During the past week or two, several multilateral institutions have been voicing out concerns about macro issues. Question is why?
First, the IMF raised the risks of rising protectionism
From the Telegraph (September 27)
Urgent action is needed to reverse a slowdown in trade and stop low inflation from triggering a downward spiral of weak growth, job cuts and higher debt, the International Monetary Fund has warned.
A global lurch towards protectionism and the sluggish recovery had driven a "remarkable" slowdown in trade since 2012, according to analysis by the Fund.
The IMF warned that a further move away from trade liberalisation was likely to "hold back international trade in goods", harm economic development and prolong the global slowdown.
The IMF further “warned that trade barriers such as anti-dumping duties had increased since 2008 as it urged countries to "resist all forms of protectionism"”. "Even though the contribution of trade costs to the trade slowdown has been limited relative to weak economic activity so far, the dearth of new global policy initiatives to reduce these costs, along with the gradual rise of non-tariff barriers since the global financial crisis, could pose further risks to trade," it said.
Though the IMF mentioned of the need to “reverse a slowdown in trade and stop low inflation from triggering a downward spiral of weak growth, job cuts and higher debt”, they didn’t say what has caused these. They also didn’t say what has sparked a rise in protectionism.
They didn’t say that most of the present problems have emanated from the bold experiments undertaken by central banks.
As reminder, here is John Maynard Keynes on how to destroy society (PBS).
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency.By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month,all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right.There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
The essence of inflationism is ‘protectionism’. It is a policy that creates winners among a few, and losers in the general. Inflationism represents the redistribution of resources through monetary means or through currency debasement. Inflationism works to the benefit of, or protects the interests of the governments and their cronies. Benefits from political redistribution through inflationism come at the expense of the people through the loss of purchasing power which spills over to the social fabric. Because inflationism is a time consuming process, the gangrene spreads unevenly to different sectors of society. In short, inflationism incites and fosters societal frictions that eventually lead to decadence.
Because the public have little idea of the ramification of inflationist policies, they have been made to believe that external factors have been the culprit for most of their afflictions. And to contain such suffering, mostly through the politics of nationalism, demand for protectionism rises. From here, barriers to trade (direct through tariffs and indirect through non tariffs) capital movements, as well as, various people controls have been erected.
Even the mainstream recognizes this.
Chief Economist of the OECD, formerly of the BIS, Mr William White, recently wrote an opinion column at the Financial Times (September 25)
Central banks have been engaged in unprecedented monetary experimentation. Unlike scientists developing drugs, fear of the unknown has had no moderating influence on their activities. That in itself is alarming. Nor is it possible to reverse recent policies. Now governments must accept responsibility for resolving an incipient global solvency crisis.
The monetary stimulus provided repeatedly over the past eight years has failed to produce the expected expansion of aggregate demand. Debt levels have risen, especially in emerging market economies, constraining expectations of future spending and current capital expenditures. Consumers have had to save more, not less, to ensure adequate income in retirement.
At the same time, easy money threatens two sets of undesirable side effects.
First, current policies foster financial instability. By squeezing credit and term spreads, the business models of banks, insurance companies and pension funds are put at risk, as is their lending. The functioning of financial markets has also changed, with market “anomalies” indicating hidden structural shifts, and many asset prices bid up to dangerously high levels.
Second, current policies threaten future growth. Resources misallocated before the crisis have been locked in through zombie banks supporting zombie companies. And with neither financial institutions nor financial markets functioning properly, real misallocations since the crisis have been further encouraged.
Perhaps we need look no further for the cause of the alarming slowdown in global growth than the insidious effects of easy-money policies. Two vicious circles are at work with a wounded financial system contributing to both. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt.
This explanation contrasts sharply with the hypothesis of a “savings glut”: little more than a tautology for slow demand growth. On the supply side, misallocations slow growth which again leads to monetary easing, more misallocation and still less growth. This explanation seems far more convincing than “secular stagnation” in an era of extraordinary technological advances.
Note of what Keynes wrote, “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered”
Again Mr White channeling Keynes:
“Nor is it possible to reverse recent policies. Now governments must accept responsibility for resolving an incipient global solvency crisis.”
“The functioning of financial markets has also changed, with market “anomalies” indicating hidden structural shifts, and many asset prices bid up to dangerously high levels.
“And with neither financial institutions nor financial markets functioning properly, real misallocations since the crisis have been further encouraged.”
Of course it hasn’t just been the IMF and the OECD, the WTO presently frets over the material fall in global trade. From Bloomberg (September 27)
Global trade will expand at the slowest pace since the financial crisis this year, the World Trade Organization said, as weakness in key regions and rising protectionism take a toll.
The Geneva-based organization forecasts that trade will expand 1.7 percent in 2016, down from an April estimate of 2.8 percent. It predicts real GDP growth of 2.2 percent, marking the weakest performance since 2009.
Worryingly, the WTO sees a risk that trade won’t pick up next year, cutting its 2017 projection to a range of 1.8 percent to 3.1 percent, down from 3.6 percent previously. It said with increasing wariness of globalization, governments and authorities must do more to support open trading that’s more inclusive.
“The dramatic slowing of trade growth is serious and should serve as a wake-up call,” WTO Director General Roberto Azevedo said in a statement Tuesday. “This is a moment to heed the lessons of history and re-commit to openness in trade, which can help to spur economic growth.”
Add to the chorus of alarmism has been the central bank of central banks, the Bank for International Settlements which sees several ominous risks from the current environment
One, the surge in the use of derivatives, as well as demand for US dollars and US dollar based assets as unforeseen repercussions from the flight from zero. From Bloomberg (September 18)
Demand for currency hedging is increasing, indirectly spurred by a handful of central banks whose unprecedented policies are crushing interest rates in some the biggest economies, according to the Bank for International Settlements.
As quantitative easing pushes bond investors to look abroad for higher yields and companies flee to foreign markets to borrow more cheaply, they need to hedge their currency exposure. It’s yet another unintended consequence of stimulus that has driven yields below zero on more than $8.3 trillion of sovereign debt, undermined banks’ lending income and raised costs for pension funds that have pledged fixed returns.
“In recent years, the term and credit-spread compression on the back of unconventional monetary policies in major jurisdictions has boosted these cross-currency investment and funding flows,’’ BIS researchers including Claudio Borio, head of the monetary and economic department, said in a quarterly report released Sunday. “In particular, Japanese life insurers’ search for yield overseas has led them to increase FX-hedged investments in U.S. dollar-denominated bonds.’’
Much of the hedging is done using swaps, which allow an investor to borrow one currency from a counterparty while simultaneously lending a second currency to another. A separate BIS triennial survey by the institution showed the daily turnover of swaps climbed 6 percent to $2.4 trillion in April from three years earlier.
Institutional investors use swaps to “strategically hedge foreign-currency investments,” as QE purchases by central banks from Japan to London reduce the availability of securities in their home markets, the BIS said.
“Banks, pension funds and life insurance companies from those economies with low or negative rates have sought to pick up yield by purchasing dollar assets,” said Hyun Song Shin, economic adviser and head of research at the Basel, Switzerland-based institution. “The search for yield has taken on the character of a “flight from zero.”
Negative interest rates outside the U.S. have caused a surge in demand for dollars and dollar assets, pushing up the cost to get into and out of the greenback at the same exchange rate to levels rarely seen in the past. The appetite for dollar assets also presents an opportunity for investors with greenbacks to spare, with Pacific Investment Management Co.’s largest international bond fund and China among the ones tapping into the phenomenon.
Another source of demand for currency hedges is banks, which may fund themselves through swaps in order to hedge their balance-sheet mismatches, the BIS researchers said. Since 2015, Japanese banks have relied more on foreign-exchange swaps for dollar funding due to the lower availability of wholesale funds in the U.S. currency, it added.
As one would note, unintended consequences means a buildup of mismatches or asset liability mismatches…all these courtesy of “all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered”
Two, the BIS also warned on amplified risks of financial instability
From the CNBC (September 18)
Financial markets have coped well with Brexit and other potentially disruptive political developments recently but asset prices may be running too high and the potential risks to market stability are growing, a report warned on Sunday.
In its Quarterly Review, the usually guarded Bank for International Settlements didn't explicitly say that stock and bond markets are bubbles waiting to burst. But valuations are high, especially given that the foundations they are built on may not be so solid.
BIS reports aren't known for their stark language and blunt warnings, but they offer an insight into what's occupying the thoughts of the world's most powerful and important central bankers.
"There has been a distinctly mixed feel to the recent rally - more stick than carrot, more push than pull, more frustration than joy. This explains the nagging question of whether market prices fully reflect the risks ahead," said Claudio Borio, Head of the BIS Monetary and Economic Department.
Again Keynes: “the process of wealth-getting degenerates into a gamble and a lottery.
From the above report: asset prices may be running too high and the potential risks to market stability are growing
As one can see, wisdom written decades ago has been foreshadowing present events.
Three, the BIS also predicted a coming crisis in China. From Reuters (September 18)
Excessive credit growth in China is signaling an increasing risk of a banking crisis in the next three years, a report from the Bank for International Settlements (BIS) says.
An early warning of financial overheating - the credit-to-GDP gap - hit 30.1 in China in the first quarter of this year, the financial watchdog said in a review of international banking and financial markets published on Sunday.
Any level above 10 signals a crisis "occurs in any of the three years ahead," the BIS said. China's indicator is way above the second highest level of 12.1 for Canada and the highest of the countries assessed by the BIS.
Debt has played a key role in shoring up China's economic growth following the global financial crisis. Outstanding debt reached 255 percent of GDP in 2015, fueled in large part by a surge in corporate borrowing, up from 220 percent just two years earlier.
Well it is more than just the BIS. And it has been more than just about China, global trade and the global economy.
The United Nations Conference on Trade and Development (UNCTAD) has likewise sounded the alarm bells on rocketing debt levels of emerging markets which they see as potential triggers to a crisis.
From the Executive Intelligence Review (September 24)
Choosing to focus on one aspect of the global $1.5 quadrillion speculative bubble, which is bankrupt in its entirety, the United Nations Conference on Trade and Development (UNCTAD) issued its 2016 annual report warning that some $25 trillion in emerging market debt is facing imminent default. That conclusion, although partial, is certainly true.
The UNCTAD report notes that there was a huge influx of capital to developing markets after the 2008 crisis, because quantitative easing and other cheap credit policies in the developed sector created a massive carry trade in search of making a killing abroad. But now,
"alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,"
the report says—a euphemism for a global collapse. Much of this emerging debt may soon become non-performing, they warn:
"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system."
UNCTAD warns of impending capital flight, devaluations, and collapsing asset prices. Last year, capital outflows from emerging markets reached $656 billion, and in the first quarter of 2016 they were already at another $185 billion.
Most people think that whatever problems that exists today will either have little effect on them, or that they will have sufficient time to get out before the avalanche. Some even think of perpetual free lunches from central banks (only positive consequences from unbridled money creation).
And be reminded too that the consequences of inflationism will not just appear on the financial markets, they will have real effects on the political economy.
Like Keynes, the great Austrian economist, author and journalist Henry Hazlitt, wrote to tell us of more of the political effects from inflationism (Economics in One Lesson p 157)
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.
Drive men towards desperate remedies...protectionism via fascism, communism and totalitarian controls.
Rings a bell?
