A global economic confluence?

A dictionary definition of “confluence” is “the flowing together of two or more streams.”

There are, of course, many kinds of stream, including the literal kind, rivers. Over the earth many rivers, large  and small, converge and flow into each other. These are obvious confluences.

But there are also less literal streams in our experience, including political, economic and cultural streams whichalso, from time to time, converge or flow into each other, often with extraordinary consequences.

I would like to call the reader’s attention to one set of streams, economic streams to be precise, which might, or might not, now converge. If they are not converging, there is not much to say about them other than to note their particular effects. Yet if they are forming a confluence, I suggest it might be useful to pay special attention – and to any possible unusual consequences their  coinciding might bring.

One of these streams is a very large “river,” that is, the Chinese economy. With more than a billion persons  composing it, and employing a curious combination of so-called capitalist free market strategies with ultimately non-democratic totalitarian controls, the Chinese economy is perhaps the hottest financial story of the past decade.

Chinese millionaires and billionaires have taken their places not only domestically in China, but as players on the international market stage, purchasing foreign stocks, debt, real estate, art works and other properties.

The Chinese government has taken a serious economic interest in  underdeveloped nations in Africa, South America and Asia.

Accompanying these activities, there has been an economic “boom” in China. Some say this is an economic “bubble” and not sustainable, primarily because so much of it, free market strategies notwithstanding, is controlled by the Chinese government and its bureaucrats. In any event, the Chinese stock market has just endured a notable downward slide, at least in the short term, after a huge uptick over the past year.

A second economic stream of note is the economy of the European Union (EU) and the state of its common currency, the euro. As with the economies of the United States and China, the EU is one of the world’s largest economic forces.

In recent years and months, the EU has made its way through a chronic series of crises, most of which have been provoked by the increasing debt and mismanagement of some of its member states.

The latest example is Greece which, as like so many smaller European economies, has seen unbridled growth of its debt after decades of creating unsupportable public expenditures and entitlements (and shortage of revenues to pay for them).

While larger and more stable European Union members have resisted underwriting this growing debt, and insisted on government-imposed measures of austerity, the Greek people have resisted the cut-backs, making the austerity programs politically impossible.

After on-again-off-again bailouts, the Greek government has closed the Greek banks and called for a plebiscite. This might not only result in the exit of Greece from the EU, but precipitate unstoppable larger crises as the Spanish, Portuguese, Italian and French economies, also heavily laden with debt, flounder.

A third, and smaller stream, is the bonded debt of the U.S. territory of Puerto Rico. It amounts to about $73 billion, not  a small amount in itself, but tiny compared to the whole U.S. economy.

The recent news is that Puerto Rico might not be able to pay for its public bonds which are not only free from federal taxes, but state and local taxes as well. As such, they have not only been attractive to large investors and many high-earning middle class investors, but other municipal bond funds as well.

In fact, 70% of all such funds have some investment in Puerto Rican bonds. The reason for this level of investment is that Puerto Rican bonds are rated “below” junk level, and since they have so high a risk, their yield (now above 9%) is so high.

With national interest rates otherwise so low, the high (and tax-free) rates are especially attractive to investors and funds which want to improve their yields. No state or territory has recently defaulted on its bonds. (After the panic of 1837, some states were unable to pay for their bonds when called in, but eventually they were paid off after several years.)

Recently, a few U.S. cities have declared bankruptcy, and several others have admitted they are having difficulty in meeting their obligations.

The governor of Puerto Rico has just warned that the territory is at the edge of default. If this Puerto Rican bond crisis is not resolved, what effect would this have on the whole bond market and the U.S. economy?

These three streams are located in the three largest economies on earth. Is there a chance they could converge into each other?

And what of other financial streams (such as those in Brazil and other large economies)?

Finally, the Bank of International Settlements (BIS), the central bank of the world’s individual central banks, has just issued a report that the world’s banking system has kept interest rates so low for so long that it has no further ability to deal with the world’s next economic crisis when it comes. The report was critical of the banking strategy of prolonged low interest rates, some of them less than zero, which has fueled short-term  bubble booms followed by busts. In response to these financial bubble bursts, central banks have lowered interest rates even further, but as the BIS report suggests, banks now cannot go any lower to try to revive economic downturns.

All free markets depend on public confidence. If the major global markets are shaken not only by the crisis in each of the economic streams I have mentioned, but the loss of confidence is magnified from a confluence of debt crises in world markets, what are the consequences?

I am making no predictions, dire or otherwise, but  I do think current economic events now warrant especially careful and prudent vigilance.

Barry Casselman has been reporting on national and international politics since 1972. He lives in Minneapolis. Find him at barrycasselman.com.