Following is a wonderful article which opens up the real economic health , and also what possible economic disaster we are going to face very shortly. I am not an economic expert, never studied economics, all I know is a little bit of chemistry. Later in life, in the course of day to day living, I gradually started taking interest in it, that too never ventured to go beyond the limit of a layman. With this background economics, I find this article as the best one. Therefore, I shall preserve it for my future reference in my adda talk.
I have a long habit. In my young college days I had the habit of making paper cutting of articles from calcutta statesman. In a few days there would be too many; would never be actually used, finally those would be covered by layer of dusts before throwing into dustbin. Now a days, we can preserve in digital format, hence the birth of this blog, here I preserve many facts, data in digital format, likewise this article also.
The main essence of the article is that 2008 world economic recession was not effectively cured. The cure was only a patch-up work. Standard economic theory sees financial market performance as reflecting economic performances. But when Alan Greenspan took over the US Federal Reserve, he ushered in the era of juicing economic growth by overstimulating financial market with liquidity. This culture has spread to other major central Banks. As the same past load is being carried over without healing the real problem, position of the world economy has worsened but only hidden as of now. It may soon create next financial crisis. For full details read on the article ” we’re living in la la land” by Andy Xie, that appeared in the economic times, Mumbai edition, on 09.02.2018—
[All major economies clocked good GDP growth in 2017, at least by recent standards. The synchronisation of all major economies generates good momentum into 2018. Trade is accelerating from 2.4% in 2017 to perhaps 4% this year. Unfortunately, the good news rests on a fragile foundation: the biggest asset bubble in history. Bubbles eventually pop. When this one does, all the good news will suddenly turn ugly. Just like in 2008.
In the last three decades, the causality between economic growth and financial market has often been reversed. Standard economic theory sees financial market performance as reflecting economic performance. But when Alan Greenspan took over the US Federal Reserve, he ushered in the era of juicing economic growth by overstimulating financial market with liquidity.
The Tick-Tock Cycle
Greenspan’s ‘Midas’ touch has spread to other major central banks. This is the origin of the boom-and-bust cycles in the recent past. The current cycle is no different.
Since the global financial crisis of 2008, all major economies have kept interest rates at, or close to, zero and maintained large fiscal deficits.
Adecade of massive, synchronised monetary and fiscal stimulus has led to the greatest asset bubble in history, to the tune of about $100 trillion, nearly 1.5 times the world’s GDP. Compared to 2-3% of GDP growth in the global economy, we should be mindful of the potential and huge cost associated with it.
Even though the US stock market is more expensive than in 1929 or 2000, and China’s property valuation is higher than Japan’s a quarter-of-a-century ago, fear-driven selloffs have been rare and brief, leading to the belief that high asset prices are the new normal. Massive amounts of financial and business activities, especially in technology, are predicated on high asset prices going higher.
The unusual longevity and resilience of high asset prices are largely because government actions — not herd behaviour in the market — are force-feeding the bubble. Government actions will lose their grip only when growth expectations crash or inflation flares up. Neither is a major risk for 2018. Hence, 2018 won’t kill the speculators of the world.
But 2018 will teach them a lesson or two. High-risk assets such as internet stocks and high-end properties will struggle like never before in the past decade. US interest rates will rise above inflation for the first time in a decade. And China is tightening, especially in the property sector, out of fear of a life-threatening financial crisis.
China accounts for about half of global credit growth. The interaction between the US Federal Reserve’s quantitative easing and China’s credit targeting has been the liquidity super machine. It is stalling in 2018.
The asset bubble demands that the excess liquidity-money supply rises faster than GDP to sustain it. This year may see global money supply line up with GDP. The Fed is likely to raise interest rates from the current 1-1.25% and take the level to 2.5%. This is still low compared with the 4.5-5% nominal GDP growth rate.
But the US stock market is more expensive than it was in 1929 or 2000. When the interest rate surpasses inflation, it will become wobbly.
Policymakers are caught between a rock and a hard place. The structural problems that led to the 2008 crisis are still here. The global economy grows ever more dependent on asset bubbles. If the global asset bubble bursts, the economy will slide into recession. Hence, when a market wobbles — as it probably will in 2018 — policymakers will come out to soothe market sentiment and may even temporarily reverse the tightening.
It’s Closer Than You Think
While 2018 may not be the end, the bubble will burst some day. There are three potential triggers: inflation, stagnation, or a dollar crash. Low inflation has been the excuse for central banks to keep pumping liquidity. But it is due to China joining the global economy rather than their domestic conditions. When China revalues its currency like Japan did four decades ago, inflation will come back to all the major economies.
Bubble-led economies will see efficiency declining due to misallocation of capital. Global low and declining productivity growth is a warning in that regard. When growth collapse finally scares all the speculators witless, the bubble will pop. This is what happened in Japan in the early 1990s.
Finally, a dollar collapse is possible. If so, it will take everything down with it. The global imbalance has been patched up with excess dollar printing. The people who are willing to hold dollars are in East Asia and West Asia, since the US is viewed as a superpower and the dollar is the global reserve currency. When that faith falters, the dumping of over $10 trillion could ensue.
The current world is a kind of makebelieve. People gain their faith from the trend. Governments use monetary and fiscal policy to manufacture the trend. When enough people are sucked in, the governments can take their feet off the gas petal, and the world seems to be booming on its own.
Policymakers call this victory. When the bubble pops, all the costs come home to roost. But the policymakers who made the mess are back calling for more of the same.]
The writer is a Shanghai-based economist. He is a speaker at the Global Business Summit, New Delhi, February 23-24, presented by YES Bank and The Economic Times