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Global Economy, 2014 – Looming Catastrophe Part 1a (#19)


About five years ago, the Global Economy - Humpty Dumpty - fell off the wall. The global economy now has more glue and tape on it than ever before, but it remains broken, and in 2014 this Humpty Dumpty is threatening to come apart at the seams, and this time there will be no arresting the fall, as in 2008.

The Global economy is broken and dysfunctional, and all the ministrations and policies enacted by the Governments and the Central Banks, since 2008, have only and steadily exacerbated and rebuilt the old problems up to a much larger scale.

The cures administered, excess liquidity, record monetary easing, and undue advantage of unprecedented easy and cheap money to the financial institutions, were the reasons why the World economies got into trouble in the first place. The current global leadership applied that same prescription of excess liquidity and monetary easing, only with greater vengeance. Of course, the other ingredients, excessive greed and unscrupulous behavior of those that pull the strings in the financial markets, and in the World capitals, can always be counted on.

Never in recent memory has the exercise of piling on vastly more debt and leverage, to solve a problem that was created by excessive leverage in the first place, been carried to the current fearsome and fateful extreme. And, this ‘experimental cure’ is going to exact a heavy price, globally. So batten down the hatches because a perfect storm of excessive liquidity, force fed speculative investment into asset markets, inadequate global demand, serious overcapacity, high energy prices, moribund labor markets and excessive debt, is threatening global economic stability.

During the past decades of mostly Republican led governance, America went on a financial deregulatory binge that cultivated destructive greed, fueled speculation in asset markets and culminated in the ‘Crash of 2008’. Then President Obama got elected and he inherited an economic catastrophe from the Republicans.

But over the last five years Obama’s advisors and administration have been a study in conformity, doing everything to please everybody, and ending up doing the wrong thing all with the best of intentions. To try and keep the totally broken economy afloat at all costs, rather than addressing the fundamental problems, his administration through the Federal Reserve, has kept the World awash in liquidity, and other governments followed suit (who is willing to fight the American administration and the Federal Reserve?). So globally, none of the fundamental mistakes got corrected, instead the old ways prevailed, and now an even bigger catastrophe looms.

The American prescription of ongoing and massive stimulus has been followed by most other major governments and their Central Banks, through cash infusions and ultra-low interest rates, and the basic problematic fundamentals of the global economy have been ignored. The expected recovery has not taken place, and at the end of February, 2014, Europe, North America and the Emerging Markets are, and still remain broken. Therefore “all the King’s horses (Liquidity) and all the King’s men (Central Banks) could not put Humpty Dumpty back together again”.

The global governments and their Central Banks continue to rely on the prescription that particularly favors the financial market players, while the general populations struggle. This one fact has left most economies with lackluster consumer demand, over capacity, over indebtedness, regression in real wages and disposable income (of the middle class, lower middle class and the poor), and accelerating inequality in wealth distribution. These are fundamental structural problems that are not being aggressively addressed by most governments, and hence the continuing global economic malaise, and the looming disaster.

The day to day, month to month, constant ebb and flow of positive and negative economic data, economic uncertainty and the financial market volatility makes for great talking points, but the consistent uncertainty underscores what we have been predicting since the start of QE3 (about September 2012) that an unsustainable, uncertain and volatile economic environment cannot be fixed with just ‘Quantitative Easing’.

As governments and the Central Banks are forced to acknowledge the increasing impotence of their stimulative actions and policies, structural changes will need to be implemented to foster future stability. And since focused and co-operative effort in that direction, by governments, was not undertaken in the past five years, we are reasonably certain that in the near term no real sustainable growth is possible, but in fact the opposite will likely take place, another global meltdown.

The sheer size of the cure (global debt) now poses a greater risk than the feared disease, a cyclical, albeit a deep recession. In trying to avoid a deep recession, the global governments and their Central Banks may be bringing on a global ‘Depression’. This dire statement is not mere fear mongering, or an attention grabbing ploy, but is almost a statement of fact, because the current macroeconomic policies being followed by the global Central Banks are breaking all immutable laws of basic finance, business and economics, and are therefore unsustainable and dangerous. The fact that they are deviating from the norm to the degree that they are, the resultant failure has to be that much more pronounced.

In early 2014, the elements of a perfect economic storm are: unsustainable levels of public and private debt; coupled with declining economic growth rates; muted international trade; steadily eroding values of most global currencies; and the biggest risk - new asset bubbles in most financial and real estate markets, re-inflated through ridiculous amounts of cheap and easy money through the Federal Reserve and other Central Banks, to the top percentile of the money market players. This extended experiment in over inflating economics was doomed for failure as governments shied away from correcting the basic fundamental imbalances first. The Chinese government provided the latest example of the reluctance of governments to let financial excesses fail, through last minute bailouts (more on that later).

Most governments were loathe to enact the deep structural policy changes that have been required, to realign their economies to the new global realities post 2008. The reason being, such policies would have brought short to medium term pain, for long term gain. But, no government wants to face public or electoral wrath during their term, and would much rather push the problems further down the road.

It is so much easier to flood the financial system with printed money, boost assets markets, be they equities, bonds or real-estate, claim the rising asset prices as proof of recovery, and the forced improving statistical numbers as the appearance of recovery, even though it takes Trillions annually to keep up the façade, and ultimately hope like heck something takes hold, just so they do not have to deal with the real structural and painful issues.

In the past few years that is precisely what most governments have done; ignored the real problems, flooded the financial markets with easy and cheap money, and in the process declared various types of fleeting victories based on nebulous month to month statistical numbers of key economic indicators. Those numbers have constantly gyrated, occasionally to the positive but mostly to the negative, resulting in the current status: Trillions spent worldwide, and no sustainable global economic recovery.

We do not buy the ever changing ‘stimulus’ induced signs of life as recovery, because, these signs will vaporize upon total stimulus withdrawal (if that ever happens), as they have continued to regress regularly over the past five years. Thereby necessitating the constant reassurance, hand holding (forward guidance), and the ever present easy money flowing teat of overactive printing press stimulus of the Federal Reserve, and the other major Central Banks, to placate the ‘tapering tantrums’ of addicted financial and real estate market players-speculators.

In spite of all this molly-coddling attention and over feeding of the markets, the underlying global economies are still unable to stand on their own legs, and continue to sag alarmingly in spite of constant stimulus, necessitating additional verbal assurances from the Central Banks, coupled with injections of immediate cash support. In fact, it all resembles a vaudevillian act where a seriously compromised person is being held up and made desperately to seem alright by the companions, as they prop the person up and tell everyone that he or she is perfectly fine.

The extraordinary printing press liquidity being pumped into the global financial system, and artificially held low interest rates, have been penalizing the general public, the cautious and the savers, by steadily eroding the value of their money and giving them negligible return on their deposits, while unwisely enabling and rewarding the large investors and speculators. And of course, the banks have proved to be bastions of misdeeds, greed and instability, and have once again received untold Billions with which they have over-inflated asset prices and created the exact same environment from the effects of which we have been trying to escape for the past 5 years. Banks and investment banks have paid tens of billions in fines to investors and regulating agencies for their ongoing litany of misdeeds. It seems, it is a small price to pay for the multi-Billions in profits they make every year.

This time too, and once again, it will end badly as the various asset bubbles blow-up or deflate. There are far too many potential triggers in the struggling global economies and environment today that could provide the pin to prick the first bubble, and start the cascading phizzes and pops.

There are big asset bubbles and potential political trouble, brewing in China, Japan, India, the United States, Europe, Russia, Brazil, Argentina (South America in general), the Middle East, the United Kingdom, Australia, and some of the countries of South East Asia, like Thailand and Indonesia.

We have been consistent in our stand for the last year and a half that ‘sustainable recovery’ was not possible regardless of size and duration of ‘Quantitative Easing’ after QE2, regardless of claims to the contrary by governments and Central Banks. The frequently touted ‘global recovery’ since then has been ethereal and nebulous at best, and as mentioned in our previous Economic Reports, we feel that global economic conditions are going to get much worse before they start getting better. We are in the calm before the real storm.

The largest Central Banks; the Federal Reserve, the European Central Bank, Central Bank of Japan, People’s Bank of China, and others with their near irresponsible, ill-considered ‘whatever it takes’ statements and stance, have unleashed a speculative boom (as intended) and a ‘Debt Monster’ that demands to be fed insatiably, or it will wreak havoc in the financial and real estate markets. So the Central Banks continue to feed the ‘Monster’ with easy cash and low interest rates. Meanwhile, the conflicting pressure continues to mount on the over inflated debt-supported asset bubbles, and the trapped underutilized - low demand - underlying economies.

The only question is, where and when will the first collapse happen, which will bring the easy money debt supported house of cards down? The overextended financial markets in the United States, dysfunctional Europe, over-leveraged China or the long term insanity of ‘Abenomics’ in Japan, could individually trigger the next global collapse, as could so many of the other festering problems around the World.

CONTINUE for USA, China and Japan updates in next section

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