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IMF: Everything That Can Go Wrong With the Global Economy is Now Happening

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“The global economy is now in a synchronized slowdown.” (Kristalina Georgieva, IMF Managing Director in a speech presented on October 8)

“While…the economy faces some risks, overall it is…in a good place.” (Federal Reserve Chairman Jerome Powell, in a speech presented on October 4)

To hear someone say it like it is can be a relief. It’s nice to hear honest opinions over manufactured truths. But honest utterances can also be brutal, sobering, even disturbing–like hearing a dismal prognosis of a terminal condition.

As Americans, we tend to temper the jagged edges of reality with the smooth ends of a smiling narrative. And we certainly see this in the way that mainstream financial content presents itself.

Remember watching the news before the 2008 financial crisis? Everything was going well before the world financial system fell apart. And for institutions, particularly the Federal Reserve, their messaging, always dry and clinical, has a way of underplaying or minimizing significant economic threats.

Fortunately, not all economists or institutions are willing to soften the blow of real life. In her October 8 speech, the IMF’s managing director, Kristalina Georgieva, did everyone a favor by telling it as it is, the way she and the IMF see the state of the global economy.

Global Growth is Synchronously Grinding to a Halt

According to Georgieva, things were going well only two years ago as “nearly 75 percent of the world was accelerating.” The global economy was in a “synchronized upswing” as measured by GDP.

Now, the world is once again in sync, but this time the global economy is decelerating.

As she stated in her IMF speech, “In 2019, we expect slower growth in nearly 90 percent of the world,” and the World Economic Outlook report for 2019 and 2020 show downgrade revisions.

So what’s wrong with the economy? Georgieva describes the factors as “complex.”

Aside from economic softening in the US, Germany (despite their unemployment numbers at historic lows), Japan and Europe, and slowing growth in China, the trade war, she claims, has begun to take its toll.

Global trade growth has come to a near standstill,” as “trade tensions, worldwide manufacturing activity, and investment have weakened substantially,” all of which can affect services and consumption.

She describes the issues affecting the global economy as a series of fractures, and claims that “the fractures are spreading.”

So, even if the trade situation were to be resolved sometime in the next year, the damages that the current “rifts” pose to the economy–broken supply chains and silo trade sectors, among others–can last an entire generation.

Everyone loses in a trade war. For the global economy, the cumulative effect of trade conflicts could mean a loss of around $700 billion by 2020, or about 0.8 percent of GDP,” which is the size of Switzerland’s economy, she notes.

Essentially, everything that can go wrong with the global economy is starting to happen.

Potentially Severe Risks Where Most Aren’t Looking: The Repo Markets

Mid-September, rates in the overnight lending market spiked to as high as 10%. As we covered in a previous article, this is a big deal, as the repo market had been functioning like a well-oiled machine with stable rates near the 2% range.

To recap, the repo market is where institutional investors, corporations, hedge funds, and other financial institutions borrow short-term funds.

The last time this market was in chaos was in 2007 as events that led up to the Great Recession were taking place.

2007 also marked the last time the Fed had to intervene in the repo markets, injecting liquidity into what was supposed to be a stable market.

The Fed began making massive liquidity injections of at least $75 Billion a day (now $120 Billion per day) for weeks in order to rein-in interest rates. 

Some call it a “technical move,” a short-term solution to a temporary problem. Others see it as a potential “flashpoint” for a new crisis.

As Anthony Rowley stated in an article for the South China Morning Post, “these markets have become the new flashpoint for a crisis that could reverberate through the financial system and the global economy.”

He continues, “The Fed can only hope to keep the markets cool (as with runaway nuclear reactors) by pouring in liquidity.”

Fed Chair Powell’s response: “For the foreseeable future, we’re going to be looking at it, if needed, doing the sorts of things we did the last two days, these temporary open market operations That’ll be the tool we use.”

We can take from Powell’s tone that the Fed expects the repo crisis to stabilize. Should we take him at his word, or are there risks that the Fed may be aware of but not addressing?

Contrast Kristalina Georgieva’s IMF speech with a comment on the economy that Powell made in the “Fed Listens” event in Washington on October 4:

“While not everyone fully shares economic opportunities and the economy faces some risks, overall it is— as I like to say— in a good place…Our job is to keep it there as long as possible.”

So, what is it with the global economy–sunshine or slowdown?

We may not be able to predict whether the economy will plunge into a crisis. But one thing we know for sure is that it may be vulnerable.

And common sense dictates that vulnerabilities leading to a potentially big negative outcome should be hedged.

Diversifying your assets across the widest spectrum of assets, including physical gold and silver, is one way to participate in all potential market booms while mitigating your portfolio from unpredictable sector busts.

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