A predicted global meltdown passed without event. But there are enough warning signs to suggest we are sleepwalking into another disaster
The 1st of October came and went without financial armageddon. Veteran forecaster Martin Armstrong, who accurately predicted the 1987 accident, employed the same model to suggest that 1A October would be a major turning point for world markets. Some investors even set wagers on it. But the happen of the predicted global accident is only good news to a point. Many indicators in global finance are pointing downwards and some even guess the accident has begun.
Lets assemble the evidence. First, the unsustainable indebtednes. Since 2007, the heap of indebtednes in the world has grown by $57 tn( APS3 7tn ). Thats aA compound annual growth rate of 5. 3 %, significantly beating GDP. Indebtedness have doubled in the so-called emerging markets, while rising by just over a third in the developed world.
John Maynard Keynes once wrote that money is a link to the future meaning that what we do with money is a signal of what we think is going to happen in the future. What weve does so with credit since the global crisis of 2008 is expand it faster than the economy which can only be done rationally if we guess the future is going to be much richer than the present.
This summer, the Bank for International Settlements( BIS) pointed out that certain major economies were assuring a sharp rise in debt-to-GDP ratios, which were well outside historic norms. In China, the rest of Asia and Brazil, private-sector borrowing has risen so quickly that BISs dashboard of risk is flashing red. In two thirds of all cases, red warnings such as this are followed by aA major banking crisis within three years.
The underlying cause of this indebtednes glut is the $12 tn of free or cheap money created by central banks since 2009, combined with near-zero interest rates. When the real price of money is close to zero, people borrow and worry about the consequences later.
Next, lets look at the price of real thing. Oil collapsed first, in mid 2014, falling from $110 aA barrel to $49 now, despite a slight rebound in the interim. Next came commodities. Copper cost $4.50 a pound in 2011, but was half that in September. Inflation across the entire G7 is barely above zero, and deflation stems the southern eurozone. World trade volumes have contracted tangibly since December 2014, according to the Dutch government indicator, while the value of global trading in primary commodities, which scored 150 on the same indicator a year ago , now stands at 114.
In these circumstances, the only style in which the expanding credit mountain can be an accurate signal about the future is if we are about to go through a spectacular productivity boom. The technology is there to do that, but the social arrangements are not. The market rewards companies that create labour exchanges for minicab drivers with multibillion-dollar valuations. Hot money chases after calculating graduates with good ideas, but that is at this phase of the cycle as much an indicator of the idiocy of the money as the brightness of the ideas.
China the engine of the post-2 009 global recovery is slowing markedly. Japan just revised its growth projections down, despite being in the middle of a massive money-printing programme. The eurozone is stagnant. In the US, growth, which recovered well under QE, has faltered after the withdrawal of QE.
In short, as the BIS economists set it, this is aA world in which indebtednes levels are too high, productivity growth too weak and financial risks too threatening. Its impossible to extrapolate from all this the date the accident will happen, or the sort it will take. All we know is there is a mismatch between rising credit, falling growth, trade and prices, and a febrile financial market, which, at present, maintains switchback riding as money flows from one sector, or geographic region, to another.
A better exercising is to image what archetypes a dramatist might use if they tried to write aA comedy describing the nation of society on the eve of yet another catastrophe. There would be a character preoccupied with property: London is fizzing with young professionals trying to clinch property deals right now. The riverbanks of the Thames are forested with cranes, present apartments and half-occupied speculative growths that they are able to, after the accident, attain great social housing.
Then there would have to be a hapless central banker, optimistically appearing through the figures for low growth, stagnant prices and collapsing trade in order to justify doing nothing.
But the protagonist would have to be aA legislator. The Kingston University economist Steve Keen points out that, in the run up to 2008, the flawed ideology of neoliberal economics made a dangerous situation worse. Economists set their professional imprimatur on the idea that risky investments were safe. Today, the stable door of economics is firmly shut. Even mainstream bank economists are calling for revolutionary measures to revive growth: Nick Kounis, ABN Amros macro-economics chief, called on central banks to create their inflation targets to 4% and deluge the world with money in a coordinated survival strategy.
Instead, it is in the world of geopolitics that the danger of elite groupthink is clearest. The economic threat becomes clear if you understand that publishing $12 tn incentivises every country to dump the final cost of anti-crisis measures on someone else. But there is nowA also clear geopolitical risk.
The oil price collapsed because the Saudis wanted to stymie the US fracking industry. Right now, although Russian and American envoys are capable of sitting together in Vienna, their strike-attack pilots do not communicate as they attack their variously selected foes on the ground in Syria. Europe, weakened by the Greek crisis, its cross-border institutions hurl into chaos by the refugee crisis, looks incapable of doing anything to anybody.
So, the biggest danger to the world, despite its growing seriousness, is not the deflation of a bubble. It is the potential of that becoming intertwined with geopolitics. Any legislator who minimises or ignores this risk is doing what the purblind economists did in the run up to 2008.
Paul Mason is economics editor of Channel 4 News . @paulmasonnews
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