“Three Bottom, Two More Remaining,” this subheading on a chart by blogger Charles Hugh Smith illustrates the fragility of the global economy.
The Apocalypse chart on the Market Daily Briefing, which compiles graphs of economic indicators from around the world, reflects the credit crunch in the UK, Japan and the Eurozone, as well as the still remaining lending in the US and China.
“As soon as the volume of lending to the private sector in China and the United States begins to decline, the global recession will begin to push the world economy towards the“Seneca cliff,”the expert notes.
"Seneca Cliff" is a reference to the Roman philosopher Lucius Anna Seneca, who is credited with the phrase: "If growth stops, the end is near."
Smith argues that as soon as businesses and households stop borrowing and instead start paying off debt, this is a sure sign of an impending recession or depression.
While private debt may not be the only barometer for recession, he said, it still remains one of the most important indicators.
“For quite a long time, an economy with a declining volume of lending to the private sector may stagnate with a 1% growth in nominal GDP. Ultimately, this stagnation erodes the economy,”says Smith.
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The $ 1.5 trillion increase in private lending since 2008, as trillions of dollars have been spent bailing out banks and injecting liquidity, is paltry. This increase is comparable to the results from the mid-90s. to 2008
He believes that much of the global economic recovery since the 2008 financial crisis is due to the rise in debt in China.
“In other words, the hyperspeed growth of private lending in China is contributing to an intermittent global recovery and asset bubbles around the world,” Smith writes in a blog post.
The Institute of International Finance estimates that China's total debt reached a record 277% of GDP at the end of 2015.
Such a significant level of debt load can painfully affect the economy.
In recent weeks, investors have worried about the ability of the Chinese authorities to cope with the crisis amid speculative attacks on the national currency.
Societe Generale strategist Albert Edwards outlined an even sadder scenario last week, predicting that China would soon burn out its reserves in a futile attempt to protect the yuan and be forced to float the currency over the next six months.
Concerns over the situation in China rose over the weekend, when Beijing announced on Sunday that the country's foreign exchange reserves fell $ 99.469 billion in January to $ 3.231 trillion - to three-year lows.
This is the second largest decline in China's reserves after falling $ 108 billion in December, indicating continued capital outflows, even as Chinese authorities intervened in the foreign exchange market to soften the yuan's fall.
“China will either strengthen capital controls, blocking domestic investors from entering international markets, or allow the exchange rate to adjust in line with market fundamentals. We remain convinced that China will eventually loosen its grip on the yuan and allow it to slowly decline,”said Sue Trin, currency analyst at RBC Capital Markets.
Trin predicted that the yuan would weaken to 6.95 against the US dollar by the end of 2016 and to 7.50 in 2017.