“UN warns humanity ‘one miscalculation away from nuke annihilation’…” – AP News
The beating of war drums has grown louder, the language barely restrained. If kinetic warfare erupts between the U.S. and either China or Russia, it will instantly become a war against both. Other nations will pick sides. It will be impossible to find gasoline.
The price of gold will go to the moon!
We are not going to waste a great deal of digital ink on war speculation following the Pelosi touchdown because the prospects are simply too grim to imagine. Still, war risks remain. One can only hope and pray that in the days to come, cool heads will prevail like they did during the Cuban missile crisis 60 years ago, the last time the world stood close to a nuclear conflagration.
Keeping one eye on international matters, we turn to economic developments and recession.
Washington’s feeble protest that the country is not in recession despite the evidence of two consecutive quarters of economic contraction is provoking some humor.
One wag says that is right, that the country is not in a recession. That is because it is really in a depression!
It’s a caustic remark, but fortunately, we’re not there… yet.
Could it happen? Could a depression be in our future?
The four biggest economies in the world, in order, are the U.S., China, Japan, and Germany. It is, as the talking heads continually remind us, a global economy. If a couple of those economic powerhouses turned down sharply, the rest of the world would be plunged into a self-perpetuating nightmare depression.
If we look for countries that can be pulled down by events taking place today, both China and Germany must be on our radar.
Retail sales in Germany fell hard in June, falling 8.8% from the same month last year. The worst may be yet to come.
Colonel Douglas Macgregor, a former senior advisor to the Secretary of Defense, spoke recently about the severe European energy crisis ahead this fall and winter from the Ukraine war sanctions on Russia. “Europe is not prepared to withstand the onslaught of no liquified natural gas…. Anybody who lives north of Rome is in trouble.”
“The German standard of living is under very serious threat,” says McGregor of the sanction’s fallout. There is no more common accompaniment to a depression than trade wars. Indeed, they define one another.
Whatever transpires from the Taiwan brinksmanship, one can be sure it has put Chinese export restrictions on the table for the future. The list of U.S. economic essentials, in addition to microchips, that come directly from China has grown staggeringly long.
In what we have called a “high alert development,” China’s holdings of U.S. government debt have now fallen below $1 trillion. That is a substantial drop. At one time, China had $1.3 trillion in U.S. government bonds.
Meanwhile, China’s internal problems grow by the day, with both a banking crisis and a growing mortgage boycott characterized by a reported 100 million unoccupied apartment units. Real estate accounts for 29% of China’s GDP, so the popping of that bubble will be felt far and wide. Our memories are long enough to recall what happened here when our own mortgage bubble popped: the steepest downturn since the Great Recession.
Perhaps we will comment more on Japan some other day. For now, under the old saying that demography is destiny, we point to the economic fragility inherent in Japan’s demography. This is best synopsized by Kyle Bass, who points out that Japan sells more diapers for seniors than it does for babies.
A recent Wall Street Journal article detailed the stresses in American households:
The past week revealed new evidence from companies and the government that household spending is increasingly strained. Families are paring back purchases of items such as electronics and furniture as prices for essentials like food and gasoline have become more expensive. Inflation drove consumer spending in June to a new four-decade high while personal incomes fell when adjusting for inflation and taxes. Two of the country’s biggest retailers, Walmart and Best Buy, warned last week that a steeper-than-expected pullback in shoppers’ spending would crimp their profits.
There is not much to cushion the consumer in a downturn. Residential real estate is headed lower, drying up home equity. Home sales are slowing, and purchase contracts are being canceled. More than six out of ten Americans are said to be living paycheck to paycheck, and the personal savings rate has collapsed to its lowest level since 2008.
Global warfare may be avoidable, but a global economic downturn is already underway. Just as we finished this piece, we ran across a comment from the International Monetary Fund’s head of research. On the IMF blog, Pierre-Olivier Gourinchas writes that the world’s three largest economies—the United States, China, and the euro area—are stalling, with important consequences for the global outlook.
That stalling is a greenlight for serious money printing and higher gold prices. Under the circumstances, it appears that gold is looking for any excuse at all to surge.
Note that the Fed’s recent rate hike was met with gold moving higher. The gold market views Fed actions as half-hearted and inadequate to wring inflation out of the system.
Gold moved up again the very next day on news of the second quarter of economic contraction, confirming for most people the arrival of a recession.
Then, the following day, the Fed’s preferred inflation gauge, the Personal Consumption Index, rose faster than it had in forty years.
Of course, gold moved up again.
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