China Is About To Cause A Global Recession

Two of the world's biggest economies, the United States and China, are struggling. Business activity in Shanghai was brought to a standstill for weeks. Disastrous. I think there is no other word for it.

What's up guys? It's Graham here. Throughout the last few weeks, there's been a lot of talk about China's failing economy, the collapse of their seven trillion dollar housing market, and the impact that's about to be felt throughout the rest of the world. In fact, I've covered those topics twice, to outline just how severely their markets were about to be affected. But I have to say, the more I researched, the more I began to realize that there are some rather serious global implications that are not being discussed, and it's worth bringing to your attention because it's already started to happen.

Europe, for example, has begun to face an imminent oil shutdown, as their dollar falls to its lowest level in 20 years. Global inflation is the highest it's been in decades. Tighter monetary policy threatens to cause a worldwide recession, and in the words of Ray Dalio, the times ahead would be radically different from those that we've experienced in our lifetime.

So, in an effort to break this down and get to the truth about what's really going on, let's discuss exactly what's happening, what this means for the entire economy, whether or not it's as bad as people say it's going to be, and what you could do about it to make money—or, alternatively, I guess not lose money, depending on which way you look at it.

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Alright, so when it comes to a global recession, you have to understand exactly what's causing it, or in other words, who's to blame. And to do that, we have the term globalization. See, even though every country has its own economy, currency, and supply for goods and services, over time, it becomes more and more profitable to expand those services overseas and attach themselves to the country that they're doing business with.

This allows them to gain a competitive advantage by manufacturing abroad, buying cost-effective materials, and gaining access to an entirely new demographic to boost profits. For example, more than half of Facebook's revenue is overseas. Sixty-seven percent of Apple's business is generated outside of the US. Even Tesla is collecting 25 percent of revenue from China alone.

But it's not without a bit of a catch. On the one hand, this allows for the creation of new jobs, innovative ideas, and a higher standard of living across the entire world. Not to mention, if it were not for outsourcing, it's estimated that the cost of a U.S. iPhone would be $600 more and fabrics would sell for two to four times their current retail price.

However, the downside is that since we're so interconnected throughout the entire world, the economic downturn of one country could create a domino effect throughout another, and another, and another, until we all see a global recession like we're beginning to see today.

So, what's happening, and how is this going to affect all of you watching? Well, it's not just one country or one event that's to blame, but instead a multitude of factors all happening at the exact same time.

First, we should talk about the Russia-Ukraine war. Even though it's an incredibly complex situation globally, the invasion resulted in a sudden increase of commodity prices, like oil and gas, as production was disrupted. In addition to that, there were also other commodity exports being affected as well, including wheat, nickel, and aluminum, of which Russia is a big producer.

The impact extends even further, though, with Reuters saying that over 90 percent of U.S. semiconductor grade neon supplies come from Ukraine, while 35 percent of U.S. palladium is sourced from Russia. This means computer chip and semiconductor production has become even more strained. After all, these chips are integrated in everything from cars, computers, phones, video games, electronics, solar panels, or basically anything with a computer.

That's partially to blame for the skyrocketing costs of so many items that we use day to day, leading, of course, to second: higher inflation. After all, gasoline makes up a large portion of the Consumer Price Index, and if oil keeps going higher due to international tension, that's going to reflect in our own inflation numbers and the inflation around the world.

The same applies to the chip shortages coming from Russia and Ukraine, with used car prices being a perfect example. Year over year, the price of automobiles has gone up by nearly 40 percent due to labor, material, and supply chain bottlenecks. But just as they were beginning to come down, they went back up.

Finally, third, we have higher interest rates. In an effort to fight inflation, the United States raised their interest rates at a slightly faster pace than the rest of the world, causing other countries to hold those U.S. dollars as a safe store of value. However, as the U.S. dollar rose in value from excess demand, it became more expensive for other countries to trade in those dollars, forcing them to print more of their own currency to pay for those items that cost more because of excess demand for the U.S. dollar because of higher inflation.

But that is just one piece of the puzzle. The next is a topic that's been recently gaining a lot of traction, and that would be China. They're one of the world's largest economies, responsible for manufacturing 20 percent of the items that we all use day to day, and they are facing severe risk of complete financial collapse.

Now, even though we could certainly point to restricted policies, questionable business practices, and a lack of regulation, there are three main factors that have contributed to a global slowdown.

First, the impact of zero Covid policy. This quite literally means that there's zero tolerance for the spread of Covid to the point where China will enforce strict lockdowns, maintain tight regulation, and do anything in their power to prevent their population from becoming infected. But as a result, their economy is expected to lose its ground. Production is slowing down, supply chains have continued to be severely impacted from a backlog of shipping, and their growth is now expected to be non-existent.

But if that's not bad enough, we have second: the real estate market, fueled by excessive speculation, false promises, and almost no oversight. Many of the largest real estate developers in China have filed for bankruptcy, leaving citizens to fend for themselves along with mortgage boycotts throughout the entire country. Even though it started with the property giant Evergrande, which is more than $300 billion in debt, within four weeks, more than 320 projects in about 100 cities were facing similar protests, roiling markets and forcing authorities to corral banks and developers to defuse the unrest.

Now, even though this doesn't have a direct correlation to the U.S. housing market, many large institutions have increased their investment in China throughout the last 10 years, and China holds nearly a trillion dollars' worth of U.S. treasuries. So, if they sell to raise money for their own economy, then demand for those treasuries would fall substantially.

Finally, third, we have production. The New York Post suggested that the slowdown in China is likely going to result in fewer exports from the United States, resulting in less demand, less product being sold, and a further slowdown throughout the global economy. It's even noted that China will fall far short of meeting its annual economic growth target of five and a half percent.

We're starting to realize very quickly that the days of China's meteoric economic rise are long past. However, in terms of what we're dealing with today and how this could lead to a global recession, we have to talk about what's happening right now.

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So, thank you guys so much, and now let's get back to the video.

Alright, so in terms of what's happening right now, flat out, inflation is a huge problem around the entire world, with several countries seeing double-digit increases year over year. That's resulted in households having to pay more money for goods and services, meaning there's less money left over to pay for everything else, driving down demand, growth, and production at a larger pace than anyone imagined.

For example, two of Europe's largest economies, Germany and Italy, are already beginning to show signs of a recession. It's also found that this downward trend is already as bad as in the 2008 crisis, and this data doesn't yet reflect the current spike in energy prices, which are expected to put even more pressure on both people and businesses.

That's resulted in the Euro falling below the value of the U.S. dollar for the first time in 20 years, with the fear that international tension would cause commodity prices to rise even higher and demand to fall even lower.

Now, in terms of the United States, it's said that since 1955, the U.S. economy has always experienced a recession within two years from every quarter in which inflation was above four percent and unemployment was below five percent, as they are today.

So, in terms of what this means for you, your money, and the global economy, here's what you need to know. On a really, really overly simplified scale, it's easy to see how one falling economy could affect the demand of another while increasing the costs of another and causing a cascade effect throughout the rest of the world.

In this case, higher energy costs result in higher inflation, which results in higher interest rates, which reduces demand, which increases supply chain shocks, and before you know it, we're in a global recession.

To me, it's not rocket science that China's lack of growth would likely result in fewer U.S. exports, less international investment, and less profit for the businesses that we invest in. But solving the issue is probably not going to happen anytime soon, and most likely it's going to serve as a reminder that each country will have to adapt for the option of producing their own materials in-house to avoid future shortages.

Realistically, though, it seems like the most plausible scenario is that both the United States and the Euro area experience near zero growth next year, with negative knock-on effects throughout the rest of the world. This basically means the economy will need to cool off before pushing forward.

But at least for the foreseeable future, it's probably a good idea just to cut back on what you spend, keep a diligent budget, save as much as you can, invest as usual, and stay employed because most likely, we're going to have to wait for these conditions to improve before the economy can continue growing again.

And hopefully, by the time that happens, it'll be in a way that benefits everybody.

So, with that said, thank you guys so much for watching. As always, feel free to add me on Instagram. Thank you so much for watching, and until next time.