Is the World Unraveling Financially?
Over 10 trillion dollars of paper wealth was destroyed worldwide over the last year as the Internet age of the 1990s unraveled financially before our eyes. Money in global stock markets had reached $35 trillion by March 2000 for an astounding 110 percent of global gross domestic product (gdp)—the total value of the world’s annual output of goods and services—up from 40 percent in 1990. That means stock markets became worth more in early 2000 than the entire amount of world output in that year!
Yet, almost one third of that value has now evaporated, seemingly overnight. Never has so much money been lost in such a short time!
Just as the Asian financial meltdown of 1997-1998 infected one economy after another, some economists are now predicting that the nightmare of a new form of financial contagion is spreading by way of international stock markets, as those markets move more closely in lock-step with each other. World markets now seem to uniformly rise and fall together. That means wonderful prosperity for the world in a rising market, but horrifying disaster when a market “correction” plunges values.
How has this widespread carnage in global stock markets come about? What changed?
How Did This Happen?
The Economist of March 10 stated, “Nowadays, falling share prices hurt economies more than they used to because stock markets are everywhere much bigger not just in absolute terms [of amounts of money invested and number of shares traded] but also in relation to national income [as a percentage of gdp].”
For example, the rapid rise in U.S. stock prices between 1990 and the peak of the market in March 2000 created $14 trillion in paper wealth in America alone. It is estimated that this remarkable gain added at least 1 percentage point to the economy’s growth each year between 1995 and 2000 due to the creation of all the jobs, wages and profits which accompany such a rise.
However, since March 2000, falling stock prices in the U.S. have vaporized over $4.5 trillion of America’s paper wealth (or about 40 percent of its gdp), which is expected to cut at least that same 1 percentage point off the economy’s growth rate each year for 2001 and 2002, and possibly beyond. National economies around the world have been traumatized by this plummeting of the markets! And it is not just the world’s wealthy who have lost money as markets dropped like a rock off a cliff.
The Economist article describes how the entire world—not just America—discovered the excitement of share ownership in the 1990s, and the “wealth effect” it created as investors watched their stock values increase dramatically in the ensuing decade. The article said (emphasis mine here and throughout), “Stock markets used to be seen as the reserve of pinstriped brokers and their wealthy clients. No longer. Over half of all Americans now own shares, twice as many as on the eve of the 1987 [U.S. stock market] crash. Share ownership is even higher in Australia, an economy which not so long ago was run by trade unions [which traditionally discourage workers from aligning themselves with company interests through stock ownership]. In Germany, where cautious investors used to put their money in bonds, one fifth of adults are now shareholders, twice as many as three years ago. Even poor countries, even communist ones—China is both—have become crazy for shares.”
Yet, that is all changing rapidly as stock prices around the world collapse. The “little man” is pulling out after seeing his savings account go up in smoke—after losing the money for his children’s education, after watching his nest egg and his retirement vanish with the stroke of a pen. The bear market—a prolonged period of falling share prices—has struck!
The average Joes around the world—white-collar and blue-collar workers alike, small business owners and office workers, plumbers, electricians, hair stylists and others of lower-to-middle incomes—the many who tried getting rich in the stock market—by and large, have been wiped out by the sudden fall in prices and will not be returning to the market. The Economist article says, “After an 11-year bear market in Japan it is hardly surprising that less than 10 percent of households still own shares.”
Lack of Experience and Wisdom
The Economist of April 7 sounded a very resonant chord about how all this happened: “The real test of a company’s strength is how it handles the bad times.” Anyone can sail a boat in smooth seas; it’s when the waters get rough that good, seasoned, veteran sailors show their skill.
In that article, “Managing the Downturn,” the Economist wrote, “Most corporate managers in the United States doubtless feel that living through the longest economic upswing ever experienced was fun while it lasted. Certainly, it was more enjoyable than what is now following: a long, maybe very long, period of retrenchment…. One problem is that the sheer length of the upswing means that most of today’s chief executives were, at best, middle managers last time around [when there was a downswing]. Indeed, some of today’s most high-profile companies (Cisco Systems, Vodafone, aol) are essentially children of the good years. Unlike executives running many European companies in the 1990s, their managers have known nothing but growth. Almost no executives who are under the age of 40 have any firsthand experience of what it is like to manage through the downswing in the business cycle. And, given that the fastest-growing businesses have tended to have young talent at the top, this bodes ill.”
The March 19 Washington Post echoed that sentiment: “After the recent stock market slide, people are dusting off their Japanese comparisons. Japan’s bubble was inflated during the spectacular growth of the 1980s, fueled by productivity gains even more marvelous than those of the United States in the ensuing decade. Japan’s firms ramped up investment spending by an extraordinary 6 percent of the gross domestic product—the same increase American firms registered during the ’90s. In both cases, this unsustainable spending was justified by the supposed discovery of a paradigm-busting magic: in Japan, a new economic model; in America, the Internet….
“Bubbles can be inflated only if people move in herds, and if they are closed-minded enough to ignorewarning signals…. What’s more, ground zero of that high-tech sector, Silicon Valley, has more in common with Japan than you might imagine….
“The Japanese believed so strongly in the magic of their model that they did not pause to ask if anything was wrong as they bought shares in each other’s firms and drove stock prices to comic levels. The denizens of the valley believed so strongly in the power of technology that they thought nothing of taking concepts, as opposed to actual businesses, and floating them on the stock market. In both cases, the real madness set in when outsiders who could read neither Japanese characters nor html [Internet] code bought into the [idea] and threw dumb billions at it.”
U.S.News & World Report of April 9 put it clearly when it wrote, “As investors are discovering to their consternation, more than a few dotcoms [Internet companies] promised a lot more than they could deliver….
“But planning to be big and actually being it are different things. ‘They’re geeks,’ says [Overstock.com’s ceo Patrick] Byrne of some of the managers of companies he now liquidates. Some, he said, were spending $20 million to $30 million to build warehouses outfitted with top-of-the-line shelving, racking systems, and conveyor belts while many were amassing more than three times the inventory typical for a bricks-and-mortar [non-Internet] retailer. ‘They’re way into technology. They would’ve been better off running a 7-Eleven for a couple of years and learning inventory control.’”
As we now see one Internet technology company after another warn that slowing demand for their products will hurt profit and sales, which is sending stock markets lower and lower, we are reminded that the greedy pursuit of riches while following young, inexperienced technocrats who lack depth of wisdom and cautious judgment based on experience has cost the world economy 10 trillion dollars! Youth, it seems, use a straight-line ruler to forecast sales, and those who should have known better have followed blindly, and greedily, along. What an indelible lesson for history!
In 2000, economic growth for the global economy almost reached a spectacular 5 percent. A phenomenal figure, and the fastest growth rate in 16 years. The two biggest single-nation economies in the world—America and Japan—comprised 46 percent of world output. Yet both now are teetering on the brink of recession (two consecutive quarters of contracting or falling output). Fears are mounting that the rest of the world is also falling into recession, especially emerging economies like Argentina, Thailand, Indonesia, the Philippines and Turkey, which are at great risk of total collapse, and tech-oriented markets like Taiwan, Korea and India, which have already crashed due to the tech stock sell-off.
If both America and Japan move into recession this year, it will be the first time since 1974 that this has happened simultaneously in the world’s two largest national economies. In America’s last three recessions, Japan has boomed economically, and when Japan slumped in 1998, America’s roaring economy continued.
But this present potential recession is different than every other recession in the last four decades. During America’s recent ten-year expansion, inflation remained under control, whereas in every other expansion since World War ii, a marked rise in inflation has preceded each recession. In each of those cases, interest rates have been raised to fight inflation, and that monetary tightening and increase in the cost of borrowing has slowed the economy and moved it into a contraction or recession.
That is not the case today, at least not in the traditional sense. The current weakening of the American economy is not due to inflation, although the traditional yardstick for inflation should have been expanded to include price inflation in the stock market, and then interest rates would have been raised earlier in the expansion in order to temper the boom while it was still manageable. Instead, a market bubble was allowed to inflate and then burst. In contrast to inflation-led recessions, the current slide in America’s economy has been brought on by such factors as weaker profits, falling share prices and falling investment. This is more like the old-fashioned “investment boom and bust” recessions prior to the Second World War than the usual post-war recessions caused by rising inflation and resultant higher interest rates.
Today, Americans are saving less—indeed, much less, even to the point of “negative savings,” in which they are spending more than their income. In the 1990s, total savings and investment of households and companies fell dramatically from a surplus of 5 percent of gdp to a deficit of 6 percent in 2000. This lack of savings, combined with a simultaneous sustained boom in business investment, is historically unprecedented and of special significance to the future of today’s marketplace. We need to look overseas to find similar examples; and they are not only alarming, but possibly indicate a long and deep American recession lying on the immediate horizon.
Other Similarities to Today
Japan and Britain in the late 1980s are the most recent of cases similar to America today. In the Economist of March 10, an article written about the cycles of the American economy stated that Japan and Britain “experienced a similarly dramatic deterioration in private-sector net saving,” and that “when asset [stock market] prices tumbled, firms and households tried to restore their financial positions and net saving increased sharply. This caused deep recessions [because the savings took consumer money out of circulation]. In Britain, during the boom, private-sector net saving fell from plus 5 percent in 1985 to minus 6 percent in 1989; then, as recession took hold, it reversed even more abruptly, to plus 6 percent by 1994 [and drove the British economy deeper into recession]. Japan’s net saving fell from plus 5 percent in 1986 to minus 2 percent in 1990. Later, it rebounded. Again that caused a deep recession, from which the economy has yet to recover, ten years on.”
Studies reveal that the average recession since 1945 has lasted 11 months, while recessions between 1854 and 1945 averaged 21 months. This is believed to be because it is easier to tame inflation by simply raising interest rates than to purge financial excesses such as too much inventory, too much production capacity or too little savings.
Many other symptoms in America today are similar to Japan in the 1980s. Both showed classic symptoms of economic and financial bubbles, along with rapid monetary (credit and money supply) expansion, surging share prices, rampant gdp growth and a boom in investment. In both America and Japan, inflation remained under control by traditional measures, and the central banks saw no reason to raise interest rates; therefore the cost of borrowing remained low for financing stock purchases or adding additional industrial capacity or more employees, and the economies expanded out of control.
Likewise, share prices in America are following the same path as those of Japan in the 1980s, when Japan’s Nikkei stock market rose to a peak of 34,059 in 1989 before falling by 70 percent to a 16-year low of 11,819. America’s Nasdaq share prices reached a high of 5,048 on March 10, 2000. That number has since fallen by two thirds to a low of 1,673; high-flying tech stocks Cisco Systems and Lucent have recently fallen by 83 percent and 90 percent, respectively.
As a result of falling share prices, the net worth of American households fell in 2000 for the first time since records began 55 years ago. Such dismal performance is rapidly undermining consumer confidence—and consumer spending accounts for two thirds of America’s gdp. Consumer confidence plunged to a four-year low in February. The destruction of $4.5 trillion in stock market wealth will likely continue to curtail spending, and without consumers generously (and foolishly) opening their pocketbooks, a deep American recession is almost assured.
The main risk to America is the labor market, which is beginning to erode: Unemployment is ratcheting higher, as over half a million jobs have been cut since December 2000, and new weekly claims for unemployment benefits on April 5 reached their highest level since July 1998. Unemployment tends to lag behind economic activity, so the worst may lie ahead, and such a strong dose of reality can severely dent consumer confidence and spending, thus extending the recession.
Just as in Japan’s decade-long stagnation and decline, America experienced a decade-long recession in the 1970s. And we should never forget the agony after the market broke in 1929 when it took a mind-bending 25 years for the Dow Jones Industrial Average to regain its former peak.
Just as importantly, the biggest differences between Japan of the 1980s and America of the 1990s are equally disturbing and bode ill for America’s future. The March 10 Economist wrote, “Japan had a large current-account [trade] surplus when the bubble burst; America has a large deficit [meaning the U.S. is importing dangerously more than it is exporting]. This makes it more vulnerable to a run on the dollar if foreign investors lose their appetite for American assets.” Such a flight of foreign capital would be devastating to the American economy, just as it was to the Asian economies during the crisis of 1997-98.
“The character of this current cycle, and the similarities it highlights between America now and Japan in the 1980s and 1990s, are enough at least to raise the possibility that America may face a recession this year—and maybe a bad one—rather than a mere pause. Even when proper weight is given to these risks, which it rarely is, the idea that America could follow Japan into a decade of pitiful underperformance still seems utterly incredible. Let us hope it still seems so a year from now” (ibid.).
Europe to the Rescue
In spite of denials to the contrary, European industry is clearly feeling the impact of the global slowdown. Falling demand is leaving many companies with oversized inventories which must be financed. Declining domestic demand and exports, along with shrinking corporate profits, are causing cuts to investment plans, downgrading of profit expectations, corporate restructuring and downsizing of staff and employees to prepare for the growing economic storm.
And yet, Europe remains relatively unscathed by the sharp fall in America when compared to the rest of the world, and is expecting a fairly respectable rate of growth of around 2.5 percent in 2001. With exports to America of only about 2.5 percent of its gdp, Europe is somewhat insulated from all the turmoil afflicting other U.S. trade partners, as it so heavily trades within its own Eurozone. These reasons explain why the European Central Bank (ecb) has not felt the need to cut interest rates.
That is not to say that Europe is not experiencing problems and profit failures during the slowdown. The Economist of March 3 wrote, “In recent years European firms have built up large stakes in American companies, and so a growing share of their profits depends on the fortunes of corporate America. Germany is particularly exposed. The sales of American-based affiliates of German companies are five times bigger than Germany’s exports to the United States.
“The good news,” the Economist wrote, “is that European consumer confidence is less sensitive to swings in share prices than American consumer confidence: Europe’s households own fewer shares. [Also,] in Europe, household saving rates have remained fairly high, and private-sector borrowing has been relatively modest…. Growth in the euro area is almost certain to outpace growth in the United States this year….
“While growth has remained robust, the ecb’s main concerns have been inflation and a weak euro…. After regaining about 15 percent against the dollar between last October and early January, the euro has since slipped back. If it resumes its climb, that would probably encourage the ecb to cut rates, in order to prevent a tightening in overall monetary conditions. If America really does go into recession, the euro might well climb strongly against the dollar.”
What Your Bible Says
The Trumpet has been warning for over a decade now that America is going to fall and Europe is going to rise to singular financial superpower status. How can we know this? Because the word of God says so!
The identity of biblical Israel is one of the major keys to unlocking the truth of your Bible. For over 60 years, the Church of God has proclaimed that identity. Without an understanding of the identity of biblical Israel and other modern-day nations, approximately 90 percent of your Bible will be a mystery to you. Primarily, America and the British nations around the world are the modern-day descendants of ancient Israel. For further explanation, please write for your free copy of The United States and Britain in Prophecy by the late Herbert W. Armstrong.
Your Bible says that great tribulation is about to come upon the nations of Israel, the ferocity of which has never before been seen in all history (Matt. 24:21; Dan. 12:1). Jeremiah 30:12-15 clearly reveals how and why America and the other nations of Israel receive such fierce punishment in this very end time in which we live. “For thus says the Lord [to Israel]: Your affliction is incurable, Your wound is severe. There is no one to plead your cause, That you may be bound up; You have no healing medicines. All your lovers have forgotten you; They do not seek you; For I [God] have wounded you with the wound of an enemy, with the chastisement of a cruel one, for the multitude of your iniquities, because your sins have increased. Why do you cry about your affliction? Your sorrow is incurable. Because of the multitude of your iniquities, because your sins have increased, I have done these things to you” (nkjv).
National sins and leadership scandals are a stench in the nostrils of the Eternal. And what is worse is that the people of America don’t care as long as their lust for money and economic well-being are satisfied. But America’s economic “lovers” (including Europe and Japan) will soon turn and tear her to pieces! As we are seeing today in America’s unprecedented loss of wealth, the riches of this world are going to be stripped from Israel to leave her bare and naked in all her shame! (Ezek. 7:19; Luke 23:30; Rev. 6:15-16).
Economic Beast Power Arises
In Revelation 17 and 18, there is described a tremendous economic powerhouse led by a great false religion. This union, characterized as a “scarlet colored beast,” will make merchants of the earth and kings of nations rich beyond their wildest dreams when they put their economic and military might behind the rising beast.
The beast power of Revelation is the German-led consortium of nations known today as the European Union! It is the final resurrection of the Holy Roman Empire spoken of in Revelation 13 and 17 and Daniel 2:40-43 (for more information, write for a free copy of Germany and the Holy Roman Empire).
In Europe today, we are seeing the final fulfillment of those prophecies, and America is hastening that culmination with its economic failures!
Do we understand that America’s present-day fall is a gigantic step toward fulfillment of the prophecies that Germany will lead a group of European nations to destroy biblical Israel? That prediction is spread throughout your Bible, but so very few understand it today.
The nations of Israel, led by America, are going down! And because of America’s meteoric fall from unprecedented heights, all nations on Earth are about to go through a time of world trouble like no other time past or future.
It is Europe that will arise from the ashes of this global financial conflagration to dominate the world. Europe will be the sole remaining financial superpower which enriches the world (Rev. 18) until the prophecy in Daniel 11:40-45 comes to pass. At that time, Europe, the king of the north, will be crushed by the combined military power of Russia, China and other Asian nations, who will then be likewise destroyed by the returning Jesus Christ (Rev. 19:11-21) as the Kingdom of God is set up on this Earth. Until that time, Europe will reign supreme and all the nations of Earth will bow before it!
Be forewarned, this will happen. It is only a matter of when