté of the American consumer, who is arrogantly unafraid of carrying increased debt into financial rough waters.
U.S. manufacturing also continues to weaken, with a slowdown showing in the loss of 52,000 jobs in October on top of 198,000 jobs lost in July. Capital spending (corporate spending on materials and equipment intended to be used in production rather than goods purchased by consumers) has fallen from an astonishing 17 percent increase in the first half of the year to a decline of 1 percent in the third quarter of 1998. Factory employment has now declined for six successive months, and output is also falling; so it appears that U.S. manufacturing is already in recession.
The chief economist of Cleveland-based KeyCorp was quoted in the November 2 Investor’s Business Daily as saying, “These numbers are fitting within a pattern of slowing economic growth. I think large companies are running scared; their profits are coming up seriously short and they’re beginning to take drastic measures to stem the hemorrhaging.”
Because U.S. unemployment remains low, companies are having to pay more at this time for talented employees. Therefore wages are gradually increasing, which causes some economists concern about inflation—because wages constitute more than 70 percent of production costs. However, a bigger threat to the U.S. economy, and the world, continues to be deflation caused by falling prices and a drop in demand due to flagging consumer confidence. Although consumers initially enjoy the lower prices on individual items, the spread of deflation can deeply destabilize an economy through collapsing real—estate prices, resulting in bad loans, ailing banks, plunging stock markets and corporate bankruptcies.
The U.S., and indeed the entire world, is relying on American consumers to continue in their historic role of “consumers of last resort.” The booming U.S. stock market, especially in the past eight years, has increased wealth to the point that American consumers have gone on a spending spree of unprecedented proportions. As a result, the U.S. savings rate in September dropped to an astonishing minus 0.2 percent from an already low 0.2 percent in August. This means that Americans, for the first time in 60 years, are taking more out of savings for purchases than they are depositing into savings. Such negative savings has not occurred since the days of the Great Depression just prior to World War II.
In spite of the economy’s desperate need for savings, if Americans do increase their savings, every 1 percent increase in savings will knock 0.7 percent off the GDP through lowered consumer purchasing, thus contracting the U.S. economy into a full-blown recession.
A Commerce Department report released November 2 reported that in September, personal spending by Americans amounted to an incredible $5.87 trillion. Much of that spent money was “borrowed” by using credit cards, home equity loans, selling investments or other assets, or by dipping into savings accounts. Because of the mountain of debt created by such spending, the pace of spending is completely and totally unsustainable. When, not if, a drastic slowdown occurs in U.S. consumer spending, it will seal the fate of southeast Asia, which is attempting to export its way out of financial crisis.
According to an October 20 Commerce Department estimate, the U.S. trade deficit for 1998 will be the largest in history, in the range of $165 billion, up from $110 billion in 1997. The all-time record for the trade deficit occurred in 1987 when imports exceeded exports by $153 billion. The gap for August 1998 is the worst single-month trade deficit since 1985, as it exploded to $16.77 billion due mainly to falling U.S. exports to foreign countries. Such shrinking U.S. sales abroad take much needed-revenue out of the pockets of U.S. farmers, manufacturers and producers of raw materials, leaving them wallowing helplessly on the brink of disaster!
Recent climbs in U.S. stocks have given some hope for recovery, with the Dow Jones industrial average climbing over 9,000 points during November in hot pursuit of the all-time record of 9,337 attained in July of 1998. But the fact remains that the American stock market continues to be substantially overvalued by historic measures and faces a new round of downward pressures. To use the old phrase, the light some people see at the end of the tunnel is the headlight of an oncoming train! The U.S. economy has only begun to experience the Asian financial meltdown, and the worst is far from over.
The concluding paragraph of an article entitled “Is the Worst Over?” (Washington Post, Nov. 2) ominously quoted an expert on emerging markets as saying, “In the [next-to-last] scene of [the movie] ‘Saving Private Ryan,’ the soldiers are resting at a bridge, waiting for this onslaught. That may be the better analogy to what is happening now.”
The Euro Onslaught
Europe’s new currency, the euro, will become “official” on January 1, 1999, though the existing national bank notes and coins of the various countries will not be withdrawn and replaced by the euro until the first half of 2002. But no matter what the timing, the arrival of the euro on January 1st complicates world financial matters considerably.
One of the major concerns is that the introduction of the euro will be amidst the worst financial turmoil since the 1930s. This by itself may throw the euro off course from the very beginning. The example of failure in the 1930s by a relatively young U.S. Federal Reserve Bank to halt the Great Depression causes great worries today that a still newer European Central Bank may likewise mishandle its very important role in the ongoing global financial crisis, which could also end in world depression.
Whether they admit it or not, Europe has been strongly impacted by the far-reaching effects of the Asian financial meltdown. Though Europe may be less exposed to trade losses in most emerging markets, their banks have been by far the largest lenders and are exposed to substantial damage through loan defaults and debt restructuring.
For example, Germany is Russia’s biggest creditor, holding an estimated $72 billion, or 40 percent of Russia’s debt, at the end of 1997. Of the 1500 banks in Russia, only about 30 of them are expected to survive. This means huge losses may need to be absorbed by Europe, and Germany in particular.
In a world locked in battle over one financial crisis after another, Europe is being touted as “an island of stability” and “an oasis of growth.” But many analysts are asking themselves if that oasis is a mirage. Many European companies appear to be concealing falling profits and downward price pressures due to the global slowdown in hopes of preserving Europe’s image of stability. Yet that image is suspect because of recent and ongoing European interest rate cuts, which suggest an illusion of prosperity covering impending recession.
Perhaps the most startling effect of the euro may be its dominance of the dollar and replacement of the dollar as the primary reserve currency of the world, just as the dollar replaced the British pound about the time of World War II. China and Japan have already pre-announced their intention, at least partially, to convert their reserves from dollars to euros. What this “onslaught” on the dollar by the euro will mean is anybody’s guess right now, but answers are available if our eyes are open to see them.
With the U.S. economy being essentially a “bag with holes” (Hag. 1:6) out of which all value is pouring, it is likely that the advent of the euro will rapidly fulfill Bible prophecy right before our eyes in the next few years.
Revelation 13 predicts a two-pronged political and religious beast to arise near the end of man’s reign on earth which will totally dominate the world financially (vv. 16-17), at least for a brief period of time, until it is replaced by the righteous government of Almighty God (Rev. 11:15). Chapter 18 of Revelation shows the dramatic downfall of the soon-to-arise globe-girdling beast power and the mourning of all the merchants of the earth (vv. 11-15) over the resultant collapse of mankind’s final, but corrupted and failed, attempt at self-government.
All indications point to the fact that we have entered into that time of fulfilled prophecy today and that the forces which will shape the events of the next few crucial years are already in place. As 1999 dawns on the world, closely watch events unfold (Luke 21:36), and seek the available God-given ways of escape from these things which shall come to pass!