Saturday, June 22, 2024

Key Issues in Economic Collapse

Cause of Economic Collapse:

1.  We are talking about economic collapse, not economic decline. Decline is gradual, collapse is sudden.

2.  Many sources of the collapse can be identified once the economic collapse has occurred. But the economy collapses on its own, when it has reached a certain level of growth such that production exceeds the ability of consumers to absorb even including speculative buys in tangible or financial assets.

3.  The economy collapses when investor and consumer confidence collapses. Investors invest and consumer consumes recklessly when they think that the bull run is going to continue forever. Greed takes over prudence and satisfaction. There only needs to be one incident that wakes everybody up, to break the hypnosis, to break the trance and get the rational mind to take over. In this case, Covid-19 which disrupts the supply chain and the oil price hike on the invasion of Ukraine which sharply contracts real wages and real incomes.

Problems arising from Economic Collapse:

4.  At the international level, the confidence of international debt holders, namely, the surplus countries. The major debt instrument is the US dollar which has been off the gold standard since 1971 as a result of overissuing of the US dollar with respect to the price of gold. Fiat money is important for stimulating growth of the global economy especially during an era of rapid innovation and technical progress. But it also suffers from the problem of overissuing with respect to economic growth resulting in unwanted inflation. The quantitative easing of the last four decades has been good in jump-starting the China economy which reawakens its self-confidence. In the world of friends, this would have been a golden age. The problem is that now China wants to exert its superiority in the world economy. But China sees its wealth to be in the US dollar which destresses it so it wants to get rid of the US dollar in exchange for more tangible assets to hold. It goes to Africa to acquire precious minerals. Monopsony. It buys gold, seen to be most precious of metals. This issue that China has over the holding the US dollar is principally politically driven which is legitimate but which may take a decade or so to adjust. The question then becomes - what is the alternative international reserve currency? The IMF has thought of the SDR which has not worked. It would seem that BRICS wants to issue a new international reserve currency based on their gold holdings - which probably is valued in US dollars. (The dumping of the US dollar to buy gold means that the price of gold will be high in US dollar terms, but this would then not be a good measure of the value of gold.) This raises the question of who is going to manage this new international reserve currency, who determines the ration of its issuance to the "value" of gold. There also needs to be confidence in holding this new reserve currency, which then requires its value to be stable - by some measure. All these issues need time to work out. So, good luck to BRICS in their noble intentions. Of course, Russia is supportive of BRICS because then there will be an alternative banking system not based on the US dollar, so that the US cannot easily sanctions its enemies. There are forces for an alternative reserve currency but there must be basis to build that confidence to hold the wealth of nations in.

5.  A major feature of China's economic growth is that it has to and it has built its productive capacity by major lumpy lots. The capacity to build to build cars, for example, cannot be to increase a few more cars each time, but probably thousands more cars per unit factory expansion. This goes across the board among the industries, from industries to real estate and the wholesale and retail businesses. With the contraction of its domestic consumption, it is naturally that China will have to export its surpluses, probably at a discount in order to clear existing stocks with or without any further new production. Productive overcapacity can always be solved easily through retrenchment of manpower and equipment. It is usually the unsold inventory that produces the headaches. In real estate, unfinished real estate that has already been sold are useless but buyers are stuck with mortgage loans and banks with non-performing loans, accentuated by rising unemployment. In Japan during after the bubble burst, the trick was to book the bad loans in another company and out of the books of the banks so that lending can continue to feed the economy. Debtors were allowed to take decades to try to repay their loans. The Japan dragged along the bottom for decades. For China, the economic collapse may have major implications on social sentiments. Many policy issues for the politicians to tackle.

6.  The dumping of the US dollar bonds increases its discount rate and raises the US interest rate. This add pressure on international inflation as all other currencies depreciate against the US dollar. And domestic prices all increase, on top of higher oil prices and the price increases from supply chain disruption due to diseases and wars.


7.  Malaysia has a small problem of having a new government that attempts to clean up the system. This means destroying the old networks and building new ones. This requires new investments - foreign? At the same time, the civil system has become such a fiscal burden for the federal government, being weighed down by a generous pension system to the extent that it is becoming worthwhile for the government to risk heightening consumer price inflation by removing subsidies starting with diesel. The domestic currency is allowed to weaken not only against the US dollar but also neighbouring currencies. The economic system continues to be stuck in the old mode, with the Approved Permit for imports (of cars) now liberalised to the entire entitled section of the population. In such measures, the local economy shall continue to limp and hopefully forward.

Concluding Remarks

The point is that the entire world is in a mess with a global economic collapse mixed with a desperate attempt to re-orientate the global system to an unknown new one. This is nothing new - after all, all these could be done in the name of revolution. We are now living in interesting times.