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Thursday, August 30, 2012

Why is the global economy slowing?

We don't have fear, panic or stock market crashes this year and yet the global economic data as a whole is the worst it has been since 2009.  I believe this is a much more serious problem than people think precisely because the down turn is not being caused by panic.  If it is not fear and panic then what is causing it?  I think there are three main causes.

 1. High food prices. Check out the food price index.


Food prices in mid 2008 helped to slow the global economy.  The big move down in food prices into 2009 helped revive it.  Is it a coincidence that the surge in food prices in 2011 above the 2008 highs corresponded with the beginning of the global economic slow down?  Prices have remained high and the global economy is still slowing.  People in emerging market countries spend a lot more of their monthly income on food and energy then the developed nations.  These high prices are surely a drag on those economies. 

2. High energy prices.  Here is the oil futures chart.

Oil prices have not gotten to the stratospheric levels of 2008.  However, the spike up to $100 in early 2011 does correspond with the start of the slow down in the global economy.  Even though prices did not stay above $100, they have stayed relatively high.  I am sure this is a drag on emerging markets especially.  The plunge in food and oil prices in 2008 and early 2009 probably did more to revive the global economy then the stimulus.  I have no way of proving that of course, but that is my opinion.  History shows the price of oil alone can have a huge affect on the economy.  Remember the oil price spike induced recessions of the 1970s.  I think that is still the case today.

3.  If you have been reading this blog for a while you must have some idea of what I think one serious problem is.  Que the band please.  Too much debt. The world wide overhang of debt is dampening final demand (to use one of Greenspan's favorite sayings).  Believe it or not the world cannot spend its way to prosperity.  Some civilizations have tried in the past.  If it had worked for Rome, Latin would most likely be a widely spoken language today instead of a dead one.  Here is a very interesting article about debt and the causes of the great depression, the great recession, and the Japan crisis.

There are more countries in the world today with a debt bubble then there were at the start of the great depression.  It is mind boggling to me why so many economists think debt is not a problem.  The mathematics of the costs of servicing the debt guarantee there is always a limit to the amount of debt an economy can support. Until the entire world deals with the debt problem, the global economy is going to suck.  No amount of new debt is going to fix the problem, it only makes it worse.  This isn't rocket science and yet so few global leaders actually understand it.


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