Welcome to the 3-D Economy

BY PATRICK WATSON

Eight years after the Fed went bananas by setting interest rates near zero, the weirdness still hasn’t stopped. In fact, the weird part is how unsurprised we are at the bizarre economic news that comes out every day.

Just one example: Almost half the western world’s outstanding sovereign debt—$12.6 trillion worth—traded at negative yields last week, according to the Financial Times. Investors are buying a guaranteed loss with every trade. Still, they can’t get enough.

What the heck is happening?

John Mauldin and I have been watching global economic trends for decades. We never run out of interesting material. The hard part is spotting connections and figuring out what they mean.

Lately, we’ve started describing this crazy landscape as the 3-D Economy. (By the way,join John Mauldin, me, and our senior analyst for a free Q&A session on Aug 23. Find more details here.)

First Dimension: Debt

When an astronomer says that a star is 100,000 light years away, do we really get it? How many miles is that? The amount of money humans collectively owe each other is similarly staggering. We see the numbers, but don’t comprehend them.

Of course, at some point the numbers don’t matter. Just as we know a star is impossibly far away, we know the debt is impossibly beyond our ability to repay it. The only question is how and when we default.

John and I think the best answer—and maybe the only answer—is some form of a worldwide debt “jubilee.” Just forgive most of it or maybe even all, while giving bond holders cash and equity and start over. Even thinking about how to do that hurts the brain.

That probably won’t happen since it would require cooperation from every government on Earth. We’ll end up doing it all the hard way, which has profoundly uneven consequences. Who do you think they are going to protect? The big guys or the little guys?

I thought so. We agree.

Second Dimension: Deglobalization

The world spent the last fifty years tearing down borders, promoting free trade, and binding former enemies into economic partnerships. Now the globalization process is going in reverse. The evidence is everywhere.

  • Global trade in hard numbers is actually slowing down as a percentage of global GDP for the first time since WW2. That is before we get to the next forces….
  • The UK wants to “Brexit” from the European Union.
  • Donald Trump draws huge crowds with promises to start a trade war.
  • Chinese consumers are shunning American products.
  • Germans and Austrians protest the thousands of Middle Eastern refugees their governments are bringing in.

Our tightly-integrated global economy is fragmenting into smaller pieces. Worse, technology is enhancing the trend. Thanks to fracking and renewable energy tech, North America is now energy independent. That simple fact is tearing OPEC apart and disturbing long-established currency flows.

That’s just one example. It’s going to get worse. The global village is spinning apart right before our eyes.

Third Dimension:

Dogfight photo
Photo by tjschloss

A world composed of debt-plagued citizens angry at their governments and debt-plagued governments angry at each other isn’t ideal, but it’s what we have. Financial and political instability is enraging all kinds of splinter groups. We see the results politically, as in Brexit, and in violence like ISIL-inspired attacks in Europe and the US.

Worse, cyberwar and drone technology are giving insurgents new, effective weapons they can use against soft targets to devastating effects.

We don’t expect World War 3. Instead, we foresee more low-grade fever that keeps everyone uncomfortable and nervous. It will affect economic policy, consumer behavior, and market trends.

Managing Your Personal Economy

We do have some good news. New advances in medicine and technology are coming that will launch us into a new golden age—one with both peace and prosperity. We’re very optimistic for the future… but we have to get through the present first.

On Tuesday, August 23, we’re having a teleconference to talk about the global economy. John Mauldin and I, plus our colleague Robert Ross, will walk through the economic landscape and help you understand what it means.

A Glimpse of the Future in Aug. 23 Q&A Session with John Mauldin

If you wonder what the future might hold for the US and global economies and stock markets, get answers in the free Q&A session “When the Future Becomes Today” with John Mauldin and his colleagues Patrick Watson and Robert Ross, on Aug. 23, 2:00 PM EDT. Click here to register for the call and to submit your questions.