Liquidity injections and zero interest rate policies disguise risk and may give a false sense of security. This risk could not be more evident today. Not only have we seen large downgrades to consensus growth estimates and central banks’ expectations of GDP and inflation, leading indicators also point to a much weaker economy ahead.
There are similarities with 2008 that we should not ignore.
- A massive China stimulus inflates risky assets and commodities.
- Poor macro and earnings data is ignored by markets assuming that all will improve in the second half of the year.
- Yield curves invert. 15 economies now have 30-year yields lower than LIBOR overnight rates.
- The figure of negative yield debt rises to $11 trillion.
- Financial repression is at all-time highs while leading indicators point to a growing risk of recession.
In the first quarter of 2019, stocks have added $9.3 trillion in market capitalization, bonds have gained almost $2 trillion in value. Meanwhile, the Conference Board Index of leading indicators has plummeted for the major economies. The Citi Economic Surprise Index has also fallen, particularly in March, despite a small bounce in the Eurozone at the beginning of the year. Global trade growth, machine equipment orders and manufacturing indices remain poor… while debt soars to another record-high of $244 trillion according to the Bank of International Settlements and the IIF.
The difference with the Asian or the 2008 crisis is that this time the excess risk is hidden under central banks’ balance sheets and will continue to do so.
So, if risk is hidden under a perennial money supply-growth carpet, why should we worry? Because the endgame is not likely to be a 2008-style bang, but a slow, painful and unstoppable zombification of the global economy. As the evidence of stagnation rises, governments get more nervous. What do they do? Stop the monetary madness? Allow high productivity sectors to thrive? Promote deleveraging and prudent investment? No. More white elephants, massive unproductive spending at the expense of taxpayers and savers in what is likely to be yet another massive transfer of wealth from salaries and savers to governments with fancy names.
Investors are forced into riskier assets for lower returns and the crowding out of productive sectors in favour of government and crony subsidised sectors accelerates, sending money velocity lower, productivity growth collapses and mainstream economists hail the financial repression madness with the excuse that “there is no inflation”, while citizens all over the world complain and demonstrate -rightly- against the rise in cost of living. Intensifying financial repression under the “there is no inflation” excuse is the most ludicrous mantra ever. It is like running a car at full speed down a highway under the premise that “we have not crashed yet”.
Many economists defend the zombification of economies under a false social premise. The argument is the following: What is bad about following the example of Japan? It has low unemployment, its debt is cheap and the economy survives rather well. It is a social contract and debt does not matter.
Everything is wrong with this argument. Japan’s low unemployment has nothing to do with monetary and fiscal policy and everything to do with demographics and lack of immigration. Japan’s low cost of debt is not a blessing. It is the result of using the savings of citizens to perpetuate an almost-Ponzi scheme that does not prevent the country from spending more than 20% of its budget on interest expenses. The idea that it is irrelevant because the Treasury buys more bonds tells us how insane we are defending such policies. It is a massive kick-the-can policy transferring the risk to the next generations. It is no wonder that Japanese citizens don´t spend or invest as much as their central planners would want them too. They are not stupid. They know that the government is going to confiscate wealth via monetary and fiscal means at some point. This endless debt machine makes the economy less dynamic, and stagnation is guaranteed. But the strength of the Yen and the low cost of Japanese debt are only supported by the high level of international reserves and strong financial flows of the country. Japan keeps its imbalances because it is one of the few that has undertaken this concerted policy of zombification. This cannot be transferred to the rest of the world, because the result would not be Japanese-style stagnation but Argentina-style crisis chain.
The fact that Japan has survived two decades of stagnation with the wrong Keynesian policies should not be an excuse to do the same, but an opportunity to do the opposite.
The idea that Quantitative Easing has failed to spur growth and healthy recovery of the world economy is correct. The thought that the mistakes of quantitative easing are solved by outright currency printing and more government crowding out of the productive economy is simply ludicrous. You do not correct mistakes with a bigger mistake.
