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Current Economy is Extremely Unstable

Current Global Economy is operating at an unprecedented level, with no backup plan.

The 2021 incident of Evergreen shipping container reminded us how fragile the economy really is, and there might be many more stress points that can cause collapse of the global economic system in the future.

 

“An age is called Dark, not because the light fails to shine, but because people refuse to see it.”

-James A. Michener

Explore the possibilities.

The Threat of Inflation

At the start of 2021, the U.S. was forecast to end the year with 2% inflation. Instead it’s close to 7%. In 2022, once again, the consensus expects inflation to end the year close to target levels. Another major miss is possible.

Wages, already rising at a rapid clip in the U.S., could climb higher. Tensions between Russia and Ukraine could  send gas prices surging. With climate change bringing more disruptive weather events, food prices may continue to rise.

Not all the risks are in the same direction. A new wave of the virus could hit travel for example — dragging down oil prices. Even so, the combined impact could still be a stagflationary shock that leaves the Fed and other central banks with no easy answers.

Energy Shortages

In the third quarter of 2021, China’s economy ground to a halt. The accumulated weight of the Evergrande real estate slump, repeated Covid lockdowns and energy shortages dragged annualized economic growth down to 0.8% — way below the 6% pace to which the world has become accustomed.

Hunger Risk

Sudan, Yemen, and Lebanon — already under stress — all look at least as vulnerable today as they did in 2011, and some are more so. Egypt is only marginally better-off.

Popular uprisings are rarely localized events. The risk of broader regional instability is real.

More wars follow.

Political Turmoil

The war in Ukraine represents a challenge for the global economy harming growth and putting upward pressure on inflation when inflation is already at high levels. Ukraine is not a significant trading partner for any major economy, but countries such as China, US, Germany, France, and Italy represent some of the major import partners for Russia.

Conflict in Ukraine has negatively changed the global economy in less than a week. Just 12 days ago, before the war started, the Russian economy was one of the largest economies in the world (the 11th biggest according to IMF data), it was a key supplier area of commodities, particularly energy and food.

As quick-fire, the Russian economy has been pummelled by Western unprecedented sanctions, unwilling to face a nuclear opponent on the battlefield. Sanctions imposed include freezing of Russian central bank assets, targeting of wealthy Russian individuals and some state-owned banks, partial access restriction to the international payments system SWIFT and a stop from Germany to its Russian gas pipeline project.

Sanctions’ costs to Russia are partly cushioned by higher prices for gas and oil exports and the avoidance of restrictions through trade conducted with third countries, but the net economic impact on the Russian economy will be negative.

Extreme climate events

The EIU warns that climate change models point to the risks associated with increased frequency of droughts. Intense heatwaves have struck Canada and the US this year. GreeceTurkey and Spain have suffered devastating fires in recent months. And volatile weather, including a drought in Brazil, has already contributed to rising prices for some foodstuffs.

Risk of Cyber Warfare

Cyber warfare involves the actions by a nation-state or international organization to attack and attempt to damage another nation’s computers or information networks through, for example, computer viruses or denial-of-service attacks.

Conflict in Ukraine presents perhaps the most acute cyber risk U.S. and western corporations have ever faced. Invasion by Russia would lead to the most comprehensive and dramatic sanctions ever imposed on Russia, which views such measures as economic warfare. Russia will not stand by, but will instead respond asymmetrically using its considerable cyber capability.

With the rise of extremism, a new type of cyber warfare threat is emerging. It involves terrorist groups deploying targeted malware to hunt down their opponents. While this phenomenon is relatively new, it could be the ideal time for governments and businesses to build preventive tools to avert any risk, which can only strengthen in the short to medium term. Employees of micro blogging website Twitter receiving threats following removal of suspicious accounts are well-documented, and it could be foolish on our part to weigh perpetrators’ capacity as not good enough to hack into social media servers to spread their propaganda.