At the start of 2015, the global economy is an unmitigated mess; globally contracting against lack-luster demand, disrupted and mangled by geopolitical, economic, religious and ideological conflicts, and absurdly unbalanced by rising liquidity driving financial/asset markets, against contracting economies and earnings. We feel the global economy is heading towards far greater trouble, rather than any recovery.
Usurped and taken hostage by the Federal Reserve and the other major Central Banks, the global economy has become the ATM machine and an experiment of national and international bankers, the very wealthy asset owners and financial speculators. Meanwhile, financial risk has been covered by Central Banks, and legal risk by governments willing to let off criminally guilty Banks with fines, along with non-admission of guilt. The average working person who produces the major portion of the global economic productivity and wealth creation, and usually underwrites the risks of this manipulating elite, through bailouts and through the erosion of their own equity and savings, have lost control of their economies and their destiny. The real economies have languished and retracted, tens of thousands of jobs are still being ‘rationalized’ as most advanced economies bob in-and-out of recurring recessions or near recessions, while the Central Banks repeatedly flood the financial markets with paper money and absurdly low or negative interest rates. This free-for-all at the top has created a bizarre economic scenario.
Collectively the major economies have had Quantitative Easing (‘QE’) in the range of $60 Trillion, at record low rates. And all that easy money has produced, is an unsustainable ‘recovery’ with ongoing hardship for most, and superficially elevated asset markets and the exceptional enrichment of a very few. This dichotomy and widening divergence was produced by years of unsound policies of endless money printing, unprecedented debt growth, rampant financial speculation, banking fraud, artificially inflated financial markets detached from economic reality, grotesquely widening inequality, contracting global demand, deflating GDPs, continuing high unemployment, job losses, and widespread conflicts, resulting in an economic and humanitarian global catastrophe swamping hundreds of millions worldwide. Entire countries and economies, like Greece, are teetering on the edge of bankruptcy and default in spite of hundreds of Billions and Trillions in bailouts over the past six years (the ‘looming catastrophe’).
So far the Central Banks have failed miserably in fostering sustainable global or national economic recovery, but succeeded admirably in boosting asset markets, creating unprecedented inequality globally, and loading up the global financial system with un-repayable financial debt. Most of that debt will have to be re-negotiated or ‘written-off’ resulting in massive wealth destruction. It is the deleveraging that was supposed to have taken place, but wasn’t allowed to, post the 2008 crash. Now, collectively we have all climbed up to the much higher level debt diving board, to take a deeper dive into the growing global economic and geopolitical disaster and dysfunction.
On the whole, the global public is strapped on to an ever wilder ride, with no escape, being shaped and steered by the Central Banks that are visibly losing control of their evolving debt-laden creation, that especially over the past 6 years has been masquerading as sound economic, monetary and fiscal policy. Now, this debt engorged ‘bug’ called the global economy, is en-route to its inevitable meeting with the reality windshield, but this time, the engorged bug will not only obliterate itself but it might also obliterate the windshield. Welcome to the economic catastrophe engineered by the “Smartest Guys in the Global Room” - to paraphrase the former Enron’s ‘brightest stars’, who were equally confident of their invincibility.
This inflating monster of unbridled greed and unrealistic expectations is the culmination of decades of rejection of regulatory, financial and economic discipline by the financial and global industry, and at their behest, by governments and their economic advisers. This steady growth in global liquidity, combined to an extent with important advances in technology, unleashed a prolonged period of increasing prosperity and consumption, resulting in global asset market appreciation and international trade prosperity. It also led to an assumption of a possible ‘perpetual consumer-demand driven global economic model’, that could provide endlessly growing trade, jobs, profits and expanding markets; a sort of economic nirvana, primarily built on ever escalating debt. That model worked until the increasing liquidity and the accompanying global prosperity unleashed the inevitable greed, corruption and over-consumption, which reached its zenith in the US sub-prime credit and financial securities fraud by the US based financial institutions that finally crashed the global financial system, in late 2008. The offending financial institutions and the collapsing global financial system were rescued by the governments through the Central Banks at the cost of the majority of the populations, and the same institutions are still being doused with easy money and encouraged to go out and play.
The severity, scale and suddenness of the crash caught most of the financial industry, governments and the public, unprepared, and the resulting deep contraction in financial markets, economies, and international trade devastated the security and financial position of the average person as unemployment spiked worldwide, equity disappeared and debt became a major and overriding burden. Suddenly, the demand driven economies of the World were awash in overcapacity, unemployment, debt and sharply shrunken global demand. The two Charts on the following page sum up the key problems afflicting global economies since the crash of 2008, dramatic and persistent shrinking global demand, resulting in global economic contraction, over capacity and resulting potential conflicts, as governments try and deflect the increasing angst and public’s attention from home grown problems. The tools used thus far, by the Federal Reserve and the other Central Banks, to stimulate demand have been massive and recurring financial stimulus and interest rate suppression. Both of these measures are the wrong kind of tools, and are being applied to the wrong end of the economies (top-down), doing next to nothing for the public while excessively enriching the already ultra-rich. The steady decline in global export volumes over the so called recovery years speaks eloquently to the failure of these economic policies that have been applied so vigorously thus far.
Chart: Deviation of world merchandise export volumes from pre-crisis trends, 2005 – 2015 (2014 - 2015 Estimates).
Source: World Trade Organization (WTO) Secretariat
Supporting the above Chart is the one below as it shows the steadily falling trade indicator of global dry goods shipments. The declining global trade and demand since the 2008 crash, is graphically self evident in these two Charts.
The post crash emergency intervention by governments was a study in cronyism economics by the powerful political and financial interests that had corrupted and crashed the system in the first place. The US Government, at the epi-center of the crash, was advised by the investment bankers of Wall Street, who shamelessly looked after their own interest at the expense of the public. Hundreds-of-Billions in immediate bailout funds to the largest financial institutions, over the past 6 years have turned into a flood of ever growing Trillions-of-dollars at near zero interest rate. The global financial system was flooded by Trillions-of-dollars in bailout and easy money, fabulously enriching the minute fraction of bankers, traders, and the already global wealthy (the fabled 1%), while costing the majority, their savings and home equity, and as they got laid-off by the tens-of-thousands, their very livelihoods. In most of Southern Europe, Middle East, some of South America and Asian countries, unemployment is in the double digits, and youth unemployment is in the soul crushing range of 25% to 50% plus. The current policies are robbing the youth of this generation of decent prospects of gainful employment, and the debt being piled on is robbing future generations.
This flood of near free money from the Central Banks, in the Tens-of-Trillions-of-Dollars (which future generations will have to pay for), has done next to nothing for the vast majority of the public, or the underlying economies, as is witness by the current rates of global unemployment, consumer debt overload, and industrial overcapacity. The resulting deflationary forces are requiring newer and ever greater amounts of QE and still lower, and in fact incredulously, negative interest rates in some advanced economies. For the populations of the advanced economies this is an ongoing disaster, as their jobs are increasingly tenuous, and their savings are gutted by ZIRP (Zero Interest Rate Policy), forcing the turn towards greater and riskier asset market speculation, as is the plan, and a possible wipe-out.
For the emerging economies as a whole, the 2008 crash induced economic contraction was not as severe as in the advanced countries, and therefore the change in employment numbers was less, but the crash did bring their high single-digit and double-digit growth rates down quite a few notches, and since then they have struggled to pick up any real momentum, with the Western demand having failed to return to the pre-crash days.
The Charts below show that the employment levels in Advanced and Emerging economies, never did recover and return to pre- 2008 crash levels.
The increasing liquidity unleashed in the World goes back decades, and has spawned major bubbles and crashes, in Asia (1997), and in the West (2000 - 2008). Rather than being slowly curtailed and the focus shifted to desperately required structural reform, it was decided that ever greater liquidity, after every crash, was exactly the medicine required to bring the global economies back to the favored state of ‘perpetually expanding demand and consumption’ that was now expected defacto, to be the only acceptable economic state globally. Centuries of economic cycles, human behavior and natural laws were to be tamed by the emerging power of the ‘recession busting Central Banks’ (our emphasis).
Most governments, always amenable to be bought by powerful vested interests, always fearful of unhappy constituents, and always ready to spend beyond their means to placate them, discovered the unadulterated joy of the money printing presses (through their Central Banks), and thereby the means to try and keep everyone happy. Globally, they have piled on the debt with unmitigated abandon, which continues till today (the current balance being a lot higher than the Charts below show). Since 2007, US$57 Trillion in debt will have been added to the global economies, according to a report by McKinsey & Company. Debt has continued to rise much faster than the World GDP, creating a massive net deficit in serviceability. That’s why, unless debt creation is dramatically curtailed and economic productivity rises dramatically to narrow the widening gap (Chart below), even at today’s low rates this overhang of unproductive debt will be un-serviceable and will have to be written-off, with very negative effects.
The global Central Banks and the their governments are hoping to inflate this debt away over time, but as we had stated before, without proper deleveraging and restructuring, sustainable economic recovery could not take place, and is still unlikely. Therefore the chances of inducing controlled inflation is unlikely, what is more likely is that in the determination to induce inflation, in a naturally occurring deleveraging cycle, so much unproductive debt will be piled on that the global system will crack under the strain. As countries, companies and consumers struggle, the economically-detached financial markets are being driven up, inexorably, by a continuous flood of cheap and easy money, creating a very real threat of a prolonged and serious correction. After all, such policies till date have resulted in a fracturing global economy, falling trade and demand, deflation, currency wars, real and geopolitical proxy wars.
As new Trillions are printed and pushed into global banks and large financial institutions, and into the gleeful hands of financial speculators at near zero percent interest rates, lessons in lack of ethics and morality aside, what is truly alarming is the fact that the governments and their economic advisers are not changing course, as their actions of ever larger stimulus packages fail to deliver the desired results. Instead, as their goals are not met, like irrational gamblers they are doubling-down with ever bigger bets.
The growing debt expansion and liquidity continues to promote over indulgence in speculation and mal-investment, and an ever fragile, unstable, geo-politically fracturing global economy that is inexorably deteriorating instead of recovering. This is the exact opposite of what was supposedly desired by the years of global stimulus and interest rate suppression by all governments and Central Banks. Additionally, the means chosen to douse the dangerous flames of the 2008 subprime credit and debt conflagration have been ever greater truckloads of debt in the form of printed money, and the resulting larger conflagration is met with even greater truckloads of printed money. The decision to smother the fire with the fuel that started it all, ever growing mal-invested liquidity - spawning asset bubbles - is now the strategy and remedy adopted by most Central Bankers today, the hapless public is along for the ride.
Central Bank led solutions are not fixing the severe economic and the resulting social problems of the vast majority of the populations in most countries, where unemployment is still in the double digits, and youth unemployment is in the range of 50% or more. These struggling countries, still being battered by the effects of the last crash, and now wallowing in unpayable debt, make up the bulk of the current Eurozone. If Greece is successful in renegotiating its debt from its creditors, other heavily indebted countries whose populations are facing similar hardships, will follow suit. That will unleash waves of volatility in the financial markets, further rocking an incredibly shaky boat. If Greece is unsuccessful in its negotiations, then all bets are off for the continuing integrity of the current makeup of the Eurozone. A day might come when the Eurozone will fracture into a North and South dual entity, but for now the desire of its members is strong to keep the Euro experiment intact in spite of the economic and political challenges.
See the continuation of this analysis in #26 and for more plus the conclusion in #27...