The Crash of 2016

by Thom Hartmann

  Meanwhile trade to the BRIC nations—Brazil, Russia, India, and China—is surging from 3.9 percent in 2000 to almost 12 percent in 2012, and projected to be 24 percent in 2020.

  The BBC notes the significance of China in Germany’s trade strategy, reporting, “What is particularly striking is that in eight years German trade with China alone is projected to be 15.6 percent of the total, according to the trends, or not far off double the share represented by Germany’s most important Eurozone trading partner, France.”

  So just as the European continent is becoming more and more reliant on Germany, Germany is gearing up to cut the strings loose. Pegging the emergence of China in Germany’s trade relations, the BBC notes, “To put it another way, by 2015 it will be so obvious to the German people that it is business with China that is making them richer that their incentive to show fiscal solidarity with Spain and Italy—to use German wealth to underpin the recovery of weaker Eurozone economies—will be even less than it is today.”

  And that’s when the Eurozone crisis will hit a critical turning point. Up until now, Germany has spent a lot of money keeping the Eurozone together, not only to enrich its own economy but also to protect its economy from the damage that would ensue if the Eurozone breaks apart.

  But sometime in the next few years, German policy makers will deem the collapse of the Eurozone as a necessary road bump in their transition to new developing economies. And they just might be willing to go through a recession, knowing that their structurally sound economy will leave them in better shape on the other side of it.

  At this point, without fear of a Eurozone collapse, Germany and the Troika will demand even more radical austerity.

  The world got a glimpse of what happens when austerity goes too far when the tiny Mediterranean member of the Eurozone, Cyprus, became the fifth country in need of a euro bailout.

  With little fear of the consequences of a Cyprus exit from the euro, Germany and the European Central Bank demanded a first-of-its-kind austerity on savers, average people who had money deposited in banking accounts in the nation.

  Initially the European Central Bank demanded, as collateral for a 10-billion-euro bailout package, a percentage of all banking deposits in Cyprus.

  This had an expected result: People rushed to the banks to pull their money out before it could be taxed. Cyprus had to shut down all their banks for over a week, and to set withdrawal limits. Just floating the idea of confiscating banking accounts shattered faith in the Cypriot banking institutions.

  Whether or not Germany and the Troika take this aggressive posture toward other bailouts in the future doesn’t matter all that much. The damage has already been done. The already fragile European banking system received another loss of confidence.

  These fears were encapsulated in an op-ed that ran in the Irish Examiner during the Cyprus crisis, in March 2013. “The raid on Cypriot banks deposits,” the authors noted, “held in the name of ordinary people, businesses, institutions, communities, and prudent savers, breaks one of the fundamental trust-based relationships that has sustained western societies for centuries.”

  It goes on, “It sets a precedent that will reverberate across Europe and find particular resonance in other supplicant countries dependent on external finance.”

  Of course, Ireland knows this situation as well, being a victim itself of Germany’s austerity.

  Then the op-ed asks the expected question: “If bank deposits can be raided by a government in one bankrupt Eurozone country, then why not in another?”

  Columnist Henry Blodget for Business Insider noted the Continental shock wave from Cyprus. He wrote, “Other depositors at weak banks all over Europe, in places like Spain, Italy, and Greece, will rightly wonder whether this is the beginning of a new era of bank bailouts.”

  He goes on to ask, “What do you think those other depositors in Spain, Italy, Greece, etc., are going to feel like doing when they realize that, if their banks ever need a bailout, they might have their deposits seized?”

  Nearing the Crash of 2016, Eurozone nations crippled by austerity and unable to print their own currencies will ask for more and more bailouts. This will spark runs on the banks across Europe, leading to a series of terrific failures and economic shocks across Europe.

  Germany and the Troika will not have nearly enough money, or support, to reach into the bailout coffers anymore. Country by country the Eurozone will disintegrate.

  In the United Kingdom, officials have been planning for another Great Crash for years. As a November 2011 article in the Telegraph exposed, “Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis.”165

  The article goes on to say that the United Kingdom believes “that a euro collapse is now just a matter of time… [and] planning for extreme scenarios including rioting and social unrest” are under way.

  Referring to the failure of Lehman Brothers bank, which shocked the financial system in 2008, the chief economist at the European Central Bank warned in July 2012 that the “Eurozone crisis is now much more profound and fundamental than at the time of Lehman.”

  By inflicting economic pain on working people across Europe, Germany is playing with fire on a continent that saw the bloodiest war in human history. A war that people are just now forgetting about.

  The Divergence and War

  It’s hard to imagine that the European Union, after winning a Nobel Peace Prize in 2012, would descend into war in 2016.

  But prior to the French Revolution, people thought things were going great, too. As de Tocqueville writes: “No one in 1780 had any idea that France was on the decline; on the contrary, there seemed to be no bounds to its progress. It was then that the theory of the continual and indefinite perfectibility of man took its rise. Twenty years before, nothing was hoped from the future; in 1780 nothing was feared. Imagination anticipated a coming era of unheard-of felicity, diverted attention from present blessings, and concentrated it upon novelties.”

  And, indeed, there had been a bubble prosperity. As de Tocqueville notes, “Public prosperity began to develop with unexampled strides. This is shown by all sorts of evidence. Population increased rapidly; wealth more rapidly still.”

  To prove his point, he cites numerous sources: An official of the time states that in 1774 “industrial progress had been so rapid that the amount of taxable articles had largely increased. On comparing the various contracts made between the state and the companies to which the taxes were farmed out, at different periods during the reign of Louis XVI, one perceives that the yield was increasing with astonishing rapidity. The lease of 1786 yielded fourteen millions more than that of 1780. Necker, in his report of 1781, estimated that ‘the produce of taxes on articles of consumption increased at the rate of two millions a year.’ ”

  British writer Arthur Young (1741–1820) wrote in his autobiography166 that when he visited France in 1788, the commerce of Bordeaux was greater than that of Liverpool, and adds that “of late years maritime trade has made more progress in France than in England; the whole trade of France has doubled in the last twenty years. Due allowance made for the difference of the times, it may be asserted that at no period since the Revolution has public prosperity made such progress as it did during the twenty years prior to the Revolution.”

  Thus, while “bread lines” and “bread shortages” and “bread riots”—juxtaposed with mind-boggling excesses including lavish parties at the court of Louis XVI—are often cited as a simplistic explanation for the French Revolution (egged on by the example of the Americans), the real cause, de Tocqueville suggests, was a rapid reversal of fortunes. While people will tolerate terrible poverty—and do, daily, all over the world (and did in his day, too) without revolution or war—they will not tolerate a rapid change from economic circumstances they expect to those they don’t.

  This is not, of course, an idea unique to de Tocqueville, although he highlighted it in a way that lit up dialogue in
the mid-nineteenth century about the American Civil War and other wars around the world. More recently, here in the United States, in 1977, Harold E. Davis wrote a brilliant monograph for the Georgia Historical Society titled The Scissors Thesis, or Frustrated Expectations as the Cause of the Revolution in Georgia. Paraphrasing the work of earlier social scientists and historians Professors R. R. Palmer and James Chowning Davies, he wrote: “Revolutions are most likely to occur when a prolonged period of objective economic and social development is followed by a short period of sharp reversal.” Revolution occurs when “reality breaks away from anticipated reality.”

  While both de Tocqueville’s and Davis’s observations have to do with internal wars—revolutions—it’s easy to build a strong and historically grounded case for wars breaking out when a nation has Davis’s break from anticipated reality and then blames it on another nation-state.

  In a more contemporary commentary, this logic was extended by Business Insider’s Ricky Kreitner in an article whose title says it all: “Serious People Are Starting to Realize That We May Be Looking at World War III.”

  Similarly, the New Republic’s John Judis wrote in August 2011 that “in the U.S. and Europe, the downturn has already inspired unsavory, right-wing populist movements. It could also bring about trade wars and intense competition over natural resources, and the eventual breakdown of important institutions like European Union and the World Trade Organization. Even a shooting war is possible.”

  War following a Great Crash that blew out people’s expectations of continued prosperity was unimaginable in the 1920s. Similarly, nobody seriously considered it in the early 1850s. And even Thomas Jefferson, in the late 1760s, was writing tracts about how American colonists could be “good citizens” of the United Kingdom.

  But then came the divergence.

  The China Syndrome

  While America declines and Europe convulses, in China, huge cities are being constructed at breakneck speed, complete with brand-new high-rise condominiums, office buildings, and infrastructure such as roads and bridges.

  Only, no one lives there. They are ghost cities. As 60 Minutes correspondent Leslie Stahl noted in March 2013, “We discovered that the most populated nation on earth is building houses, districts and cities with no one in them… desolate condos and vacant subdivisions uninhabited for miles and miles and miles and miles.”

  The Chinese economy is growing at speeds not seen at any other time in world history. It’s estimated that as many as 200 million Chinese will undergo the urbanization process and move into the cities. That means more housing needs to be built, about ten million new units a year.

  Build the cities and the people will come.

  But construction is far outpacing projected demand.

  As Forbes contributor Gordon Chang reported in March 2013, the Chinese put up 11 million new units in 2012, but in five years they will be building 19 million units every single year—far more than is needed to keep up with demand for housing.

  What’s really happening in China is a housing bubble, even worse than the one that popped in the United States. And, like in the United States before it, the housing bubble is being driven in large part by a debt bubble.

  This expectation of limitless demand is driving an enormous construction boom in China, which accounts for about half of the entire Chinese economy.

  And expecting that property values will continue rising dramatically, the emerging Chinese upper and middle classes are investing everything they have, and leveraging their wealth with bank debt, buying up property in these ghost cities as investments for the future.

  Chang explains, “The rich buy apartments and often leave them empty, treating them as a store of value. It’s not uncommon to find a single owner with as many as 20 vacant flats.”

  But what happens if, under pressure from economies that buy from them, the Chinese economy slows down?

  Chang writes, “When the underlying economy erodes—as it is showing signs of doing now—owners will dump units either to raise cash or to avoid taking even bigger losses. Most unsold apartments are in smaller urban areas, which is where a panic could start.”

  The panic may already be under way. In 2012, unsold Chinese apartments increased by 40 percent, as measured by floor space.

  China has done unprecedented things in its rise to becoming an economic powerhouse. But that doesn’t mean it’s immune from the dangers of Royalist capitalism.

  Chang adds, “Analysts like to say China is different. Yet we hear a variation of this line just before every economic collapse. Beijing’s technocrats can postpone a reckoning, but they have not repealed the laws of economics. There will be a crash.”167

  And this crash could come sooner than projected.

  Economist Richard Wolff argued in 2010 that the Chinese economy is secretly making a huge gamble on the global economy.

  With exports making up nearly a third of the entire Chinese economy, a slowdown all around the world means big trouble for the Chinese domestic economy.

  Yet in 2009 the Chinese economy grew by 8.7 percent, only slightly lower than in 2008, and then in 2010 it grew by more than 10 percent.

  “How are they doing this?” Wolff asks. “How are they employing all of these people, keeping people out of the streets? They are an export economy, and the exports have dried up!”

  Wolff explains what’s going on: “They are keeping everybody working. They are literally holding, stockpiling, warehousing unspeakable quantities of output in the hope that the world economy will correct itself soon enough that they can unload all that stuff.”

  But they can’t do this indefinitely.

  “This is the biggest gamble any country we know of has ever taken,” Wolff adds.

  By 2012, it began to look like the gamble might not pay off. That year, the Chinese growth rate drastically slowed to 7.8 percent, its lowest rate in thirteen years.

  With their consumer base drying up around the world, the internal problems in the Chinese economy will only worsen. By 2016, as the masses that moved in to the cities start losing their jobs, unrest will sweep the country.

  The faster the domestic Chinese economy shrinks, the quicker the real estate bubble will burst, dragging upper-income Chinese citizens into the economic crisis, too.

  Suddenly, the primary cheap-labor source the Western economies, in particular the United States, rely on will be wiped out.

  Wolff warned what happens if the Chinese gamble doesn’t pay off: “The kind of economic downturn we had [in 2008] will look like a picnic.”

  Those emerging markets that the Economic Royalists in Germany and the United States were betting will still be there after the Great Crash will, instead, be swept up into the global catastrophe.

  The Oil Shock

  Assuming the Eurozone holds it together, and assuming the technocrats in China are able to stave off the pitfalls of rapid economic growth, there’s still another potential shock lurking that can bring down the entire system: oil.

  The entire world’s economy is lubricated by oil. We rely on oil for energy, to grow and transport food, for construction, for our military, and as a raw material for fertilizers, pesticides/herbicides, and pharmaceuticals, just to name a few.

  So when the price of oil goes up, then the price of everything goes up, the economy grinds to a halt.

  This happened in the United States during the oil shocks of the 1970s, when OPEC cut off oil exports to the United States in October 1974. The price of a barrel of oil doubled in one year, and a deep economic recession hit the nation that cracked open the door for the Economic Royalists.

  Similarly, while the 2007–08 financial panic was certainly caused by bad behavior on Wall Street, it was preceded by another drastic spike in oil prices. Between 2004 and 2008, the price of oil climbed from the $40-a-barrel range to a peak of $147 a barrel in 2008.

  Economist Jeremy Rifkin, author of the book The Third Industrial Revolution, argues that the root cause of the 2007–0
8 financial panic was the surge in oil prices. And ultimately, there will be several more shocks as the Industrial Revolution, which has been based on fossil fuels, reaches its inevitable conclusion—the point at which we run out of oil.

  Rifkin said in 2012, “When oil hit $147 a barrel on world markets,” then “the other prices across the supply chain went through the roof because so much in this civilization is made out of fossil fuels.”

  The effects were catastrophic.

  “We had food riots in twenty-two countries,” Rifkin said. “The price on basic commodities, rice, wheat, and other basic foodstuffs was doubling and tripling. We had a billion people in harm’s way in terms of hunger and starvation. People stopped buying everywhere.”

  Finally, Rifkin argued, “The entire economic engine—the growing economy—shut down, and purchasing went plummeting… that was an economic earthquake. The collapse of the financial market sixty days later—that was the aftershock.”168

  As oil becomes more and more scarce, and developing economies such as China and India demand more and more oil, then the prices will inevitably increase, producing a vicious cycle of oil shocks every time the world economy starts to grow again.

  Rifkin notes, “[W]ithin the last ten years, China and India made a bid to bring a third of the human race into a second industrial revolution. The aggregate demand was so great, it dramatically spiked prices for oil. All the other goods and services went up, and per capita purchasing powers shut down.

  “This is an endgame,” Rifkin says. Referring to the coming oil-shock cycles, he adds, “Every time we try to restart the economy at the same rate it was growing before July 2008, this process repeats itself… [When] India and China started moving, Europe and America started moving, and immediately oil prices shot up over a hundred [dollars] a barrel, all the other prices went up, and purchasing power shut down again.