Welcome to the late nineteenth century: the glass-is-half-empty view of today's economy.

• Author: Smick, David M.
• Position: FROM THE FOUNDER

The economy's animal spirits are tough to predict. The glass could be half full, but it could just as easily be half empty.

The world, after all, is returning to the late nineteenth century. In today's new Wild West of disorder and unpredictability, there is no Sheriff Wyatt Earp on the scene. Case in point: Russia annexes Crimea. The potential for Putin copy-catting worldwide is enormous.

This is the beginning of a new economic world, as well. The U.S. Congressional Budget Office and the OECD both predict slow global growth ahead. The geopolitical landscape will increasingly be one of volatility, anger, risk, and violence. That is what happens in a world desperate for growth.

There could also be greater financial risk. History prior to World War II shows that financial crises occurred roughly every ten years. They were a fact of life. The relatively stable financial system of the post-war era was the anomaly. Probably not any more.

One would think that with all of mankind's advancements, we'd be better able to resolve financial tensions before they become major calamities. We can't. Maybe it is because our brains are genetically hardwired for the short term. But looking at the global financial system today, there are considerable risks that could easily prove calamitous.

China's shadow financial institutions, for example, are at risk of becoming the next Fannie Mae. In 2013 alone, this mysterious collection of unregulated trust companies, insurance firms, off-balance-sheet lenders, and, yes, pawnbrokers grew by a size equivalent to the entire U.S. financial system, estimates analyst Philippa Malmgren (p. 75). They are an accident waiting to happen.

Throughout the first decade of this century, China, financed in part by this system, invested in new urban industrial space and housing equivalent to an incredible 322 Manhattans. Talk about potential investment bubbles.

The problem is that both the corporate sector and local governments there have cash flows too small to service the debt created by such investment. Producer prices are declining by 2 percent, while wages are increasing by 10 to 12 percent. Translation: Chinese producers are losing money. Empty apartment buildings produce no returns. Neither does infrastructure spending. Now the shadow banks are up to their eyeballs rolling over loans at maturity and replacing them with new riskier loans.

To make matters worse, China faces a competitiveness nightmare. Wage demands in Mexico today...