Editor’s note: While I’m about to issue a warning about the risk of a major economic crisis, it’s not all bad news. My fellow contributor here at Fortune & Freedom, investment director John Butler, is sharing his personal portfolio strategy to help guide you through the ups and downs of the economy. Find out more from John himself right here.
In today’s issue:
- Don’t march across a suspension bridge
- Economic resonance is just as dangerous
- The GDP suspension bridge is about to snap
Ever seen the army march across a suspension bridge? It’s a trick question. They don’t. And, next year, our global economy is going to find out why…
It’s all got to do with something called resonance. But this isn’t a science lesson. So we’ll stick to history to explain.
In 1831, 74 soldiers marched over the Broughton Suspension Bridge near Manchester. They were in step. This synchronised vibration caused the bridge to bounce more and more with each stride.
Apparently the soldiers enjoyed the bouncy phenomenon. They began whistling a tune. This was one step too far for the bridge. It decided enough was enough and fired back with “a sound resembling an irregular discharge of firearms”. Something had snapped.
The bridge threw about 40 of the soldiers into the shallow river. Pride aside, the injuries were light.
The British Army learned its lesson that day. It pre-emptively surrendered to all suspension bridges around the world. And still breaks step when crossing them.
Economic resonance is just as dangerous
My worry is that Europe, China, the US and much of the rest of the world are about to demonstrate the economic version of the Broughton Suspension Bride story.
GDP is taking a globally synchronised downturn. And that’s unusually bad news.
The synchronised nature of the downturn creates the risk of resonance – the economies dragging each other down even further by exacerbating each other’s declines.
It tells us means something could outright snap. Probably in financial markets.
Here’s why…
Booms, busts and bubbles
Your regular booms and busts are a normal part of the economy. So say some economics textbooks, anyway. I’d argue they’re caused by government and central bank intervention. But that’s another story.
The business cycle used to be known as the trade cycle. That’s because booming and busting countries offset each other’s fortunes via trade.
That’s why early economists focus so much on the trade balance. It is a proxy for whether an economy is performing above or below its long-term potential. Is it buying more than it produces, or vice versa?
An exporter has a booming economy while an importer has a stagnant one. But trade balances self-correct eventually. This takes place when the country living beyond its means eventually gets its act together and becomes economically competitive with its trading partners.
The fact that trade balances eventually self-correct, in a free market system, is what makes the trade cycle a cycle. It implies a turn in fortunes. Booms turn to bust and vice versa.
The best example of this was between the 17th and 18th century, when Britain’s sheep-driven economy was booming despite Spain having all the South American gold. Why? Because the Spanish used that gold to buy British goods. It stimulated the British economy instead of the Spanish one.
But what happens when countries experience a synchronised slowdown? When countries can’t drag each other out of the malaise by rebalancing trade flows? When their resonance creates thew risk of something snapping?
We’re about to find out…
The GDP bridge is about to snap
The world’s major economies are all stuck in the doldrums or likely to enter them soon.
The UK’s GDP flatlined for the second month in a row in July.
Not to worry, Labour’s economic policy will fix this shortly. Higher taxes, more environmental regulations and cutting oil exploration always does.
I’ll let Ambrose Evans-Pritchard of the Telegraph sum up the situation in Europe:
Europe has been worrying about economic decline and techno-stagnation for a quarter of a century. The gnawing angst has finally given way to something closer to panic.
The Europeans have a plan to fix things too. Italy’s former prime minister and former head of the European Central Bank, Mario Draghi, of all people, is urging the EU to reform and become more productive.
Who does he think caused the problem in the first place!?
The US yield curve has uninverted. The Ahead of the Herd blog did the maths for what this means: “The yield curve has inverted 28 times since 1900, and in 22 of those times, a recession followed.”
Germany’s industrial production continues to resemble a slow-motion train wreck. The economy will follow.
The Germans are so short on GDP that they’re having to shuffle it around to keep up appearances. “Germany is reportedly considering counting motorway repairs as a defence expenditure in an attempt to hit Nato’s 2 per cent of GDP target.” It’s not clear whose army they’re paving the way for either.
In China, the economic data is bad enough to get blamed for dumping the global oil price.
Australia’s GDP is still growing. But it is in the midst of the worst household disposable income and consumption crunch since before the 70s, by a long shot.
Japan’s GDP growth is oscillating around zero, despite my attempts to buy up the local wagyu market each week.
Only India and Russia seem to be bucking the trend by growing.
Why are so many regions of the world getting into economic trouble at the same time?
The price for allowing inflation out of the box must now be paid. High interest rates are crunching GDP everywhere at the same time. And we’d need one hell of a catalyst to get us out of this mess.
Something that can revolutionise our GDP, labour productivity, debt serviceability and reverse our demographic decline.
What’ll snap GDP’s suspension?
Unless someone comes up with something like this soon, we await the economics version of “a sound resembling an irregular discharge of firearms” that signals something has snapped. Then we’ll get dunked into the river.
Personally, I think that volley will come next year, when President Trump releases his tax policies. He’ll get the Liz Trump treatment at worst. And the Tsipras/Salvini treatment at best.
The question is how much chaos it’ll cause in the meantime. Either way, the US budget is in enough trouble to cause a crisis. Especially if GDP turns down too.
Other possibilities include an economic crisis in China. Or a genuine attempt to reach net zero.
Until next time,
Nick Hubble
Editor, Fortune & Freedom
