Reserve Bank of India Governor Raghuram Rajan (left) warned last Wednesday that the global economy bears an uncannily terrifying resemblance to the early 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense. The only difference this time around is that competitive monetary policy easing has replaced competitive currency devaluation as the favoured scam for playing a zero-sum game.
Clearly Rajan is a fine fellow, as he agrees with me 100%. Towards the end of his doom prediction, however, Mr Rajan made one very telling observation:
“The euro exchange rate is too strong given the area’s economic standing,” he said, concluding, “Financial sector crises are not always predictable. The risks build up until, wham, it hits you.”
Or as The Slog is wont to remark, “There is no such thing as a gradual panic”.
We’re not seeing any panic now, because Mario Draghi remains the ultimate Swan, elegantly appearing to walk on water, while just below the surface his legs are paddling like billy-oh. But we are seeing influential people taking positions – and we are now seeing symptoms presenting in a manner not even Draghi can hide. The endemic currency deflation alongside rising living costs is spreading through ClubMed, and up into the peripheral central/east EU membership. And each week brings a new bank failure where every last ‘rule’ set out for the bailin process has been first broken, and then recycled in a form acceptable to the Sleeple.
African Bank (the latest) is a particularly heinous example, because it had always been a usurious sort of ‘secondary bank’ feeding off the ignorance and desperation of the African poor. Now innocent depositors are getting their heads shaved to rescue the villains…as with BES – another bank whose family had been a byword for dishonesty in the banking business for years. In the light of the AB demise, Capitec Bank was downgraded two levels to Ba2 from Baa3 by Moody’s yesterday – specifically on the expectation that South Africa’s central bank won’t protect creditors in a future bank failure. There’s that c-word again…the one that used to be customer, but is now creditor. But also notable was this macro-economic observation from the ratings agency: “Capitec also faces weaker economic growth, reduced consumer affordability and high consumer indebtedness that are leading to higher credit costs”.
Hmm. Higher credit costs. Rising interest rates. But surely we have a cap on that volcano. Don’t we? Yesterday, the Minneapolis Fed president Narayana Kocherlakota said he believes “it will take until 2018 before inflation returns to the Fed’s 2-percent target. By the Fed’s preferred measure, inflation is stuck around 1.6 percent”. In other words, no call to raise interest rates, nothing to worry about. But sotto voce, time to print some more money, pump some more credit out there, get those serfs consuming further beyond their means. Truth is, the deflation thang is about to start presenting in the US too, a trend that will be disastrous for American debt – and have a dam-like effect on the economy as people put off purchasing.
It’s hard to avoid the feeling that, if further fiat is printed and credit starts to fire up, hyperinflation could come powering through, and interest rate rises become irresistible. That would be The End for America….but then, the end is coming whatever Washington or Wall Street may do.
In fact, globally everyone is in a corner: Russia’s energy-biased economy is threatened by sanctions and, more seriously, firm signs that energy demand is going into reverse. Japan has fired its Big Bertha, but while the ignition produced an enormous release of wind, it detonated on landing as a silent but deadly fart: real economy screwed, not enough tax income, raise sales tax, see growth fall back again. The theory of ‘one more heave’ is wearing very thin indeed. Germany jackbooted all opposition to its ClubMed austerity policy out of the way, and now it has no export customers in the EU. China has poured a near unimaginable amount of money into its own QE programme, but the economy there showed further signs of softening in July; shockingly, the credit and financing numbers released last Thursday showed cash flowing into the decelerating economy at a six-year low in July – just 14% of the June figure. That is some liquidity problem. Does Beijing have the answer? No, of course not: weaker demand for loans and/or nervous banks worried about credit risk….whatever your chosen interpretation, the figure of 14% has stagnation written all over it. China is an export tiger, but its western customers are cash-strapped: of course it would love the US to stimulate demand in the short term….but not if that led to American sovereign debt being inflated away to nothing after that.
Now think about this, people: the eurozone economy is flatlining, the African banks look suspect, and the damned if do or don’t list reads America, Russia, Germany, Eurozone and China. So convinced are the movers and shakers that there is zero real prospect of economic recovery, they’ve first poured money into gold, then smelt the fix and moved onto property. Now even the alternative of effectively paying to lend money to the German and American governments looks better than hanging around too much longer in the most overpriced stock market in human history.
Which brings us full circle back to our friend Indian central bank boss Raghuram Rajan. In today’s FT, he has this to say:
Behind us, there’s a lynch-mob of creditors, and ahead of us – a thousand feet below – the raging rapids of debt. We are going over the cliff, and it cannot be delayed much longer.