Rolf Englund IntCom internetional
This Is The Endgame, According To Deutsche Bank
The Aftershock Survival Summit is a gripping, no-nonsense presentation that’s quickly becoming a financial beacon in an economic tsunami.
Three years ago to the day, BNP Paribas, the French banking giant, suspended redemptions on three funds, marking the beginning of the credit crunch.
The collapse of the US subprime market and its knock-on effects of the mortgage-backed securities market began a series of crisis that have come close to bringing the global economy to its knees.
Three years later, it appears the world remains clouded by uncertainty. Unprecedented actions by central banks and governments across the world have averted a melt-down in the global economy but commentators say we are not out of the woods yet.
Skall 8/10 bli lika känt som 9/11 ?
The Debt Supercycle
When I mention The End Game, you'll immediately want to know what is ending. What I think is ending for a significant number of countries in the "developed" world is the Debt Supercycle. The concept of the Debt Supercycle was originally developed by the Bank Credit Analyst. It was Hamilton Bolton, the BCA founder, who used the word supercycle, and he was referring generally to a lot of things, including money velocity, bank liquidity, and interest rates.
There is a limit to how much debt you can pile on. But as the work of Reinhart and Rogoff points out (This Time Is Different), there is not a fixed limit or some certain percentage of GNP. Rather, the limit is all about confidence, a theme I have written on many times. Everything goes along well, and then "Boom!" it doesn't. That "Boom" has happened to Greece. Without massive assistance, Greek debt would be unmarketable. Default would be inevitable. (I still think it is!)
It's all well and good to say that you want fiscal rectitude. It's another thing when it is hitting budgets near and dear to you. And to get back to a remotely sustainable deficit is going to take pain in every corner. It is going to hit near you, gentle reader. Some will get hit harder than others.
And this is the case in every country running large and out-of-control deficits. It is not just a US problem. The Irish are in what can only be called a depression, along with the Baltic states and Hungary. Greece will soon be there, once they have to meet market rates for their debt, or force their labor markets to endure a very serious deflation to make themselves more competitive.
Inflation has been the traditional method of default for many countries over the years. Instead of outright default, they simply inflate away debt. And the logic is compelling.
If you have 5% inflation along with 3% real growth, you get a nominal growth rate of 8%. That means in nine years the economy is twice the size in dollar terms, but only about 35% bigger in inflation-adjusted terms. If somewhere along the way you can get your deficits down to "just" 3%, then you can reduce your debt-to-GDP ratio by 5% a year. In less than ten years, you cut your debt-to-GDP ratio in half. Sounds good, right?
Of course, you have destroyed the purchasing power of your currency, given a real hit to the incomes of the middle class, defrauded those who bought your debt, and in all likelihood you did not hold inflation to just 5%. Think the '70s.
Comment by Rolf Englund
The Fed minutes warned of "significant downside risks" and a possible slide into deflation, an admission that zero interest rates, $1.75 trillion of QE, and a fiscal deficit above 10pc of GDP have so far failed to lift the economy out of a structural slump.
A study by the San Francisco Fed said the interest rates need to be –4.5pc to stabilise the economy under the Fed's "rule of thumb". Since this is impossible, massive QE needs to make up the difference.
There is undeniably a risk that tightening policy too early will cause the economy to dip back into recession. But ...
Anybody who looks carefully at the world economy will recognise that
The private sector is now spending far less than its aggregate income.
Forecasts in the Organisation for Economic Co-operation and Development’s latest Economic Outlook imply that in six of its members (the Netherlands, Switzerland, Sweden, Japan, the UK and Ireland) the private sector will run a surplus of income over spending greater than 10 per cent of gross domestic product this year
Note that such huge shifts towards frugality will have occurred, despite the unprecedented monetary loosening.
If governments had tried to close fiscal deficits, as they attempted to do in the 1930s, we would be in another Great Depression.
So how do we exit? To answer the question, we need to agree on how we entered.
William White, former chief economist of the Bank for International Settlements, is a leading proponent of the view that monetary policy errors, particularly by the Federal Reserve, have driven the world economy. Richard Duncan offers a similar, but more radical, critique in his thought-provoking new book, The Corruption of Capitalism.
By “success”, I mean reignition of the credit engine in high-income deficit countries.
I can envisage two ways by which the world might grow out of its debt overhangs without such a collapse:
Unfortunately, nobody is seized of such a radical post-crisis agenda.
Let us not repeat past errors. Let us not hope that a credit-fuelled consumption binge will save us.
This is the endgame for the global imbalances
In 2008, according to forecasts from the International Monetary Fund, the aggregate excess of savings over investment in surplus countries will be just over $2,000bn
The oil exporters are expected to generate $813bn. Remarkably, a number of oil-importing countries are also expected to generate huge surpluses.
In 2008 the big deficit countries are, in order, the US, Spain, the UK, France, Italy and Australia.
In normal times, current account surpluses of countries that are either structurally mercantilist – that is, have a chronic excess of output over spending, like Germany and Japan – or follow mercantilist policies – that is, keep exchange rates down through huge foreign currency intervention, like China – are even useful.
In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output.
Let dollar fall or risk global disorder