Musings on the Coast

An Economic Primer for the New Year

If you are worried about our economy, you have a lot of company. The stock and housing markets are off and a lot of people are scared.

In my business, I have two main jobs: obtaining funds for our real estate projects and predicting the economic cycle. The second task is the more important. No matter how smart you are or how good your product, the market is king. No one can beat it. One can only work within its boundaries.

So, here we go. Here are the things going wrong:

1. CHINA: Biggest problem: a rapidly aging population. Reason: one-child policy. Next: China is so over-leveraged it is in free fall. The government owns the four big banks. If China had the same transparency rules as the rest of the world, all four would be broke. To deal with over-leveraged corporations, those same banks, and most others, are cutting back on new loans and calling old ones. Loan defaults are now common. Anyone with any money is attempting to get it out. In response, the government is making it more difficult to transfer cash out of the country. Further, to shore up its currency, China is selling U.S Treasury bonds. Gravity exists, even for China.
2. EUROPE: Biggest Problem: an aging population. There are fewer workers to support the EU’s expensive social support system, and now the source of new people, immigration, is under attack. Individually, Germany, the EU’s biggest economy, is slipping. France has riots over tax increases. Italy, Greece, Spain and all the southern countries are broke. Dictators increasingly run the eastern members of the EU and their aim is to copycat Russia and rip off as much as possible. And if some EU members try to mimic Brexit and exit the EU, all bets are off.
3. ENGLAND: Biggest problem: an aging population. It needs more immigrants, but Brexit was/is an anti-immigrant ranting statement. Further, the Brexit vote, (BTW, Russia fixed that one, too) is beyond economically idiotic. It is akin to shooting one’s own head because you have a headache. Financial firms in London, which are the pillar of England’s economy, are leaving. And if Brexit actually happens, Ireland and Scotland probably will renounce their allegiance to the U.K. and join the EU. For them, Brexit means the relocation of London firms into their territories. England’s idiocy is their good luck. In the meantime, due to Brexit unknowns, the UK is stuck in neutral.
4. JAPAN: Biggest problem: a rapidly aging population. Further, the Japanese collectively have decided to return to what it was before Commodore Perry steamed into its waters in 1853. It wants isolation, no immigrants, just pure Japanese. If that means Japan’s population is bound to shrink, so be it. And except for defending its borders, Japan has had enough on the world stage. They are taking their huge cash hoard and investing it conservatively and mostly wisely, but as an international player who drives the economy, those days are over. And their GDP numbers are declining.
5. RUSSIA: Fun fact: The GDP of Russia is only about 60 percent of California’s. It had potential after the fall of Communism, but that potential is gone now. Putin turned it into an oligarchy, with the rich ripping off everyone else. He also has converted Russia into a colossal source of international instability. It is manipulating elections in all major countries and turning them more brutal. This is not good for the international economy and it is not stopping.
6. THE UNITED STATES: Biggest problem: an aging population. This used to be mitigated by relatively easy immigration, which was America’s saving economic grace. Despite right-wing rhetoric, all immigration, even from very poor countries, creates economic vigor. Immigrants come here for better futures, work harder, create more jobs, save more, and always increase the economic growth rate. Now, prompted by Trump because it is good for his politics, the U.S. has slammed down the immigration curtain. This is bad for us (aging population). Next: we’ve been the world’s biggest buyers, but we are slowing down. When the Fed lowered interest rates to near zero, corporate America went on a borrowing spree and now has way too much debt. Not good. Corporate bankruptcies are accelerating and could create another crisis. The sugar high from the business tax cut is over and it was a failure; real new investment did not occur, only more corporate dividends. Now we have a trillion-dollar U.S. deficit at the end/top of our economic cycle: fiscally insane. Finally, there is one big point to be made: at first, business America basically ignored Trump. Yeah, he was crazy and he tweeted a lot, but he did not create much real financial damage. Those days are over. His cumulative affect now is widely considered economically pernicious.

In summary, my friends in Laguna Beach, buckle up. The next recession is just around the corner.