[Editor’s Note: Rabbi Jonathan Cahn’s column today, “The Sword of the Shemitah and how it just changed your world,” asks if an ancient mystery more than 3,000 years old could be manifesting itself in today’s economies, financial systems and stock markets.]
NEW YORK – Will the last year of the Obama administration see an economic downturn even more severe than the recession George W. Bush suffered as he left the White House in 2009?
On Wednesday, that was the question on the minds of investors worldwide as the Dow lost 550 points in mid-day trading.
After a late-day rally, the Dow ended trading down 249.21 points, or 1.56 percent.
Renewed fears swept Wall Street that the global economy was entering a downturn of a magnitude dwarfing the last recession caused by the 2007-2008 financial crisis.
WND has reported analysts’ warnings that the Federal Reserve’s quantitative easing policy – under which it printed money to buy U.S. Treasury debt – was an artificial means to contain interest rates as near zero that would backfire in a broad stock market selloff once the Fed began to raise benchmark interest rates.
On Dec. 16, 2015, the Federal Reserve Open Market Committee decided to raise rates for the first time since June 29, 2006, increasing the target federal funds rate modestly, from zero to 25 basis points (0.25 points).
Since Jan. 1, the Dow has dropped nearly 10 percent, the worst start to a year since the Great Depression.
Reuters reported Wednesday the MSCI World equity index has dropped 11.1 percent in January, which if sustained would be the worst monthly loss since October 2008, the month after Lehman Brothers went bankrupt.
Reuters confirmed a “bear market configuration” is developing, with the MSCI World equity index down 20.5 percent from its high May 22. A bear market is generally defined as a drop of more than 20 percent.
A leading reason economists cite for what appears to be shaping up as the “Crash of 2016” is a historic drop in oil prices, with the price of crude oil plunging to $26.30 a barrel, its lowest since May 2003. The problem today clearly is a global oil oversupply that has discredited the “peak oil” fears of previous decades that the world was exhausting the supply of oil.
With the lifting of sanctions, Iran is preparing to place its oil on world markets. The International Energy Agency warned Tuesday that the global oil market “could drown in oversupply, threatening a further price collapse.
Last week, China allowed the biggest fall in the yuan in five months, causing trading in its stock market to be suspended twice. China’s currency has continued to drop since a 2 percent devaluation last August touched off a global stock market selloff that prefigured what global equity markets are experiencing in January.
The People’s Bank of China, the nation’s central bank, insisted again last week that there was no basis for the yuan’s continuous depreciation and that China’s currency was stable against a basket of currencies in 2015.
China’s economic growth at 7 percent for 2015 was the weakest pace in a quarter of a century, raising investor hopes that Beijing would implement more policies to stimulate economic growth.
‘Epic debt defaults’
From the World Economic Forum in Davos, Switzerland, respected economic correspondent Ambrose Evans-Pritchard reported Wednesday a dire warning that a wave of epic debt defaults could tank the global economy.
Speaking at Davos, William White, the Swiss-based chairman of the OECD’s review committee and former chief economist of the Bank of International Settlements, warned that the global financial system has become dangerously unstable, facing “an avalanche of bankruptcies” worse than 2007, at a time when central banks have run out of “macroeconomic ammunition” to fight downturns.
“Debts have continued to build up over the last eight years, and they have reached such levels in every part of the world that they have become a potent cause for mischief,” White warned.
He said it will “become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something.”
“The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.”
White frightened the Davos audience by noting European banks already have admitted to holding $1 trillion of non-performing loans.
Evans-Pritchard noted White’s warnings were especially concerning because he was one of the few voices “in the central bank fraternity” who stated loudly and clearly between 2005 and 2008 that Western finance was “riding for a fall” and that the global economy was susceptible to a crisis.
As Evans-Pritchard reported, White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis “leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows.”
White argued the Federal Reserve is now “in a horrible quandary” as it tries to end QE policies.
“It’s a debt trap,” White claimed. “Things are so bad there is no right answer. If [the Federal Reserve] raise rates it’ll be nasty. If they don’t raise rates, it just makes matters worse.”