Next Financial Collapse Will Be Dangerous to a Lot of Folks
Jim Rogers is sounding the alarm on an upcoming financial collapse, and investors best take notice.
The former George Soros protégé and Quantum Fund founder believes economic conditions are rife for a collapse in the near future. In a recently released podcast, Rogers goes as far as saying this upcoming financial collapse could actually be dangerous for one’s health. “Get prepared because we’re going to have the worst economic problems we’ve had in your lifetime or my lifetime and when that happens a lot of people are going to disappear.” (Source: “Jim Rogers: “We’re About To Have the Worst Economic Problems Of A Lifetime, A Lot Of People Will Disappear,” Zero Hedge, February 12, 2017.)
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This is quite a worrisome prognostication.
In the podcast, Rogers highlights a confluence of reasons behind the thesis. Jim touches on some post-election buzz issues like free trade, while others are less discussed.
The possibility of a wide-scale trade war is among the bigger concerns Rogers has at the moment. It seems Donald Trump intends to take the “free” out of trade, coercing the Fortune 500 to “Make America Great Again” by setting up shop within its borders. With the threat of punitive tariffs on exporting nations looming, Rogers believes this will portend problems ahead. “If he does Eric, it’s all over. I mean, history is very clear that trade wars always lead to problems, often to disaster, sometimes even to a real war, a shooting war.” (Source: Ibid.)
Upon closer inspection, Rogers concerns on trade may have historical precedent on his side.
The Smoot-Hawley Tariff Act of 1930 was, at worst, an adjunct catalyst to the Great Depression, which began in 1929. The act, originally designed to protect U.S. farmers, metastasized into something far greater as it rolled through Congress. By the time it hit the president’s desk, no fewer than 890 tariffs were imposed against products entering the States, touching practically every industry.
Of course, this bill took effect at the worst possible time. The Great Depression was just starting to sink its teeth into the American economy. Economic growth was backtracking, and joblessness soaring. Although international trade was much less entrenched than it is today, the collapse of trade had a piling-on effect which hamstrung growth even further. The end result was not pretty.
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In the two years after enactment of Smoot-Hawley, U.S. imports plummeted 41.2% between the second quarter of 1930 and the third quarter of 1932. Exports fell by almost the exact amount in this span, as foreign nations reciprocated the punishing tariffs on U.S. exports. Gross National Product (GNP) fell a stunning 29.8% during the same period. Unemployment skyrocketed to over 25% at the height of the Great Depression. (Source: “The Smoot-Hawley Tariff: A Quantitative Assessment,” Dartmouth, May, 1998.)
Although there’s some debate whether Smoot-Hawley caused the Great Depression, most economies agree it wasn’t helpful. Of course, a white-hot stock market and manufacturing overcapacity played important roles, but the Smoot-Hawley Act was a key negative component. Keep in mind, these damaging effects occurred when the percentage of gross domestic product (GDP) in relation to trade was much lower–seven percent in 1930 versus 26% today. If the same policies were instituted in today’s much more leveraged global trade environment, a global financial collapse could be possible.
Interestingly, Jim Rogers references the possibility of the U.S. dollar moving higher, portending an American financial collapse. The same thing occurred in the first four years of the Great Depression, where the dollar sharply increased in value.
Jim Rogers Expects a Financial Collapse…Eventually
Moving towards historical domestic events, Rogers references that bedrock institutions literally disappeared overnight during the financial collapse of 2008. It was then that iconic investment firm Lehman Brothers Holdings Inc. was suddenly declared insolvent, cratering under the weight of bad mortgage debt. The Lehman Brothers collapse rocked Wall Street to the core, having been among the top investment banks in the U.S. for 150 years prior.
Today, Jim Rogers is warning us that many of the institutions we deem safe can just as easily vanish in a global financial collapse. In fact, not just individual corporations but entire nations or governments. “In 2008… Lehman Brothers disappeared. Lehman Brothers had been around over 150 years. A long, long time, a long glorious history they’ve been through wars, depression, civil war they’ve been through everything and yet they disappear. So the next time around it’s going to be worse than anything we’ve seen and a lot of institutions, people, companies even countries, certainly governments and maybe even countries are going to disappear. I hope you get very worried.” (Source: Zero Hedge, op cit.)
Indeed, the body count could have easily been higher had the government not intervened in the wake of the U.S. housing crisis. No fewer than 968 institutions (mostly financial) were spoon fed bailout funds to bolster balance sheets and ensure corporate solvency. This included money to corporate manufacturing giants like General Motors Company (NYSE:GM), insurers like American International Group (NYSE:AIG), and international banks like Royal Bank of Scotland Group PLC (NYSE:RBS). There was a palpable fear that a world financial collapse could have transpired had Congress not authorized Troubled Asset Relief Program (TARP) funding.
|Fannie Mae||Government-Sponsored Enterprise||D.C.||$116,149,000,000||$38,187,000,000|
|Freddie Mac||Government-Sponsored Enterprise||Va.||$71,336,000,000||$30,112,000,000|
|General Motors||Auto Company||Mich.||$50,744,648,329||-$11,393,681,666|
|Bank of America||Bank||N.C.||$45,000,000,000||$4,566,857,694|
|GMAC (now Ally Financial)||Financial Services Company||Mich.||$16,290,000,000||$3,057,502,589|
(Source: “Bailout Recipient,” Pro Publica, January 30, 2017.)
Although nobody is thinking about it now, what happens when the next big crisis comes? Will the U.S. government have the means to bail out Wall Street and Big Industry in the next go-around? With the “success” of TARP nine years ago, they certainly may try, even if it blows up the Federal deficit even more. The moral hazard runs deep.
The inability to service debt spending is ultimately what Jim Rogers is referring to when he talks about the calamity ahead. Right now, the market is partying on renewed hopes of deficit spending and low corporate taxes. Under Trump’s own plan, the deficit would rise another $5.0 or $6.0 billion over the next ten years. And we all know assumptions in these forecasts rarely work out.
Should another big financial crisis ensue (a debt crisis perhaps), the result could be more cataclysmic. In 2008, China was humming along at 13% annual growth and had the capacity to engineer the world economy out of a rut. Today, not so much.
China’s economy is limping along near six percent annual growth (if you believe the numbers) and President Xi Jinping recently signaled China would no longer defend its 6.5% growth target. The yuan is devaluing to keep exports as competitive as possible. China’s debt binge over the past few years has dwarfed anything ever witnessed in modern times. Just last month, China created a record $540.0 billion in debt (Source: “China Just Created A Record $540 Billion In Debt In One Month,” Zero Hedge, February 14, 2017.)
With China abiding by the Keynesian playbook, all bets are off. There will be no lender of last resort if the twin pillars of the global economy, the U.S. and China, experience debt crises at the same time. That is, unless America is to remain a sovereign nation.
We sincerely hope the financial alchemists prove Jim Rogers incorrect.