Threats to the Global Economy
The triumph of global capitalism after the collapse of the Soviet Union in 1991 appeared to set mankind on the road to peace and affluence. World trade began booming around the globe. Capital flows flooded seemingly every niche of so-called emerging markets like Asia, Latin America and Eastern Europe, as investors sought ever-increasing and exhilaratingly high returns on investment. Stock markets around the world seemed to burst in unprecedented growth and prosperity as countries liberalized, privatized and deregulated their economies in pursuit of democracy and capitalism. It seemed a new era of peace, stability and abundance had arrived!
But something went wrong. In 1992-1993, Western Europe was shaken by violent currency-exchange-rate fluctuations. Mexico was rocked by a banking and currency crisis in 1994-1995 when total collapse of their economy and currency was only narrowly averted by a massive $50 billion bailout led by America and the International Monetary Fund (IMF). Southeast Asia melted down economically beginning in the summer of 1997, followed by Russia and Latin America in August of 1998. As the November 1998 issue of Current History put it, “Far from being the decade of global capitalism, the 1990s may well be remembered as the decade of financial instability.”
What happens to America happens to the global economy. And America’s future is not a pretty picture. In Leviticus 26:19, God says to Israel (America primarily), “I will break the pride of your power.” Economic strength is at the heart and core of the pride of America’s power. Many Americans equate wealth with righteousness. In the American mind, wealth shows not only that we are better off than others—it shows we are superior. Many Americans even view their wealth as an indicator of moral superiority, but God sees that only as pride, and as it says in Proverbs 16:18, “Pride goes before destruction, and a haughty spirit before a fall.”
That fall is coming. At present, at least four immediate areas of concern could have serious consequences on the fragile state of global economic affairs.
Overvalued U.S. Stock Market
After climbing back to record heights following a precipitous fall in the autumn of 1998, the U.S. stock market began fluttering in December in a confusion of peaks and valleys in spite of America’s robust growth, low inflation and almost-full employment. Such gyrations are evidence of an unhealthy economy with severe underlying weaknesses such as an extremely overvalued stock market, a negative personal savings rate, high foreign borrowing accompanied by a severely bloated national debt, and an enormous and ballooning trade deficit.
Such flawed fundamentals suggest that a major stock market correction of perhaps 25 percent or more may be immediately on the horizon. A fall of that magnitude will have ominous repercussions for the entire world.
With much volatility in the market, there is disagreement among financial forecasters, some analysts predicting the Dow will reach 10,000 while others expect a Dow in the range of 7,000 or below by the end of 1999 or sooner. Time will tell whether the amazingly resilient U.S. economy and markets can withstand the powerful economic forces at work around the globe.
The forces presently driving down the U.S. market include a fear of soon-to-be rising interest rates due to an anticipated reappearance of inflation, as well as a more profound recognition of the overvaluation existing in the stock market itself. White-hot consumer confidence, propped up by the income and wealth effect of a soaring stock market, is fueling the booming U.S. economy, which in turn is providing the buying power needed to save the world from financial collapse. Yet it is the enormous strength of the American economy which now threatens to bring down the house of cards.
Investors are sensing that the U.S. Federal Reserve is leaning toward raising interest rates in the near future to slow down the rapidly overheating American economy. This overheating is reflected, in part, by the excessive earnings-to-price ratios in U.S. stocks which put stock values at highs which are simply unsustainable.
Barron’s Dictionary of Finance and Investment Terms states that the earnings-to-price ratio is the “relationship of earnings per share to current stock price. Also known as earnings yield, it is used in comparing the relative attractiveness of stocks, bonds and money market instruments.” Earnings per share are defined as a “portion of a company’s profit allocated to each outstanding share of common stock. For instance, a corporation that earned $10 million last year and has 10 million shares outstanding would report earnings of $1 per share.”
Historically, the price per share of stock is about 16 times the amount of earnings for that same share, meaning that a company with earnings of $1 per share would put the average price per share at $16. However, the major U.S. stock market indicators have risen at a double-digit pace for an unprecedented four straight years so that, according to the February 8 Wall Street Journal (WSJ), tech or internet stocks like “Microsoft trades at close to 70 times its past-year’s earnings, and networker Cisco Systems at more than 100 times, astronomic levels for such big companies.” Clearly stock valuations must suffer a considerable drop to be more in line with sustainable historic levels, otherwise, as published in Australia’s Sydney Telegraph of January 23, U.S. financier George Soros forecast that “the U.S. asset [stock market] bubble will burst and trigger the next major global economic crisis.”
What Budget Surplus?
Another major threat to the global economy is the unrealistic dependence upon a non-existent U.S. federal budget surplus to correct the major flaws in the American economy. One of those uncorrectable flaws, the Social Security system, will in all likelihood remain an albatross around the neck of America, dragging it ever downward as the huge-but-aging Baby Boomer generation stops putting money into the system as it reaches retirement age and begins drawing more and more funds out of the system. As explained by New York Post journalist John Crudele, it is today’s overabundance of funds being put into Social Security and “borrowed” by the U.S. government which makes it appear as if there is a budget surplus. In actuality, there is an expanding budget deficit.
Mr. Crudele wrote on January 22, “There is no federal budget surplus.
“I’ll say it again,” he writes, “There is no federal budget surplus….
“Over the past year, the federal deficit—which is money owed by our government—rose from $5.486 trillion to $5.618 trillion. Those are government numbers right out of Barron’s.
“That means the federal debt climbed by $132 billion [in 1998]. Which means the federal budget deficit last year was $132 billion. There was no surplus of $70 billion, or any other amount, as Washington is claiming….
“Washington is able to pretend there is a surplus because it has been raiding the Social Security trust fund, which, you have to understand, isn’t a pile of cash sitting somewhere in the Treasury. It’s really a pile of government IOUs (Treasury bills, really) which Washington puts into Social Security in exchange for the cash it steals.
“And it is our cash that is being stolen. Anyone who pays into Social Security is really unwittingly buying IOUs from a government that might not be able to pay in decades to come…. [Under President Clinton’s plan], Washington will steal $200 billion from Social Security (turning a real $132 billion deficit into a $70 billion surplus), so that it can proclaim a budget surplus, then it will return the excess money to Social Security from where it was stolen in the first place.” Those kinds of deceitful practices in government are called names like “smoke and mirrors” and “voodoo economics.”
God’s word in Isaiah 30 identifies the problems and the consequences of our deceitful natures when it says in verse 1, “Woe to the rebellious children, saith the Lord, that take counsel, but not of me; and that cover with a covering, but not of my spirit, that they may add sin to sin.” The phrase “cover with a cover” literally means in Hebrew “to weave a web” and its meaning is to “devise schemes.” This phrase certainly describes the “creative accounting” which is presently occurring in the American debt crisis.
God says man is rebellious; people are not getting their counsel from Him through His Holy Spirit, but are devising their own deceitful schemes and “adding sin to sin” or, one might say, deficit spending to deficit spending.
Verse 12 continues, “Wherefore thus saith the Holy One of Israel, Because ye despise this word, and trust in oppression [which means ‘fraud’] and perverseness, and stay [or rely] thereon.” God is saying the nations of biblical Israel (America and the British Commonwealth nations) are relying on perverse practices of fraud and deceit, and there will be a terrible price to pay. Verse 13 pronounces sentence: “Therefore this iniquity shall be to you as a breach ready to fall, swelling out in a high wall, whose breaking cometh suddenly at an instant.” Sudden destruction in the form of financial collapse will come on the United States unless we repent and turn from our fraudulent ways! Unless we turn back to God, this nation is doomed to the scrap heap of history!
Federal Reserve Chairman Alan Greenspan said in January 1999, “Reducing the Federal debt to the public at this stage is unquestionably the most important thing that I believe that we can do….” Yet paying off the U.S. national debt is not now happening and is not likely to happen in the future.
Interest on America’s national debt continues to accumulate at approximately $40 million per hour! America’s trade deficit, called the current account, hit $170 billion in 1998 and is expected to reach as much as $300 billion in 1999. Those outrageous interest charges and a growing trade deficit will continue driving up the national debt, so eliminating the deficit is not enough; the debt principal itself must be eliminated. To do otherwise leaves in place this enormous threat to the American economy—and that threatens the entire world, which is totally dependent for economic survival upon continued massive spending by U.S. consumers.
War’s Ever-Present Danger
One of the greatest threats facing the global economy is the growing likelihood of war, just as Jesus Christ prophesied would happen in Matthew 24:6 when He said that in this end time mankind would “hear of wars and rumors of wars.” This world is certainly fulfilling that prophecy!
In the last decade, America has again and again found itself in the middle of foreign, internal conflicts from Haiti to the debacle in Somalia and most recently in the Balkan conflict after the former Yugoslavia collapsed into war. These disastrous and costly interventions were preceded by U.S. blunders in Korea and Vietnam, while domestic strife in El Salvador and Nicaragua dominated American foreign policy throughout the 1980s.
The January/February 1999 issue of Foreign Affairs presents an article with extreme importance to the continued health of the global economy. The article, titled “Saving America from the Coming Civil Wars,” says, in part, “Most civil wars do not directly threaten the United States or its allies. While recent internal conflicts have raised humanitarian concerns, none has seriously affected American security or economic interests. This, however, was largely a matter of luck. The United States should recognize a vital and sobering truth: that Russia, Mexico, and Saudi Arabia all now stand on the brink of civil war, conflicts that would have devastating consequences for the United States. These consequences are not the traditional dangers of state-to-state aggression, such as outside attack or invasion. Though largely ignored by scholars and policy makers, who remain fixated on the idea of international conflict, internal war has emerged as a principal threat to security in the post-Cold War world.
“Conflicts fought within the borders of a single state send shock waves far beyond their frontiers. To begin with, internal wars risk destroying assets the United States needs. Were the Persian Gulf oil fields destroyed in a Saudi civil war, the American economy (and those of the rest of the developed world) would suffer severely. Internal wars can also unleash threats that stable governments formerly held in check. As central governments weaken and fall, weapons of mass destruction may fall into the hands of rogue leaders or anti-American factions….
“Civil conflict in Mexico would produce waves of disorder that would spill into the United States, endangering lives of hundreds of thousands of Americans, destroying a valuable export market, and sending a torrent of refugees northward. A rebellion in Saudi Arabia could destroy its ability to export oil, the oil on which the industrialized world depends. And internal war in Russia could devastate Europe and trigger the use of nuclear weapons.”
All three countries, which are heavily dependent upon oil exports to sustain their economies, have been wracked by the expanding global economic crisis which has sent oil and other commodity prices into the basement.
Saudi Arabia, for example, posted a $12.3 billion deficit in 1998 due to falling oil revenues, thus dramatically increasing the possibility of social unrest. Foreign Affairs says, “As likely as is conflict in Mexico, there is even less hope for Saudi Arabia…. A country built on contradictions, Saudi Arabia is extremely vulnerable to internal war. The same factors that have kept its regime in power—the oil economy, the military, Islam, the royal family—could now fuel an insurrection. Meanwhile, global dependence on Saudi oil will only increase in coming years, making an interruption in its flow even more dangerous….
“A crisis in the planet’s largest oil producer, with reserves estimated at 25 percent of the world’s total, would have a massive and protracted impact on the price and availability of oil worldwide…. The oil shocks of the 1970s threw the United States into recession, causing spiraling inflation and a decline in savings rates that plagues the U.S. economy even now. Trillions of dollars were lost worldwide. And all this occurred at a time when the United States was less dependent on foreign petroleum than it is now. Cutting the Saudi pipeline today would cause a severe worldwide recession or depression. Short of physical attack, it is the gravest threat imaginable to American interests.”
Regarding America’s southern neighbor the article states, “Mexico today faces a future more uncertain than at any other point in its modern history,” and that it may be too late for U.S. help in conquering the “pervasive corruption financed by drug traffickers, the end of one-party rule, armed revolt and economic disaster [which] have all surfaced over the past few years.”
The article also says, “At no time since the civil war of 1918-20 has Russia been closer to bloody conflict than it is today,” and that “if internal war does strike Russia, economic deterioration will be a prime cause.” As an indicator of Russia’s present financial condition, the February 6 Economist states that “Western bankers say they would rather eat nuclear waste than lend to Russia in its current state.”
Foreign Affairs concludes, “Most alarming is the real possibility that the violent disintegration of Russia could lead to loss of control over its nuclear arsenal. No nuclear state has ever fallen victim to civil war, but even without a clear precedent the grim consequences can be foreseen. Russia retains some 20,000 nuclear weapons and the raw material for tens of thousands more, in scores of sites scattered throughout the country….
“If war erupts, however, Moscow’s already weak grip on nuclear sites will slacken, making weapons and supplies available to a wide range of anti-American groups and states. Such dispersal of nuclear weapons represents the greatest physical threat America now faces. And it is hard to think of anything that would increase this threat more than the chaos that would follow a Russian civil war.”
The scourge of war has ravaged mankind all throughout history and scripture makes it clear that not only is there the curse of lost human lives, but there are also severe financial repercussions from war. Jeremiah 5:17 prophesies that in this end time, war will impoverish our cities. Unless mankind turns from the evil in this world, the sword of war will descend on nations of this earth as at no previous time in history (Matt. 24:21; Dan. 12:1). Even now, Jeremiah 6:25 says, war and the fear of war surround us on every side. The global economy, and indeed the entire world itself, is in grave danger from the devastating and impoverishing effects of war.
The Japanese Threat
Japan continues to be a major threat to the global economy because its financial house is sinking deeper and deeper into depression, and its leaders are rapidly running out of options to turn it around.
The Japanese national debt is among the biggest in the developed world when compared with the size of its economy or Gross Domestic Product (GDP: the country’s annual output in goods and services). According to the IMF, the estimate for Japan’s fiscal year 1998 (ending March 31, 1999) is a $4.34 trillion GDP compared to a Japanese national debt of over $3.5 trillion. That means Japan’s national debt, which is growing larger by the day, is a staggering 81 percent of GDP, compared with about 45 percent for heavily indebted America. Japan’s indebtedness is proportionately even greater than America’s!
In spite of that enormous national debt, the Japanese government is continuing to borrow massive amounts of money in what may be a last-ditch effort to support its failing banks and kick-start its dying economy. Because of that immense borrowing, long-term interest rates in Japan have risen dramatically, which is forcing the yield (or return on investment) on the benchmark ten-year Japanese government bond (JGB) to rise by over 300 percent.
The major danger that high-yielding JGBs play in the global market is the fear that Japanese investors will sell their quarter of a trillion dollars of U.S. Treasury bonds to bring their money home. Such selling would mean disaster for the United States, which is dependent upon heavy foreign borrowing to keep its economy growing.
Foreigners who own America’s assets and are financing our national debt have great power over this nation. Even past verbalized threats by the prime minister of Japan and other officials that they may sell their Treasury bonds and discontinue buying have dramatically shaken our financial markets.
What is occurring today in the bond market, sometimes referred to as the debt market, brings clearly to mind scriptures like Deuteronomy 28:44, which describes the financial curses of turning from God. The New Century Version of the Bible translates that verse as, “Foreigners will lend money to you, but you will not be able to lend to them. They will be like the head, and you will be like the tail.”
As explained in the February 9 Financial Times, “The Japanese government bond market is set to overtake the U.S. Treasury market to become the largest in the world as a result of [Japan’s] planned borrowing spree this year.
“Japan will account for more than 90 percent of net government bond issuance (new debt minus redemption of maturing bonds) among the leading 18 developed economies in 1999, according to J.P. Morgan, the investment bank….
“Japanese government borrowing is a desperate bid to ward off depression after a succession of smaller fiscal stimulus packages have failed to revive the economy.”
Historically, at least for the last 15 or so years, Japan’s huge trade surplus with America has been recycled back into the U.S. economy by Japanese purchases of U.S. government bonds. Because of the availability of that easy money, the U.S. has not had to raise interest rates to attract foreign investors, and therefore interest rates have remained low, which has helped fuel the boom in stocks. This will now no longer be the case.
Global bond markets will literally be flooded with Japanese bonds, which have become more attractive to investors who now have more reason to buy and hold JGBs instead of Treasuries.
Some say that desperate times call for desperate measures. Japanese government officials as well as U.S. and other international officials are putting heavy pressure on the Bank of Japan to pursue more aggressive monetary policy by printing more money to buy Japanese government bonds. The thinking is that such a move would reinflate the Japanese economy by bringing down bond yields as well as lowering the value of the yen, thus improving poorly performing bank and export stocks, which are weighing down Japan’s Nikkei stock index.
However, such a move by Japan to weaken the yen by printing more money would endanger the global economy because a cheaper yen would also make Japanese goods cheaper in the U.S. and heighten already escalat-ing trade tensions. The WSJ of February 10 says, “The Clinton administration has apparently decided that Japan’s recovery is worth risking an even larger trade deficit [again, expected to reach an all-time record in 1999 of $300 billion]. A weaker yen might also make it harder for other recovering Asian countries to sell their wares in Japan, and could, in a worst-case scenario, put pressure on China to devalue the yuan [Chinese currency] to keep pace.” Japan is caught between the proverbial “rock and a hard place.” None of their options are good ones.
The Bank of Japan’s governor, Masaru Hayami, is reluctant to print money to buy the JGBs because he fears it would “lead to a loss of fiscal discipline” as well as uncontrolled inflation based on history. As reported in the Financial Times on February 5, “Sixty years ago, in the run-up to the second world war, Japan’s central bank [the BOJ] was forced by politicians to buy Japanese government bonds (JGBs) to fund a [pre-war defense] spending spree. This triggered a disastrous inflationary spiral, and later prompted the government to ban the Bank of Japan from buying bonds directly from the government…. The bank [says] that creating ‘a little inflation’ is extremely risky. For what started as a limited step in the 1930s rapidly spiraled out of control, with politicians using it as an excuse to raise spending further.”
A senior BOJ official is then quoted, saying, “This would be a huge gamble. If you lose central bank credibility, it will take another 50 years to recover it.”
Clearly, Japan has no good options, and her dire condition continues to be a great threat to America and to the global economy. Or, as stated in the January 20 Financial Times by Paul Krugman, the highly respected professor of economics at the Massachusetts Institute of Technology, “The [Japanese] story is starting to look like a tragedy. A great economy, which does not deserve or need to be in a slump at all, is heading for the edge of the cliff—and its drivers refuse to turn the wheel.”
The United States is under the imminent threats mentioned throughout this article as well as many other threats to its security and economy. Some of those national and international threats include impending economic collapse in Latin America; China’s fiscal deterioration and its warmongering toward Taiwan and the rest of the world; looming trade war between America, Europe, Japan, Latin America and China; the continued decline of America’s manufacturing sector as it dies on the vine due to foreign competition; and the very real threat of a biblically prophesied rising Europe posing the strongest challenge to U.S. dominance in over 50 years.
The potential for all of this to suddenly come to pass is clearly there. In spite of the glowing reports being foisted on a naïve citizenry, America is in grave danger and, therefore, so is the global economy. America is continuing its valiant fight for economic survival and is showing amazing resilience, but without national repentance and a return to the true God, biblical prophecy indicates fearsome times ahead.