Econopocalypse Looming Again?
Stock market and debt troubles could mean bad news for this presidential election year, giving Trump and Sanders both more traction for their respective bad ideas.
While those who strongly doubt the core solidity of our modern financial system have, as is often joked, predicted 30 of the last one huge economic downturns, and past results are no performance of future guarantees, and you can't win if you don't play and all that, this week sure isn't looking too great for "the system."
The stock market, as noted in P.M links here, hit a one-year low, and in this first 20 days is having its official worst year in history, and has lost the past couple of years in gains.
If you believe the theory that Federal Reserve QE policies were a large cause of the past few years upswings, as has been discussed here, then seeing this downturn after the Fed finally started edging up interest rates is not super surprising.
And Ambrose Evans-Pritchard, reporting from Davos for the UK Guardian, warns us that (especially in a world facing possible growing interest rates) that world debtpocalypse verging on debtgeddon looms:
William White, the Swiss-based chairman of the OECD's review committee and former chief economist of the Bank for International Settlements (BIS) [says] "Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief," he said.
"It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something," he told The Telegraph on the eve of the World Economic Forum in Davos…
Mr White said Europe's creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed….
And the blame lies largely on the very forces we are told to rely on to keep all copacetic:
Mr White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows.
The result is that these countries have now been drawn into the morass as well. Combined public and private debt has surged to all-time highs to 185pc of GDP in emerging markets and to 265pc of GDP in the OECD club, both up by 35 percentage points since the top of the last credit cycle in 2007….
Mr White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as "inter-temporal smoothing". It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you.
Also: don't forget to panic over plunges in the Baltic Dry Index (which measures price of international shipping) and oil prices, as many nervous folk are, though I've never fully understood from a full-circle economic perspective why needed things becoming cheaper should be a long-term worry.
That said, banks who have loaned tons of money to institutions depending on high oil prices to stay solvent and manage their debts are not happy. (See above about the domino danger of debt.)
As I once explained on a tense hour-long episode of Glenn Beck back in 2009 (which I entered thinking I was doing a 8-minute segment), this financial stuff can be a mess but at root involves a shifting of ownership claims over what is actually key to economic health: the flow of income and productivity of human beings and their tools and their knowledge (and, yes, their needs, for you demand-side freaks), all of which will (barring even bigger troubles I don't know about) continue to exist.
But 2016 might look more like 2008-09 than we'd like.
And that's bad news for this presidential election year. Such troubles will likely make both general bloviating economically ignorant strongmanism (Trump) and "now the government needs to give you more free stuff than ever" (Sanders) even more appealing than they unfortunately already are.