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.
Some excerpts:
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.
