- Three Scenarios of the Global Collapse
2019 has started more calmly after a very volatile year-end in the markets. Focus has been on the trade deal between China and the US and the words of the central bankers, most notably those of Jay Powell. However, this is all just a distraction, a side-show. The market volatility was only the first sign of an approaching global economic crisis, as we warned in December 2017.
As the recent PMI figures across the globe show, a global downturn has started and the world is utterly unprepared for it. The global imbalances that have been growing for years cannot lead to anything else than a global crisis . However, there are different paths the crisis could take.
Here, we present three scenarios that the global economy is likely to follow, when the global downturn morphs into something much more sinister. We’ll start with the most likely scenario: Global Depression.
Scenario I: Global Depression
In a depression, everything that has been driven the economic expansion goes into reverse. Asset markets experience severe contraction (in excess of 50 percent), credit becomes restricted, corporations and households de-lever fiercely, and global trade flows stall (for more details see Q-review 2/2018). GDP falls dramatically, between 10 to 25 percent. Unemployment skyrockets. The standard means of stimulus by central banks and governments are exhausted without any notable improvement in the economic environment.
The implosion of the current asset bubble will start a relentless unwinding of leverage and risk in the global financial system. Because major central banks are still “all-in” with rates pinned at or near historic lows, and balance sheets bloated to extreme levels, their ability to respond will be highly restricted. Governments are also highly-indebted, and when interest rates rise, some sovereigns are likely to default, aggravating the global banking crisis, which will probably be in motion already. Combined with the zombified global business sector and a hard landing in China, these factors will lead the world economy into a depression. However, a possibility of something even more ominous is lurking in the background.
Scenario II: Systemic Meltdown
Systemic crisis would mean that the global financial melts down due to an existential deficit of trust between counterparties within the system. Before 2008, a systemic meltdown was mostly a theoretical construct. However, in mid-October in 2008, global leaders were faced with the possibility that banks would not open on Monday. The interbank markets had frozen, because no one knew the amount of the losses banks carried on their books. The global financial system was grinding to a halt. Politicians and central bankers saved the day by guaranteeing bank deposits and by providing capital and extraordinary guarantees to keep the important financial institutions standing and credit flowing.