Real estate markets, Brexit and banking issues all across the globe.
Anyone who doesn’t recognize that we’re facing a serious debt and financial bubble has either been living under a rock, or has retreated into their own fantasy la-la-land to cope with just how bad central bankers and governments have let things get.
We’re not just talking domestic markets, but several major foreign markets, which may be on worse shape.
Banks have taken on too much bad debt that keeps turning into more non-performing loans, and we’re especially seeing that now in countries like Greece and Italy. But instead of restructuring those loans to let their stock and bondholders cover the losses, banks are resorting to what I call financial magic tricks.
Since 2008, the response to the global debt crisis has been to pump more free money and stimulus into the system to keep our financial institutions from imploding.
When will people learn that you can’t fight a debt problem with more debt!? And that restructuring debt is healthy long-term despite the short-term pain.
This could all be coming to a head, and much sooner rather than later.
The first trigger of the global debt crisis is going to come from the foreign markets, starting in Europe, where the banks and the economy are the weakest.
Italy is the next Greece and it is simply too big to bail out. After that, it will be a domino effect. Then, when China finally blows… it’s game over! No stimulus plan will be able to cover that one.
The global banking crisis is all too real, and if we don’t start preparing for it now at home and in the foreign markets we’ll be paying for it in the years ahead.
The Chinese Economic Strategy
One of the most intriguing global markets is in China. In 2013, the Chinese government introduced the Silk Road Economic Belt and 21st Century Maritime Silk Road initiative, which has been shortened to One Belt, One Road.
The plan was to develop infrastructure to facilitate trade among other foreign markets in Eurasia and Northern Africa.
But after the financial crisis, China poured on the monetary coals to propel its economic engine. The country expanded credit at a torrid pace, fueling an unprecedented building boom. Roads, bridges, and condominiums sprung from the ground.
China produced and used more cement between 2011 and 2013 than the United States did in all of the 20th century.
But even in a land of 1.3 billion people, that pace of building couldn’t last and eventually, there would be a dramatic slowdown.
China now has empty cities. Not because everyone left, but because they built them and no one came. Now as their domestic expansion slows down, the Chinese have created an outlet for all of their resources and construction know-how.
Under the One Belt, One Road Initiative, the Chinese provide the resources, expertise, and much of the labor to build roads, bridges, ports, and other infrastructure in other foreign markets like Pakistan, Kenya, India, Malaysia, and even Russia and Greece.
The initiative is expected to touch 68 countries and billions of people.
Of course, many of those countries can’t pay for expensive new ports and roads,
but that’s not an obstacle, it’s an opportunity, if you’re the Chinese.
China will not only provide the materials, expertise, and labor, but also the funding. Through the Asian Development Bank and other entities, China is loaning money to foreign nations that then use the capital to buy stuff from China.
And once those projects are completed, guess which country will have a claim on the assets to repay the loans, and also have priority status when it comes to trade?
China has another issue that it’s turning into an opportunity.
Of the foreign markets, China is one of the better countries at building coal-fired electric plants. But, as one of the vocal members of the Paris Climate Accord, building a bunch of new coal plants creates bad optics.
The country also already has a lot of electricity generation capacity, and a fair amount of renewable energy. So as with their other spare capacity, they went looking elsewhere.
Over the next 10 years, China expects to build 700 new coal-fired electric plants, but 20% of the capacity will be overseas. While the new plants (with all of the environmental issues that come with them) will benefit the local populations, they’ll also support operations along the trade routes that will carry Chinese goods.
And I’m guessing that the plants in other foreign countries will buy their coal from the Chinese.
The strategy is bold, but not without risks. What happens when locals in Pakistan get annoyed with Chinese workers? What happens when a friendly foreign government is toppled by a political foe that doesn’t want to honor previous arrangements? Only time will tell.
Learn much more about the global banking crisis, China and what’s going on in many other foreign markets, every day, in Economy & Markets.