The UK’s Guardian newspaper, of Edward Snowden leaks fame, just published a good overview of the world’s recent financial missteps titled The world economic order is collapsing and this time there seems no way out.
The heart of the economic disorder is a world financial system that has gone rogue. Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level.
The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees.
The false boom that follows seems to justify the lending. Property prices rise. Companies and households grow overconfident about their prospects and borrow freely. Economies surge well above their trend growth rates and all seems well until something – a collapse in property or commodity prices – unravels the whole process. The money floods out as quickly as it flooded in, leaving bust banks and governments desperately picking up the pieces.
The result, says the Guardian, is a crisis in three acts. Act one was the 2008 bursting of the housing/derivatives bubble that nearly wiped out the global banking system. Act two was the 2011 euro crisis in which the idea that Greek, Italian and Spanish bonds were equivalent to German paper was abruptly discredited, again nearly wiping out the big banks.
Act three, now in progress, is the bursting of the emerging markets bubble, led by China (great stat: “China manufactured more cement from 2010-13 than the US had produced over the entire 20th century.”)
China’s banks are, in effect, bust: few of the vast loans they have made can ever be repaid, so they cannot now lend at the rate needed to sustain China’s once super-high but illusory growth rates. China’s real growth is now below that of the Mao years: the economic crisis will spawn a crisis of legitimacy for the deeply corrupt communist party. Commodity prices have crashed.
Money is flooding out of the EMEs, leaving overborrowed companies, indebted households and stricken banks, but EMEs do not have institutions such as the Federal Reserve or European Central Bank to knock up rescue packages. Yet these nations now account for more than half of global GDP. Small wonder the IMF is worried.
So far so good. But then the Guardian ruins its perceptive analysis by proposing more of the same:
The world needs inventive responses. It needs a bigger, reinvigorated IMF whose constitution should reflect the global balance of economic power and that can rescue the EMEs… It needs western governments to launch massive economic stimuli, centred on infrastructure spending. It needs new smart monetary policies that allow negative interest rates.
This isn’t surprising but it is instructive because it represents the thought process at work in the upper echelons of virtually all the major economies: What we’ve tried has failed, but the fault is with the execution rather than the concept. We didn’t go big enough. We didn’t borrow enough money, we didn’t build enough roads and bridges, we didn’t push interest rates down far enough. So let’s hit the emerging market crisis with everything: bigger multinational institutions making vastly larger development loans, rich-world governments ramping up spending and paying for it with borrowed money, and central banks pushing interest rates down to negative mid-single digits.
For those who view this as the financial equivalent of a junkie doubling the dose of heroin to ensure a permanent high, the question isn’t whether some mutant strain of easy money will save us, but what dosage will turn out to be fatal. And of course which asset classes will benefit from the intervening high.
At the risk of sounding like a broken record, the negative interest rate/high debt/rapid money growth world envisioned by the Guardian looks like a precious metals paradise.