How the Bursting Bubbles Will Impact the World

Although all the economies of the world will suffer as the current Bubblequake recession deepens into the coming Aftershock mega-depression, some regions will do better than others. Similar to reactions to flu, those who are healthier and stronger before trouble hits tend to hold up better under stress. Here’s what we see ahead.

Europe and Japan

As mentioned earlier, the U.S. economy will fare best in the Bubblequake and Aftershock, followed by the countries of Europe and Japan, which have larger shares of their economies devoted to exports than we do, and so will be hit harder when their exports radically decline.

At the same time, Europe and Japan will have to continue to import some goods from other countries, although far less than before. Much more than the United States, Europe, and Japan will continue to import food and energy. To keep manufactured imports to a minimum, these countries will enact protectionist tariffs to protect what remains of their manufacturing industries, and higher taxes on food and energy, slowing the flow of imports into their countries. This will naturally decrease other countries’ exports to Europe and Japan even further than they will have already fallen, adding to the already negative downward spiral for the overall world economy.

Because their export industries will be so hard hit across the board, Europe and Japan will suffer very high unemployment, again with that multiplier effect mentioned earlier, in which each lost job that is directly related to exports is coupled with several additional jobs lost that are indirectly related. Stocks will do quite badly, and real estate values will crash. The European welfare system and many labor protections, currently far more generous than ours, will become increasingly difficult for their governments to afford and will decline to U.S. levels.

But despite this grim picture, some governments in Europe, such as France, Germany, the Scandinavian countries, and Switzerland will not need to default on their debts, but the U.S. government will. Japan will not need to default either. Ironically, although the U.S. economy will do better than these other economies in the Aftershock, we will be forced into default, and they will not. That’s because these governments did not depend so heavily on large amounts of foreign capital that will suddenly disappear. Like the United States, these countries will print money out of necessity and suffer extremely high inflation, just as we will. But the value of the euro and the yen will hold up relative to the dollar, because Europe and Japan won’t have the massive outflow of capital that we will experience, as investment money pulls out of the United States and flows back to home countries. Europe and Japan will be further protected from the need to default on their debts, because inflation will help reduce their debts, as it will reduce ours. However, U.S. inflation will be much greater than in other countries, because we printed so much more money. Our dollar will be crashing faster and deeper because foreign capital will be leaving.

Massive outflows of capital from the United States into Europe will cause the dollar bubble to pop and the U.S. government to default on its debt. Some governments in Europe (France, Germany, the Scandinavian countries, and Switzerland) will avoid having to default on their debt for three reasons. First, massive inflows of new capital into those European countries and Japan when U.S. and foreign investors sell their U.S. assets and buy euro-denominated assets will keep more capital available for European governments. Second, as many governments seek stimulus spending to save their economies, there will be a smaller and smaller money pie. The U.S. government will gobble up a big share of this smaller money pie, going into debt further and faster than some countries in Europe, which will help keep those European governments from running up massive increases in their debt. Third, investors who buy those European government bonds will encourage those European governments not to go too far into debt because they will be worried about a possible bankruptcy.

China

China has had unbelievable growth in the last two decades, and under other circumstances you might expect China to do fairly well despite a global economic downturn—but not in a global bubble economy. Much of China’s recent growth has been driven by America’s and the world’s bubble economies. While the economies of some of the poorest countries, such as in Africa, will be in far worse shape, none will suffer the pain of crushed expectations more than China.

In addition to tremendous decreases in their exports and the resulting collapse of the part of their domestic economy that was supported by those exports, China will be hit again, because it has been actively supporting the U.S. dollar for many years, a position that will prove to be particularly devastating to its own finances when the dollar bubble finally pops.

On top of the massive decline in Chinese exports, as well as China’s losses due to holding so many falling U.S. dollars, China will also endure a bursting bubble economy of its own. The rapid growth of the Chinese economy created a series of co-linked Chinese bubbles that will have no choice but to burst with devastating force. Their falling bubbles in real estate, stocks, and banking will be particularly dramatic. Construction and related industries, which have grown so rapidly in the past few years, will see huge declines (see sidebar “Now That’s Stimulus!”). This will contribute to massive unemployment in China and inflation as the government is forced to print more currency.

These economic shocks will cut deeply into China’s economy. When the United States, Europe, and Japan drastically cut their imports from China, China will experience their great boom in reverse. Unlike in the United States, Chinese citizens are not so used to prosperity that they can’t easily return to lower consumption, like eating less meat, for example. And when Chinese consumers do pull back, their still-fragile economy will collapse. In fact, after a while, the Chinese stock market and banking system could suffer a semi shutdown for a period of time. There will likely be a massive migration out of the depressed urban centers and back into the countryside, with widespread poverty and eventual malnutrition because there is no safety net.