by Bobby Akart
Another observation we should make is that regardless of our measures to correct the problems, the time between crashes has decreased. We had centuries of market crashes, then decades, and now years. We cannot say whether this foretells anything dire for the future, but the best thing you can do is keep yourself educated, informed, and well-prepared by doing research.
Chapter Sixteen
Who's Next?
There are as many as two dozen nations around the globe facing a full-blown debt crisis which puts them on the edge of economic collapse. Overall, the debt to GDP ratio around the world is nearly three hundred per cent. The total amount of debt outstanding is well over $200 Trillion. Nations have stopped looking for solutions and have actively pursued an easier alternative to dealing with their incredible debt. They delay. Let's take a look at some of the more prominent examples, followed by a dozen or more nations on the brink.
Latin America, especially Mexico, Venezuela, and Brazil
Falling oil prices and uncertainty in the world's largest economies appear to have hit the three biggest economies in Latin America hard. These economic struggles, when coupled with political instability, indicate that the region will face dire financial consequences into 2016.
Brazil is Deteriorating Rapidly
The largest economy in Latin America is a shadow of its former self. Economic activity is estimated to be shrinking at five percent per year. The hopes of a boost from the upcoming Olympic games have been doused as a result of Zika virus fears
According to economists, growth is unlikely to return before 2018—seven years of zero or negative growth for Latin America's largest economy.
At the beginning of August 2015, the Brazilian currency was trading against the U.S. dollar at its lowest level in years, and inflation has been predicted to surpass nine percent, which prompted a half-percentage-point hike in interest rates by the Brazilian central bank in 2015—the largest rate hike in a decade.
Activity in Brazil's service sector was at its lowest point since the world financial crisis of 2007-2009, and the unemployment rate grew to nearly nine percent in the second quarter of 2015, as nine million of the country's two hundred and four million people became jobless.
Consumer confidence has fallen to its lowest level since 2005 — when measurements began — and Moody's downgraded the country's bond rating to Baa3, with a negative outlook.
Economists at Moody's opined that the "combined output of the manufacturing and service sectors suffered the largest fall since early-2009. Weak demand, high-interest rates, fiscal tightening, strong inflation and rising unemployment are expected to continue to hamper activity."
The economic calamities facing Brazil has caused considerable political instability. This downturn would, on its own, likely be enough to imperil any government. But there's also a wide-ranging corruption scandal involving the state-owned oil company Petrobras that has ensnared many leading politicians, including President Dilma Rousseff, and has led to a wave of resignations and indictments.
The resiliency of Brazil's democratic institutions signals that the country may survive this contentious political atmosphere. If the government doesn't sink with the nation's economic ship, the independence of the judiciary and continued investigations by law enforcement suggest that, in the end, it may strengthen the quality of Brazil's democracy, forcing it to open up and become more accountable.
As for the economy, the jury is still out. Consider this recent reporting from CNN:
"Amid political chaos, Brazil's economic collapse is worse than its government once believed. In the midst of rising calls to impeach President Dilma Rousseff, Brazil's central bank announced Thursday that it now expects the country's economy to shrink 3.5% this year. That's worse than the central bank's previous estimate for a 1.9% contraction. The darker forecast matches what the International Monetary Fund projected for Brazil — Latin America's largest country — and what many independent economists have suspected."
Mexico's Ailing Economy and a Crime-Filled Nation
Latin America's second-largest economy faces its broad set of challenges. Mexico opened 2015 with a GDP growth forecast that reached as high as four percent. Throughout the year, growth estimates shed percentage points, with the final number reflecting just one percent growth.
Some Mexican states, those with trade links to the US, have continued to grow, while others — ones with energy-focused economies, in particular — have slowed faster than expected.
Other national trends have stoked concern. The Mexico peso reached a value of seventeen to the dollar in late 2015, which was a new historical low signaling a fifteen percent depreciation over the previous year. Many Mexicans blamed the government for the tumble, and a majority, when polled, doubted it would recover.
Some economists have suggested a cheaper peso could boost exports, but depreciation in other national currencies appears to have stalled that increase. One Latin American expert on emerging markets, Carlos Petersen, cautioned, "The Central Bank of Mexico has argued that given the orderly depreciation of the peso, prices have not been affected, but this cannot be discarded from happening in the future."
Many other regional economists, however, claim that a weakening peso at a time of stagnant or negligible economic growth could trigger a debt crisis as the dollar-denominated debt held by Mexican corporations with peso-denominated operating income becomes increasingly difficult to service.
As a result of this economic downturn, Mexican workers have experienced growing poverty and a striking wealth gap. The numbers bear this out. By the end of 2012, more than half of all Mexicans were living in poverty. Two million more joined them by 2014. By the end of 2015, more than half the country reportedly fell short of the monthly minimum income level that is set by the Mexican government.
Mexicans also saw their purchasing power decline, and, between 1994 and 2012, wages grew just two percent when adjusted for inflation. Regarding real GDP growth, Mexico is eighteenth of twenty countries among Latin American economies.
On the other end of the spectrum, only twenty-five hundred Mexicans — about two-thousandths of a percent of the population — hold forty-three percent of the country's total individual wealth.
In addition to economic hardship, many Mexicans have also had to endure widespread violence. In 2015, a multitude of innocent Mexican citizens have been killed in suspected attacks by police, hundreds of migrants have been kidnapped or killed, journalists have been slain, and politicians have been assassinated without hesitation.
Despite the fact that Mexico faces a mixed economic outlook, the weakening currency has not yet led to inflation or higher prices. The goal of the weakened peso, a major boost to exports, has not materialized. Unlike the major economic nations of the world, the Mexican government has few tools to meaningfully boost growth, which is an indicator that its economy will only worsen in the years to come.
Venezuela is on the Verge of Economic Collapse
As of spring, 2016, the only question on economist's mind is whether Venezuela's government or its economy, will completely collapse first. At the start of 2014, economists at Barclays declared the economy of Venezuela to be beyond the point of no return and that a bankruptcy in 2016 will be near impossible to avoid.
Both the socialist government of Nicolas Maduro, and the economy which suffers under his rule, are under tremendous pressure. In recent elections, Venezuela's ruling party's losses gave the opposition a veto-proof majority. Recently the UK Independent added, "it's hard to see that getting any better for them anytime soon. Incumbents, after all, don't tend to do too well when, according to the IMF, their economy shrinks ten percent in one year, an additional six percent the next, and inflation explodes to 720 percent."
Bloomberg reported that the inflation rate for 2015 was in excess of 275 percent, and that the 2016 number will easily surpass 720 percent. It's no wonder, then, that markets expect Venezuela to default on its debt in the very near future. The country is te
chnically bankrupt.
That's not an easy thing to do when you have the largest oil reserves in the world, but Venezuela has managed it. How? The first step was when Hugo Chávez's socialist government started spending more money on the poor, with everything from two-cent gasoline to free housing. The problem with these socialist policies is that the Venezuelan government didn't have the money. Despite having one of the planet's most precious commodities, oil, the Chavez government destroyed the economic potential of being a part of OPEC.
Chávez turned Petróleos de Venezuela, S.A. (PDVSA), the state-owned oil company from being professionally run to being barely run. People who knew what they were doing were replaced with people who were loyal to the regime, and profits came out but new investment didn't go in. The destruction of PDVSA was particularly devastating because Venezuela's extra-heavy crude needs to be blended or refined — neither of which is cheap — before it can be sold. So Venezuela just hasn't been able to churn out as much oil as it used to without upgraded or even maintained infrastructure. Specifically, oil production fell twenty-five percent between 1999 and 2013.
The rest is a familiar tale of fiscal woe. Even the triple-digit oil prices of summer, 2008, weren't enough to keep Venezuela out of the red when it was spending more on its people but producing less crude. So it did what all poorly run states do when the money runs out—it printed a lot more. When the crude oil prices started collapsing in mid-2014, Venezuela fired up the printing presses even more. The result of all this money-printing is that Venezuela's currency has lost over ninety percent of its value since 2014.
The Maduro government has tried to deny economic reality with price and currency controls. The Washington Post summed up the scheme this way:
"The idea was that it could stop inflation without having to stop printing money by telling businesses what they were allowed to charge, and then giving them dollars on cheap enough terms that they could actually afford to sell at those prices. The problem with that idea is that it's not profitable for unsubsidized companies to stock their shelves, and not profitable enough for subsidized ones to do so either when they can just sell their dollars in the black market instead of using them to import things. That's left Venezuela's supermarkets without enough food, its breweries without enough hops to make beer, and its factories without enough pulp to produce toilet paper. The only thing Venezuela is well-supplied with are lines."
The failed policies of Socialist President Maduro has hastened the collapse. He has changed the law so the opposition-controlled National Assembly can't remove the central bank governor or appoint a new one. Also, Maduro has picked a staunch socialist who doesn't believe in the concept of inflation but is a firm believer in corporate greed. During his first speech after being appointed by President Maduro, Governor Eudomar Tovar said:
"When a person goes to a shop and finds that prices have gone up, they are not in the presence of 'inflation,' but rather "parasitic" businesses that are trying to push up profits as much as possible."
According to the Governor's theory, printing too much money never causes inflation. And so Venezuela will continue to do so. If past examples of hyperinflationary periods are any guide, this will keep going until Venezuela can't afford to run its printing presses anymore, or until radical regime change takes place, whichever comes first. But for now, Venezuela is a modern day example of the failed economic policies followed by the Roman Empire, and others.
In the United States, there are still people who doubt that an economic crisis is happening. But in Mexico, Venezuela and Brazil there is no debate.
Unfortunately, what is happening in Venezuela and Brazil is also slowly starting to happen to most of the rest of the planet as well. It is just that they are a little farther down the road. Economic and financial bubbles are bursting all over the world.
"Deflationary tides are lapping the shores of countries across the world, and financial bubbles are set to burst everywhere," said Vikram Mansharamani, a lecturer at Yale University, during a CNBC interview at the Global Financial Markets Forum in Abu Dhabi in January 2016. He continued, "I think it all started with the China investment bubble that has burst and that brought with it commodities. That pushed deflation around the world and those ripples are landing on the shore of countries literally everywhere."
Russia
Despite outward appearances to the contrary, some economists argue that the days of Russian President Vladimir Putin's regime are numbered. As the countdown to Russia's economy demise begins, many experts are predicting chaos for Russia. The Russian economic conditions have been affecting a broad swath of Russians since the beginning of 2015 and the collapse of world oil prices.
HSBC economists report not only have wages in Russia not increased, but an increasingly large number of Russian firms have also started delaying payment of wages. The value of the Russian ruble is plummeting day by day, losing value to the US dollar consistently throughout 2015— to its lowest levels since the end of the 1990s.
The collapse of Russia's economy is explained by plummeting oil prices, which dropped to below $30 per barrel. Further, Russia's budget is in an unsustainable, high deficit condition, as it directly depends on rising oil prices.
Meanwhile, Russia's bank system is imploding, leaving Moscow without sufficient funds for its operations. With Western economic sanctions put in place during the Crimean and Ukrainian conflicts, Russia is limited in its options to seek assistance.
These sanctions have curtailed Russian access to funding based in dollar and euro currencies, leading to a contraction in access to cash for Russia-based companies that have a $44 billion amount of debt payment due in 2016. The Russian economy is heavily dependent on the energy sector, and plunging oil prices from the second half of 2015 onwards has hurt the Russian economy further.
The Ukraine crisis prompted a number of governments to apply sanctions against individuals and businesses from Russia and Ukraine starting in March 2014. Sanctions were approved by a combination of nations including the US, the European Union and numerous other countries and international organizations.
Russia has responded to this with sanctions of their own against a number of countries. These Russian sanctions now include a full ban on food imported from the EU, US, Norway, Canada and Australia. Both of these sets of sanctions applied to Russia and Russia's import bans in response have contributed to the collapse of the ruble and the 2014–16 Russian financial crisis.
As a result, businesses and investors have been leaving the nation — in particular there has been a flight of global banks out of Russia's borders. Along with these banks, there has been a reduction of capital, further exacerbating the fall in the ruble's value.
Faced with the economic downturn and its consequences, many of these banks have had to face up to the reality of their toxic-asset holdings, and this has forced them to close down or merge with other banks. The banking and financial-services sector has grown to a disproportionate, hard-to-control size. It appears that only those with the largest, most resilient balance sheets will be able to survive the turmoil that the Russian economy is suffering.
Economists predict that no matter what emergency measures Russia's leadership is willing to take, the outcome does not look good for the country. Russia's economy is approaching its demise.
Russia is on the brink of economic collapse, a British economist has warned. William Browder, CEO of Hermitage Capital (a Russian-focused investment firm) warned that Russia is approaching chaos due to global oil prices. While Moscow is hanging on, for now, Mr. Browder, a long-time critic of Putin's regime, warned that Russia is about to fall into a huge and deep hole of economic collapse. The investment manager explained that Russia's aggressive actions in Ukraine and Syria were to blame for Russia's current economic crisis, since the West imposed economic sanction on Putin's nation, destroying any hopes for economic growth.
This is exacerbating matters as oil prices worldwide have plummeted, hitting hard Russia's biggest exp
ort. "I don't think you can underestimate how bad the situation in Russia is right now. You've got oil below any measure where the budget can survive and you've got sanctions from the West. Russia is in what I'd call a real serious economic crisis," Mr. Browder told CNBC.
Russia's Central Bank is keeping the country's economy together for now, largely thanks to burning through cash reserves. "Eventually they're going to run out of that money and when they do, that's when the real trouble begins," Browder added in an interview with the UK Daily Mail. He also suggested that economic sufferings of Russia have led Putin to become a more nationalistic leader with a strong geopolitical position. As a result, the Russian President has oppressed his people and made a scapegoat of Western civilization.
Are the days of Putin's regime numbered?
Russia's ruble has depreciated by twelve percent in the first quarter of 2016. Its rise and fall can be directly attributed to crude oil prices. Russia has virtually no economy except its oil exports. Given the economic decline in China, the demand for oil has significantly decreased, but more importantly, there are more oil producers around the world, especially in the U.S.
Between the shale revolution, Saudi Arabia's refusal to cut down on oil production and lifting sanctions against Iran for its nuclear program, the production of oil on the global oil market reached one-and-a-half million barrels a day according to estimations made by the International Energy Agency. As a result – oil prices have decreased by $95 to as low as $30 per barrel.
If oil prices continue to fall, the ruble continues to depreciate, and Russian leadership takes no immediate emergency measures, Russia's days will be numbered. That's a bad sign for the future of Putin's crumbling regime.
Italy's Banking System, like the Greek banks before it, is on the verge of collapse.
