March 01, 2016
Between 2008 and 2015, central banks
pretended that they had
'fixed' the economy.
In 2016, they're starting to admit that
they haven't fixed much of anything.
The current head of the Bank of England
said last week:
The global economy risks becoming
trapped in a low growth, low
inflation, low interest rate equilibrium.
the past seven years, growth has serially disappointed
- sometimes spectacularly, as in the depths of the global
financial and euro crises; more often than not grindingly as
past debts weigh on activity...
This underperformance is principally
the product of weaker potential
supply growth in virtually all G20 economies. It is a
reminder that demand stimulus on its own can do little to
counteract longer-term forces of
demographic change [background]
and productivity growth.
In most advanced economies,
difficult structural reforms
have been deferred [true,
In parallel, in a number of emerging market
economies, the post-crisis period was marked by
credit booms reinforced by
foreign capital inflows [including from
central banks themselves],
which are now brutally reversing….
Since 2007, global nominal GDP growth
(in dollars) has been cut in
half from over 8% to 4% last year, thereby compounding
the challenges of private and public deleveraging…
Renewed appreciation of the weak global outlook
appears to have been the underlying cause of recent market
The latest freefall
in commodity prices - though largely the product of actual and
potential supply increases - has reinforced concerns about the
sluggishness of global demand.
Necessary changes in the stance of
monetary policy removed the
complacent assumption that "all bad news is good news" (because
it brought renewed stimulus) that many felt underpinned
markets [Zero Hedge
As a consequence of these
developments, investors are now re-considering whether the past
seven years have been well spent. Has exceptional monetary
policy merely bridged two low-growth equilibrium?
worse, has it been a pier, leaving the global economy facing a
global liquidity trap? Can more time be purchased? If so, at
what cost and, most importantly, how would that time be best
Despite a recent recovery, equity
markets are still down materially since the start of the year.
Volatility has spilled over into corporate bond markets with US
high-yield spreads at levels last seen during the euro-area
crisis. The default rate implied by the US high-yield CDX index
is more than double its long-run average [background
And sterling and US dollar investment grade
corporate bond spreads are more than 75bp higher over the past
Similarly, the former head of the Bank
of England (Mervyn King) is
Unless we go back to the underlying
the 2008 crash] we will never understand what
happened and will be unable to prevent a repetition and help our
economies truly recover.
The world economy today seems
incapable of restoring the prosperity we took for granted before
Further turbulence in the world
economy, and quite possibly another crisis, are to be expected.
Since the end of the immediate
banking crisis in 2009, recovery has been anemic at best.
By late 2015, the world
recovery had been slower than
predicted by policymakers, and central banks had
postponed the inevitable rise in interest rates for longer than
had seemed either possible or likely.
was a continuing shortfall of demand and output from their
pre-crisis trend path of close to 15%. Stagnation - in the
sense of output remaining persistently below its previously
anticipated path - had once again become synonymous with the
Lost output and employment of such
magnitude has revealed the true cost of the crisis and
shaken confidence in our
understanding of how economies behave [Correctomundo].
Almost every financial crisis starts
with the belief that the provision of more liquidity is the
answer, only for time to reveal that
beneath the surface are genuine
problems of solvency [We
reluctance to admit that the issue is solvency
rather than liquidity - even if the provision of
liquidity is part of a bridge to the right solution
- lay at the heart of Japan's slow response to its
problems after the asset price bubble burst in the
late 1980s, different countries' responses to the
banking collapse in 2008, and the continuing woes of
the euro area.
Over the past two
decades, successive American administrations dealt
with the many financial crises around the world by
acting on the assumption that the best way to
restore market confidence was to provide liquidity -
and lots of it.
Political pressures will
always favor the provision of liquidity; lasting
solutions require a willingness to tackle the
Federal Reserve chairman Alan
said today that the Dodd-Frank financial bill didn't fix
that we're in real trouble, and that he's been pessimistic for a
We're in trouble basically because productivity
is dead in the water… Real capital
investment is way below average. Why? Because business people
are very uncertain about the future.
The [Dodd-Frank] regulations are
supposed to be making changes of addressing the problems that
existed in 2008 or leading up to 2008. It's not doing that. "Too
Big to Fail" is a critical issue back then, and now.
is nothing in Dodd-Frank which actually addresses this issue.
I haven't been [optimistic on the
economy] for quite a while.
And the world's most prestigious
financial agency - called the "Central Banks' Central Bank" (the
Bank for International Settlements, or
BIS) - has
consistently slammed the FED and other central banks for doing
the wrong things and
failing to stabilize the economy.
If the central bankers' words aren't
clear enough for you, their
actions reveal their desperation.
Read also "Central Banks are Trojan Horses,
Looting their Host Nations".