“Warnings abound about a repeat of the 2008 financial crisis, which stemmed from reckless property market lending in the US.
“This time the risks are different. If a crisis erupts it will be due to high national debt, primarily in the US, Japan and UK, as well as the liquidity pumped into the global system over the last decade…
“As governments are reluctant to raise taxes or cut spending on welfare, the only option left is for central banks to print money. This has produced the strange phenomenon of ‘free money’. Unfortunately, even with money available at little to no cost, lacklustre growth is holding the business sector back from borrowing to invest.
“Banks are left with useless cash. If they wish to deposit money with a central bank, they must pay to do so. Burdened with too much cash, they cannot offer attractive interest rates to people and institutions depositing money. Squeezed between deposits with no remuneration and a lack of lending opportunities, banks lose their normal role as an intermediary between saver and investor, experiencing a worrying fall in earnings and solvency needed to survive if a crisis erupts.
“Normally, such policies would lead to inflation, but consumer prices have been steady and in some instances falling. ‘Free money’ has, however, placed property prices, gold and new assets like bitcoin in an inflationary cycle. Traditional remuneration linked to economic activity has been replaced by the purchase of assets in the expectation of capital gains.
“This explains stock markets’ astonishing performance. Rather than paying to deposit money in a bank, investors are flocking to stocks, driving prices up to record highs, out of tune with the real economy in the grip of low growth. These investors are mainly financial funds, looking to make a profit off stocks rather than run the companies in which they invest.
“The lack of confidence in the system has popularised new assets linked to digitalisation…
“In a sound economy, the asset market is linked to the markets for goods and services. This allows investors to switch from goods and services to assets and vice versa. There is a certain equilibrium between asset prices and prices on goods and services, reflecting what market forces see as reasonable prices on assets that ultimately will be converted into consumption and investment. Investment in assets can be viable in the long run only if it is underpinned by production capacity for consumption. That is possible only if money and capital are not drained from productive investment into assets like gold and bitcoin.
“The next crisis will materialise when investors realise that the two markets have disconnected. Asset prices will be seen as too high compared to the market for goods and services. Investors will rush to sell assets, wishing to purchase goods and services. Asset prices will plummet as there will be no demand for this surge in supply. Investors who borrowed easy money will go bankrupt and drag the economy down. Banks will be hit as investors will be unable to repay their loans.”
https://www.omfif.org/2019/12/free-money-may-spark-financial-crisis/
“Central banks are set to keep pumping money into the economy in 2020.”
“Weakening economic growth, low interest rates and more volatile operating conditions will increase the credit challenges for lenders across the world, Moody’s Investors Service said in a report published today. The agency cut its outlook [for banks, globally] from stable to negative.
“A return to monetary easing and the use of negative interest rates in some regions has ramped up the pressures on profitability.”
https://www.cityam.com/moodys-downgrades-outlook-for-global-banks/
“Former Fed Gov. Daniel Tarullo on Thursday said the turmoil in the crucial short-term lending [repo] market in September raises a fundamental question for regulators — will the new rules put in place in the wake of the 2008 financial crisis exacerbate an “over-hoarding” of capital during market stress?”
“For all the marked policy differences between the different parties in the UK election, they share a common blindspot. They all seem to assume that the UK is the sole determiner of its economic fate.
“There is nothing in the party manifestos about how they would respond to the very real threat of another major downturn.”
“Police have been seen dragging and beating protesters as demonstrations in Paris turned violent.
“Officers deployed tear gas and used pepper spray as demonstrators threw projectiles and firecrackers.”
“Germany’s sprawling industrial sector is suffering its steepest downturn for a decade, underlining how the engine of the eurozone’s biggest economy is sputtering.
“Industrial output, which includes Germany’s dominant factory sector, dropped 5.3 per cent [!] in October from the same month in 2018, according to the Federal Statistics Office.”
https://www.ft.com/content/a1a14220-1801-11ea-9ee4-11f260415385
“South Africa‘s rand was weaker early on Thursday as a batch of economic indicators showed the economy was still on its knees following a surprise third quarter contraction.
“On Tuesday, the statistics agency said growth shrank 0.6% in the third quarter, raising concerns the country could lose its last investment grade credit rating.”
“With an increasingly cash-strapped and hungry citizenry, the survival of Zimbabwe‘s current government will hinge heavily on keeping its security forces paid and happy.
“Though doing so will be no easy feat given the country’s depleted reserves…”
“More than a dozen people have been stabbed in a Baghdad square that has become a focal point for anti-government and anti-Iran protests after supporters of an Iranian-backed militia flooded the area.
“Thousands of men waving sticks, Iraqi flags and the insignia of the Hashd al-Shaabi armed group descended on Tahrir Square on Thursday morning.”
“A perfect storm of factors has created this situation — a disruptive monsoon, high NPAs and self-defeating policies.
“In just four quarters, India’s economic growth has declined from 8 per cent to a six-year low of 4.5 per cent.”
“Crisis-hit Hong Kong Airlines (HKA) is expecting a substantial amount of money to be pumped into its hands for survival by Saturday, when the government will decide its fate, CEO Sun Jianfeng has said.
““We will try our best to get enough money,” he said. “But it’s very short notice to get a huge [amount] of money.””
“China’s leaders are well aware that the post-2008 stimulus “became excessive”, says Simon Hunt in Halkin’s Thought For The Day newsletter. Too much of the lending and spending splurge ended up in “the stockmarket, property and other speculative activities” rather than the real economy.
“From local government to state-owned enterprises to a “myriad of small banks”, the indebted financial system is now paying the price.”
https://moneyweek.com/519151/cracks-spread-in-chinas-fragile-economy/
“Chinese private companies are defaulting on their debt obligations even after receiving government bailouts, raising questions over Beijing’s efforts to rescue listed groups using public funds…
“Of 339 listed private companies that have received government funding since the rescue campaign began in August 2018, 75 later reneged on payments even after local courts ordered them to pay up, according to public records.”
https://www.ft.com/content/9f2f2370-15a1-11ea-9ee4-11f260415385
“Former Treasury boss Ken Henry says “something is desperately wrong” with Australia‘s economy, which is beset by “structural deficiencies” that cannot be fixed by interest rate cuts or government largesse…
“Dr Henry said the nation’s current economic weakness was potentially far more concerning because it appears to be driven by long-term “secular” problems, not a one-off shock.”
“The blockbuster growth in the world’s major cities in recent years will slow sharply in 2020 and 2021…
“Nine of the top 10 biggest global cities will slow next year, with the stars of the US Silicon Valley showing the most dramatic signs of slamming on the brakes…”
“The Opec oil cartel is considering deeper cuts to production next year to avert a price slump in the market as the global economy falters.
“Ministers from some of the world’s biggest “petro-nations” are expected to cut an extra 400,000 barrels of oil a day from the global market and may consider even deeper cuts of up to 800,000 barrels, according to reports.”
“Economies on the verge of collapse, a yearning for greater democracy, revulsion against corruption and inequality–the grievances that drove people into the streets in 2019 were consistent across continents.
“Some marched peacefully, others clashed violently with security forces, and in at least five places the unrest helped topple government leaders.”
Read the previous ‘Economic’ thread here and visit my Patreon page here.
