Even the Best-Case Scenario Is Pretty Grim

The comments below are an edited and abridged synopsis of an article by John Rubino

Let’s say President Trump is right about the coronavirus fading away as temperatures rise in summer. Will things go back to the old normal of globalization, free trade and finance-driven ‘growth’?

Even the Best-Case Scenario Is Pretty Grim | BullionBuzz
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Almost certainly not, because the psychological damage has already been done. Over the past weeks, the globalized economy with its multi-nation supply chains and just-in-time inventory systems has been forced to recognize that such a system only works in a nearly perfect environment.

Most of the world’s pharmaceutical building blocks come from China and India. Car parts are made in multiple countries before being shipped to assembly plants near consumers. Virtually all of this depends on an environment where trade flows are unhindered, capital is free to find its most efficient home, and shipping is frictionless. That’s the system the developed world has built, and now everyone recognizes it as fragile and too risky to maintain.

Major companies in every sector of manufacturing will be forced to scale back their work in Asia and the rest of the developing world and bring much of it closer. This is, at first glance, a good thing for the US and maybe Europe, but it will be more than offset by its devastating effect on China’s vast and massively over-indebted contract manufacturing sector and hyper-leveraged municipalities.

This means that the best-case scenario is the long-awaited Chinese financial crisis. And with the rest of the world just as over-leveraged as China, the implications of the second-biggest economy shifting into reverse and possibly descending into chaos are hard to predict in detail but easy to envision generally: Turmoil in the currency, fixed income and stock markets that force governments to push interest rates into negative territory and run deficits that dwarf those of the Great Recession. If any major fiat currency is still functioning at the end of this process, that will be the real miracle.

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