By Charles Coles
Looking at global financial crashes and recessions through the decades a trend can be spotted – they happen roughly every eight to 10 years, and depending on where you’re sitting, New Zealand (and the world) is overdue a financial humdinger.
Right now we are in what’s termed by some as the Covid Recession, it started in 2020. The one before that was the 2007/8 Global Financial Crisis (GFC) which shook the banking system to its roots and saw the collapse of numerous institutions – from investment bank Lehman Brothers in the US, to Northern Rock in the UK, and closer to home South Canterbury Finance (SCF) which cost Kiwi taxpayers a cool $1.6 billion in government bailouts under the retail deposit scheme. SCF was one of nine Kiwi investment firms to fail.
The global recession that followed in 2009/10 saw real estate in New Zealand drop in value by 10% – but prices bounced back within three years as a result of the immigration doors being flung wide open and foreign cash boosting the economy.
That caused a demand for housing – something we have not yet caught up with, and it’s continuing high immigration that is driving the insane rise in house prices still.
Before the GFC the Dot Com bubble burst in 2000, before that there was a recession in 1990/1, another in 1980/1, and the 1973 oil crisis led to the lights going out in the UK.
And amid the recessions, depending on which country you were in at the time, there were job losses, pay cuts, pay freezes, strikes, protests, clashes, scabs, rubbish left on the streets and the dead remained un-buried as grave diggers went on strike in the UK. Grim.
In 2020, as government lockdowns started to bite hard, and money stopped being shuffled around by consumers, plenty of countries suffered a drop in revenue in lower tax receipts. Governments borrowed $Billions to keep as many people as possible from defaulting on their bank loans (must save the banks).
In addition, central banks – such as the Reserve Bank of New Zealand – created even more money to provide liquidity in their financial systems (again to support the banks). But a year on, governments the world over are deep in debt, they collectively owe trillions of dollars to banks in loans that are paid back with tax receipts – except tax receipts aren’t what they were two years ago.
Even China is suffering
Chinese property firm Evergrande – which employs 200,000 people in 280 cities across China – is set to default on debts totalling US$300 billion. And China’s premiere Xi Jinping looks like he’s going to let it happen – fears are it could trigger a property crash worldwide.
Mum and dad investors in China have already stormed the offices of Evergrande demanding their investments back. Needless to say, they were not successful. Meanwhile, Evergrande teeters on the brink of collapse. Real estate accounts for 30% of China’s GDP – it’s a veritable house of cards.
Closer to home, according to the New Zealand Debt Clock, the country owes $126,179,493,868 and it’s ticking up every second – in fact, the number shown on this page was out of date by the time I finished typing it in.
To put it simply, the figure is $126.1 billion and it works out at $71,000 for every household in the country. Every hour the debt grows by $3 million. Half the total is owed to our own Reserve Bank (and so could be wiped off at the press of a button). It created the money out of thin and and can make it evaporate just as easily.
Frankly, we, nor our government (remember it’s our government) haven’t a hope in hell of clearing the debt and getting us into real surplus – cash in the bank. Could a great reset wipe it, and our mortgages, to zero? If you really want to get depressed, check out the World Debt Clock (it’s a doozie!).
This week saw the much-predicted rise in the cash rate to 0.50% as the governor of the Reserve Bank took his first swipe at controlling inflation – his job is to keep it at between 1% and 3% while keeping an eye on employment figures. However, he may have jumped a bit too quickly and I wouldn’t be surprised if the OCR went back to 0.25% by February 2022.
Still, prices are going up. But why?
If you’ve been to the supermarket this week you would have noticed prices are jumping up. Not by a few cents, or even 50 cents, but dollars are being added to some items from one week to the next. All the specials have disappeared, not doubt to hold back stock as supply chain issues start to really bite. Still, most of us are just happy to buy what we need and get out, leaving expensive items on the shelves.
But higher interest rates mean higher mortgage and business loan repayments. It means business owners – particularly SMEs – will be further squeezed as they head into 2022, and those who borrowed against their homes to start a business may have some tough choices to make.
Higher interest rates also mean higher prices overall because the cost of finance is a significant cost to businesses.
Meanwhile, the UK Express newspaper has a headline that screams: Biggest crash in world history’ to destroy shares, property, gold and Bitcoin! Act NOW.
It’s reporter Harvey Jones reports the stock market is heading for the ‘biggest crash in world history’ and the meltdown could even happen this month (October), according to author and investor Robert Kiyosaki.
Kiyosaki is quoted as saying shares, property, gold and Bitcoin could drop in value. When investments such as shares drop it could be seen as a good time to buy, and those with shares are advised by Kiyosaki to sit tight and ride out the storm.
“The safest home for your money right now is cash,” advises Kiyosaki.
However, supply chains are crumbling and causing prices to rise across the board as it costs more to get products from A to B.
There’s a gas shortage looming too. This is already causing power outages in countries such as China, the US and UK. No power means closed shops and factories. And that means no work, no income. Apple and Tesla are among those who have shut factories in China due to power shortages.
Russia is already flexing its muscles in Europe, wanting concessions to deliver gas.
International tension is growing as countries start protecting their positions, knowing that each may have to grow and create at home what its people needs and not rely on imports. Not all countries can do that. It could turn into a global protection racket where countries such as the US, China and Russia, flex their muscles and create strategic allegiances.
Our answer? Start small. Grow what food you can. Seriously. Get the seeds and grow what you can. Plant fruit trees when the time is right, but help yourself. Start neighbourhood allotments to grow and share food and support farmers markets. Don’t rely on the two supermarket chains to provide all you need.
Bottom line, there are massive supply chain issues, global power struggles, energy shortages, and currency wars afoot. Countries are awash with debt, and at some point those loans will be called in.
I don’t know what the first sign of any future recession will be, but come the day public sector workers, nurses, police, and civil servants, start losing their jobs, that will likely be an indication that trouble is directly ahead. I fear 2022 will be a tough year for many.