Governments around the world are tightening budgets, reducing spending, at the same moment that consumers are still slow to spend and businesses slow to invest. (Update end of October: later data show the US consumer has been saving less lately and spending somewhat more, so this situation is still salvageable if governments avoid simultaneous deep budget cuts. But, it appears cuts are in the cards. Only China and Germany, those nations with the giant surpluses, are in a good position to change the tune.)
Everybody together spending less results in an economic death.
It's the Savings Conundrum writ large.
As I wrote, The World Is Not On A Pleasant Course.
An end is now in sight, an absolute end of our current world order. The beginning of the end of this period of stability we've know most of our lives.
AEP's prediction of the rise of a new protectionist American trade bloc -- free trade among cooperating nations behind high tariff walls to exclude currency manipulators like China -- this is a best possible scenario.
It's a best scenario. A hopeful one.
One that has hope of avoiding the spiral to increasing hostility that would result from general global economic collapse.
Let me be clear. I'm talking about not only global economic depression, but further, the possibility of increasing tensions that would set the stage for large-scale wars between major nations.
War like we haven't seen since the 1940s.
That's the less favorable possibility than a new American Trade Bloc which ends trade with China on current terms.
Readers may notice this post is more alarming than posts I've written before. This is because the mistakes of nations around the world are all aligning in the same direction and negative momentum is building rapidly.
The last-chance alternative to these radical changes is for the major surplus nations -- China, Germany and Japan -- to spend roughly the equivalent of all of their trade surpluses in ways that will create income and spending at home.
Chinese and German spending could rescue the world we've known: improved retirement stipends, infrastructure investments, consumption incentives, and even purchases of goods from deficit nations. For example, China (which still has a significant sector of command economy) might buy more Boeing airplanes, and much more. Or simply move to free trade.
Especially, China could end domestic piracy of foreign goods and thus allow US software and movies to earn their fair returns in the Chinese markets.
That would be very different. That would be just normal trade as most people understand it -- you pay for what you get, instead of stealing it.
There is a more basic opening that is ultimately needed.
An end the Chinese trade-war via currency peg and the German trade-war via European Monetary Union would tremendously benefit the global economy, and therefore benefit China and Germany in short order (within years).
In fact, only such true free trade (with freely floating currencies) has any chance of creating healthy global growth, which China and Germany need to thrive.
It's in their national interests.
These changes are the only method of preserving the current world order.
But that doesn't mean they will see it. Psychology normally rules over reason and facts.
As global riots haven't been sufficient yet and economies still sputter along for a while, China and Germany are likely to continue to maintain comfortable national illusions for now, and perhaps always.
They will likely drive the world into collapse, and most of their citizens will wonder why all other peoples in the world are so irresponsible and wrong....
Thus it is more likely the current world order will end.
Expect the death throes to be painful.