The road to recovery has been long and hard since the stock market crash of 2008, however, here we are again finding ourselves in a similar situation. The S&P 500 index has risen more than 92% over the past five years and the NASDAQ is reaching all-time highs. Growth is good, however this growth has been fueled by large government bailouts, along with a liberal monetary policy and huge injections of capital in the form of quantitative easing. Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes. The U.S. cannot not continue on this path. Just like a rubber band being stretched to a breaking point time and time again, eventually it is going to snap. There are some current circumstances that point to a possible Global Recession in the coming years.
THE EUROPEAN SITUATION
Europe represents a large part of the world economy. Just like the U.S. Government, the European Central Bank (ECB) has taken drastic measures of implementing quantitative easing in the Eurozone to stimulate growth. The European Union and the IMF have had to bail out countries repeatedly in the Eurozone, most recently Greece with their 3rd bailout totaling over 86 Billion Euros. Instability in the euro could cause a collapse and would have widespread negative effects on the world economy.
THE CHINESE MARKET BUBBLE
China has shown tremendous growth over the past few decades. The GDP of China is second only to the United States and could take first place with the next 10 years at the pace they are growing. China has capital control over the money within it country, meaning that they control where the Chinese citizens are allowed to invest their hard earned money. This has given the people of China few options to invest. Real estate and the stock market have been investment vehicle of choice for many and it is becoming more and more expensive to in these areas. The Chinese stock market is over inflated, which is why the big pull back happened in July 2015, which it did so after reaching its seven year high. This has led to Chinese officials and securities regulators to tell directors, executives and senior managers of publicly traded companies who have sold shares in those companies within the past six months to buy them back and said they are barred from selling to help prevent a complete breakdown of their stock market. Also, overbuilding in China has created ghost towns/cities. These are entire urban landscapes where nobody lives. This is a perfect example of oversupply and not enough demand. If China falls into an economic recession, it will affect the rest of the world’s economy also.
THE EVER INCREASING STUDENT LOAN DEBT
The debt crisis along with the recession has a lot do with the fact that many people were issued home loans and they did not have the ability to repay them back. Student loans are being issued to individuals with hopes that they will be able to pay them back. However the amount owed in most cases it more than the cost to buy a home. Imagine purchasing a home right out of college with no employment? The government currently backs all student loans. As of today, student loan debt is over $1.2 Trillion dollars which is more than three times the amount of debt from just a decade ago. To put it into perspective, Mexico’s GDP is $1.2 Trillion. Also the employment picture is not what is seems. When they release the unemployment rate numbers (5.3% in June 2015), they fail to include the U6 unemployment figure. The U6 unemployment figure is known as the “real unemployment rate”. When that is added, our unemployment rate jumps to 10.5% almost double the amount we are made to believe it is. This is a problem that is continuously growing and there has not been a solution for.
There are patterns we can look at from the last recession such as the U.S. export growth weakening, corporate profits beginning to decline and many more. Central banks hands are tied as they cannot print any more money. The Fed has kept rates at a record low near zero since December 2008. This along with the bubble in China and the troubles in Europe our signs of weakness in our global economy. Although the last recession was 7 years ago, a new one could be soon approaching.