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Yes, A New Crisis is Coming - And Here's Why
Submitted by Saxobank's Dembik Christopher via TradingFloor.com,
- Shortening economic cycle means more frequent crises
- 'Great Divergence' model saw China assuming the US' leadership role
- We have likely reached the limits of adjusting monetary policy
- States have compromised a return to growth due to debt
Occupy Wall Street may been been a popular response to the financial crisis, but Wall Street was never actually occupied and business largely continued as usual. Photo: iStock
The oracles predicting an impending new global crisis are countless. Over the last two decades, economic cycles have been shortened due to deregulation, the financialisation of the economy, trade globalisation, and the acceleration of innovation cycles. During the last 25 years, the US economy has experienced three recessions: in 1991, 2001 and 2009. The outbreak of a new crisis in the coming years is inevitable. To forecast it amounts to acknowledging that capitalism now moves in cycles shorter than 10 years. There is no glory in that.
Here are four macroeconomic scenarios for 2016:
Until recently, the consensus assumed a strengthening of the global economy in 2016. Various downward revisions of growth forecasts by major international organisations, however, confirm that this assumption is becoming less and less likely.
Gross domestic product growth momentum, particularly in the US, is still the main driver of global growth. It is also weaker than it used to be during the previous recoveries, as shown by potential GDP growth which has been reduced to 2% for the 2015-2015 period, compared to 3% for 2000-2007.
The weakness of this recovery can be seen in the substantial slowdown of international trade growth. The increase of global imports in volume is significantly lower compared to the years from 1992 to 2008. The adverse effects of the subprime crisis still influence global dynamics.
The prospect of a new crisis brought the Great Divergence theory back to life. However, this circumstance has failed to materialise. In 2008, this model was steadily evoked but didn’t happen because it is based on the illusion that Asia, and particularly China, will prove able to take over from the US.
Still the bridesmaid
Beijing’s economic influence is clearly on the rise: the yuan is the fourth most exchanged currency in the world – ahead of the Japanese yen – and should overtake the British pound in financial transactions before the end of 2016.
The “new Silk Road” strategy, which aims to build an economic bridge between Europe and the South China Sea, is an incredible tool for providing leverage to develop the country and take a leadership role in international business.
Nevertheless, the emerging yuan zone is not able to compete with the large dollar zone's hegemony. Any deterioration of the American economic outlook will have extended consequences on Asia and the whole emerging world.
The possibility of a Chinese monetary bazooka cannot be overlooked in the first half of 2016. Expectations regarding new stimulus are much likely to increase in the coming months as Western central banks’ monetary policy become less clear every day.
Still, there is no emergency given the stabilisation of the Chinese stock exchange and the macroeconomic evolution of the country, which does not indicate any worrying deterioration even if it is disappointing compared to the years between 1979 and 2012.
The Chinese central bank could lower its rates and it could also act on banks' required reserve ratio – an oft-favored tool – to revive credit. With its $3.56 trillion in foreign exchange reserves (as of the end of August), China still maintains an unprecedented level of force.
Along with a dovish monetary policy, China could launch a Keynesian stimulus programme, relying on the already-expected bond issue plan which could raise 1 billion yuan. Even though president Xi Jinping proved reluctant to introduce massive economic stimulus package since coming into office in November 2012, preferring case-by-case adjustments, he won’t be able to avoid this option very long if he wants to meet the country's official macroeconomic targets.
A Chinese monetary bazooka could temporarily reassure world markets but believing it would save the global economy if developed countries sink into crisis would be a bridge too far.
The Chinese economy may be big, but it is not yet ready
to take the reins from the US. Photo: iStock
Everybody thought the global economy was on its way to a sustainable growth but more and more leading indicators (Empire Manufacturing in the US, industrial output and business sentiment in Japan, Canadian GDP, copper prices, etc.) raise concerns about a global recession.
Emerging countries are the first in line. Brazil opened the way and Turkey could be next. The increasing risk of recession should put further pressure on central bankers to keep providing liquidity.
The end of policy
The Federal Reserve's possible announcement of negative rates would be seen as a desperate action with major negative consequences as rates below zero would emphasise financial distortions. Such behavior would confirm that it is impossible to get out of accommodating monetary policies.
This headlong rush will last as long as will central bankers’ credibility. But this credibility has already been damaged, particularly following the Swiss National Bank’s unexpected decision to abandon the Swiss franc’s cap earlier this year, as well as Fed chair Janet Yellen’s hesitation during the press conference held on September 17.
It is just a question of time before markets realise that the limits of monetary policy have been reached.
The crisis that never ended
The weakness seen in world economic activity is partly the result of the lack of a real purge of the financial system in 2008. It has become unimaginable to let entire parts of the system collapse, and the titling of some financial institutions as “systemic” is part of this logic.
Policymakers attempting to keep unhealthy economic and financial institutions alive are making a mistake. The very essence of capitalism lies in the process of creative destruction. If companies prove unable to innovate when confronted to new competitors or if they take disproportionate financial risks, they should bear the consequences .
In 2008, public authorities refused to take responsibility for the social cost of widespread bankruptcies. Despite their role as "lender of last resort", however, states couldn’t avoid mass unemployment.
In refusing to reform the system they have compromised the prospects of a sustainable return to growth, and this is due to excess debt. Over the last seven years, private and public debt has increased by $57 billion – a figure near-equivalent of global GDP.
What we see here is not a way out of the crisis. Instead, we are on the edge of a new financial disaster.
The world's financial districts are beginning to form a new consensus, and it's a gloomy one.
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indeed.. NIRP and ZIRP'le'
ZIRP Exacerbates Pension & Retirement CrisisSure, Suuuure...any day now. Please.
Mericans to Mexicans in one generation.
could be an improvement as most americans left critical thinking in the toliet after thier morning dump.
"The increasing risk of recession should put further pressure on central bankers to keep providing liquidity."
Any person that can utter such a blowhard comment as this one is worthy of nothing but contempt. Providing liquidity, my ass. God, I hate these fuckers.
Apparently you are one of those Americans, as you're statement implies Mexicans are better critical thinkers. Not sure I've seen any evidence of that.
"Negative rates would be seen as a desperate action as rates below zero would emphasise financial distortions."
As if holding rates at the zero bound for 6+ years ISN'T an act of desperation?
I think all the above are simply symptoms of the deeper issue...
I think what we are seeing is that the demographic demand destruction is already well underway. Slowing and shrinking populations are happening bottom up (declining young vs ramping old) and from rich nations to poor nations...said otherwise, the quantity and quality of growth is rapidly breaking down and everything is based on the margin...and the marginal declines are already breaking down the highly levered global economy (littered w/ very sensitive dangerous derivatives) here and now. We're already decades into demographically driven interest rate cuts whose purpose was to incent credit / debt to maintain demand in the face of decelerating global growth. This is why ZIRP is almost sure to be followed by NIRP in 2016.
The linked article goes through the details.
http://bit.ly/1GmeT8l
Demographics are what they have always been. Growing slowly, punctuated by booms every now and then. The demographics dodge is specifically an attempt to shift blame because programs like Social Security are going to fail.
Welcome to read up and try again.
My 2cents.
GDP metrics do not take into account the quality of growth. Our myopic pursuit of GDP growth has lead us into this toxic quagmire of debt and stagnation. Agreed, major demographics are slowing down, which would entail peak consumption having been reached, along with peak private credit. So desperate to keep the charade alive, major central banks have engaged in ZIRP, and soon I believe, NIRP. I can't foresee another course. Can you? How else to keep the ponzi alive? They are figuratively building train tracks over an endless canyon. Their philosophies and institutional thinking have taken us to this point. They refused to let their system fail. They must desire a colossal financial meltdown. So, the final spasm, perhaps another round of QE, and NIRP, will have ushered the system into the final stage of madness. Central banks will explode the system. The FED's balance sheet can't expand indefinitely. This bizarre experiment will be the catalyst that kills USD and its hegemony, usher in a cashless society, and mark the turning point on the geopolitical chess board. When confidence is lost in credit and fiat currencies, we will likely pendulum swing back into hard assets and things of real worth.
Mojojojo - I couldn't say it any better...or even as well as you have.
Tyler posted a article a few years back about the limits of taxation when a certain level of taxation stopped the government from bringing extra income and where the higher taxes would become counterproductive and slow growth.
Here in Europe, we've crossed that point and that's why we can't get to our budget even with austerity and higher taxes.
It's not stopping our governments from taxing more on fair taxes and speculation taxing and sugar taxes.....
Here are hundreds of new taxes.
And that's the real problem our countries are facing as our debts keep getting higher.
Nirp is just to delay it a bit more but that also will have it's limits. Where? I don't know but I don't think we'll survive a nirp of -10% for example.
This is known as the Laffer Curve. Amusingly some of the neo-economists have actually tried to discredit it, when the logic behind it is very basic common sense (e,g,, people won't work when taxed at 100%!)
A deep underlyng issue, whether we're dealing with Laffer curves, NIRP, or anything involving interest rates or taxes is time. The market doesn't react instantaneously, which is why you can jack tax rates up and collect more. Indeed, you could jack rates to 100% and collect a shitload of taxes the first year or two before people quit, left the country, gave up and died, etc.
This is the problem with the CBs and NIRP. They're trying to fix their problems with NIRP, which will work in the very short term, but causes massive mispricing of risk, kills people on fixed incomes, etc. So they do NIRP, the problem isn't fixed, and they do more NIRP. They could do -10% NIRP, for a year. They can't do -10% NIRP for two decades and have anything resembling an economy left standing, as the markets get distorted as they are now and the most efficient use of capital isn't building factories but buying assets that escape the NIRP tax.
NIRP is indeed just to delay. The fact that it's happened basically shows that the fuse has been lit and the financial bomb it's attached to is going to blow. They're now trying to mathematically redefine the economy to make weird things like negative money work, and they ultimately won't -- negative rates are jus t making things work by sucking more money out of the system via savings. Eventually there is nothing left to take.
There is an old saying that there's nothing more dangerous than someone with nothing left to lose, and NIRP is taking away the last bits average people have. They'll get a revolution before they ever make their mathematical fantasy economy work in the real world.
this b 1 wise owl
There were 2 places in the article where the word billion was used in error. Only the word
trillion would make sense. Other than that nothing new was brought to light, instead we
got a lot of rehash.
ZIRP Exacerbates Pension & Retirement Crisis? What do you think NIRP is going to do when the Pension fund managers see -1% and realize that the 8% assumption on rate of return is 1) Not believeable. and 2). Means we are going to go bankruptpetty fucking quick given the rate of disbursement of already retired pensioners!
Pittsburgh and Cincy have rivers with bridges for the 8 percent assholes to jump from. So does Boston and NYC.
Interesting and it ties in with this......
http://beforeitsnews.com/conspiracy-theories/2015/10/time-travel-is-no-l...
Meet the new crisis, same as the old crisis.
We are plucked, fucked, nuked, and puked.
Thanks, New World overlords !
These guys are so smart, they are imitating every POTB since the Romans.
These posts about the crisis is coming and here is why have become ZH's version of the "6 weeks to washboard abs" or "7 secrets to please your man" articles in Men's Health and Cosmo.
Bangin, where can I find out more about those washboard abs. That sounds great.
When all the youngmans leave the roost, you know a crisis is a brewin.
You know that it shuda been a crisis a loooong time ago.
"Clever Girls"
https://www.youtube.com/watch?v=l8o5fxnDUjs
Except denial is deeper than skin with this scenario.
Figures that the "World's financial districts are beginning to form a new consensus" only when their gravy train is in jeopardy.
FUCKWADS caused all this shit and have paid dime one for it.
"KILL THEM ALL and let God sort them out" might be something they hear more of.
Bankers? Economists? CEOs? No sorting need be done and God can take the day off. They are all relegated to the worst circle of Hell.
but they are surrounded by the sexfurtarys and clerks and adminz.
This has to be the mantra of the dronz pilots pullin the hellfire triggerz.
- Ned
Okay, you know how Graham's number is the upper bound for a solution to a problem?
Where's the upper bound for the solution to when this actually starts? Surely we can say a date BY when it will happen, if not the actual date.
Its here
Well, wake the fuck up then and stop accepting their bullshit paper/digital credit in exchange for your labor!!
NOTHING changes otherwise...
Most people have no choice but to accept the digital paycheck. But they have the choice on how they structure their money and debt.
If bail-ins come all they will get from me is -----minus money.,,,kinda like what the gov. does. If you got the credit? You could operate out of overdraft accounts. Feed hem to fund outlays. And keep any wealth within control. Bank fails? What are they going to bail-in? Overdraft debt? All depends on your bankruptcy laws, of course.
Why is it that banks?, hedge funds?, gambling and lying billionaires can skirt the laws? Well you folks in US ask your buddy Hillary about here about face on bankrupt bill that negated any forgiveness to middle class but gave it to Wall St.?
These fools want the world to become slavery to wealth? Take your money out of the system. Use any good crdit rating to run your life....and then just walk away IF that is what the Big Boyz are doing. Cannot bail-in what is a whiff of credit.
Back in 2008, it took about $2.54 of debt to get $1 of GDP growth. Now its nearly $10.00.... but if you can borrow your way to prosperity, then I guess we're good.
Wasn't the standard Fed "business cycle" about 6-8 year booms, followed by 1-3 year busts? When did people forget that?
Seems like short memories are letting some of these people responsible for this shit skate by.
China has already used the keynesbomb - look at all the ghost cities built! What else can they possibly do without increasing consumption?
Here are some signs of a coming recession.
1. Business loans for M&A not CAPEX.
http://www.zerohedge.com/news/2015-10-15/there-goes-final-pillar-us-recovery-loan-growth-paradox-explained
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
It seems APPL will push back the collapse a few days...dang it
According to Macquarie Research:
http://is.gd/QdV7KJ
The more they do; the worse it gets
In our latest commentary we ask whether indications of easing by ECB and PBoC and BoJ’s potential expansion of its own stimulus would lead to further contraction of global GDP/trade and whether only Fed QE4 could be reflationary.
Deflators of the world unite. As expected (here), CBs are becoming concerned. Not only has the Fed deferred tightening but ECB is sending a strong signal that it is contemplating expansionary measures by Dec’15 and it is likely that BoJ would at some stage increase both size and pace of its own stimulus. Finally, PBoC has simultaneously cut interest rates and RRR. Not surprisingly, financial assets responded in a typical “Pavlovian fashion” by assuming a “goldilocks” outcome of low interest rates for longer; ample liquidity; steady (but unspectacular) growth rates and low but positive inflationary outcomes.
However as discussed here and here, short of massive globally co-ordinated rise in monetary stimulus, incremental changes are unlikely to make much difference and there is an urgent need to re-think the entire Government support system by either allowing restoration of conventional business cycles (unlikely) or embarking on far more extreme and unorthodox policies (such as CBs directly funding fiscal spending, investment and consumption). Erosion of global velocity of money is severely blunting the impact of more conventional QEs.
At the same time, the divergent paths of the Fed and other key CBs are causing monetary and inflationary cross-currents. In essence non-Fed CBs are attempting to export their domestic overcapacity and deflation to the rest of the world and the more aggressive they become, the higher would be the likely deflationary outcomes. The global economy and trade are already shrinking in US$ terms. In the last three quarters, global (US$) GDP has shrunk at ~5% clip with US$ global trade eroding at ~10% pace. The more ECB, BoJ and PBoC ease, the more likely US$ would ultimately appreciate at far stronger pace. Whilst initially an increase in non-US monetary stimulus reduces perception of tail risks and hence stabilizes or even depreciates US$, over the longer-term it is a recipe for much higher US$. As a result, at some stage DXY (US$) could surge from 95-97 to 110-120 and possibly higher. This would further compress the size of the global economy and trade (US$), perhaps returning global economy back to the levels of ‘09-10 (essentially wiping out the last five or six years of growth).
Why is measuring global economy and trade in US$ critical? As discussed in the past, global economy resides on the de-facto US$ standard. Other currencies play relatively minor role, with US$ accounting for ~50% of global transactions and in excess of 70% of global finance (Rmb is responsible for only ~3%). US$ is particularly significant for Asia-Pacific traders, Latam and commodity producers (though less so for Eastern Europe). If Fed tightens, it could potentially get much worse. However, even if Fed does not tighten but simply refuses to embark on a QE4, the outcome would still be higher deflation and lower US$ global economy and trade. In other words, some currencies are more equal than others and therefore Fed’s policies are far more inflationary than equivalent policies pursued by other CBs. If our core assumption of no tightening but no QE4 comes true, then deflationary pressures are still likely to strengthen as supply of global US$ continues to contract.
This explains our unwillingness to buy countries like Indo or Mal and instead our preference for commodity consumers and countries with trapped domestic liquidity and limited external vulnerabilities (i.e. India, China, Phil and Taiwan).
"We have likely reached the limits of adjusting monetary policy"
Uh - no, we have not. In fact, we've only seen the opening act, with the main event yet to come.
Main event is coming and it is desperation. Ever seen a junkie Jones out? They will do amazingly desperate things to get the next FIX.
did you think they would cave in so fast? by dec the sp will be 22-2300 and will go on through april pf 2016. they are about to push the gas to the floor.
The financial crisis starts this november... "Be there! or be square."
re ...a new crisis is coming...
You'd have thought - ONE crISIS with ISIS would suffICE US
"Over the last seven years, private and public debt has increased by $57 billion – a figure near-equivalent of global GDP."
Seems that number is in error. Fifty-seven Trillion is the more likely figure. Billions are now chump change.
I accept a recession is coming, and that all this policy is really to avoid a hard landing. Expect this cycle of decay to go on for years so we can all get use to it. The way to avoid public and civil unrest is to cook the frog slowly.
Is it not true that if we saw CBs and the Feds doing what they are doing today in 1998 there would have been riots?
The frog is warm right now.
Meltdown may not be a financial crisis. it can be the coming of lost decades of debt sheds. The 1% that commands the wealth having captured the system can prolong the culls on the 99% preys. Deformed markets can just die out of the exhaustion with diminishing liquidity (not necasrrily thru heart attacks). This spin sells because it is a faked balm to the pains that cry out for immediate terminations. Are you sure that such charlatans have their skins in the games and not just taliking their books ?
you can't spell crisis without isis.
The global economy has been replaced by global money printing - Everyone is doing it now - it's a 'printathon' !