Apocalypse
now: has the next giant financial crash already begun?
A
predicted global meltdown passed without event. But there are enough
warning signs to suggest we are sleepwalking into another disaster
Paul Mason / Sunday
1 November 2015 20.00 GMT
The 1st of October
came and went without financial armageddon. Veteran forecaster Martin
Armstrong, who accurately predicted the 1987 crash, used the same
model to suggest that 1 October would be a major turning point for
global markets. Some investors even put bets on it. But the passing
of the predicted global crash is only good news to a point. Many
indicators in global finance are pointing downwards – and some even
think the crash has begun.
Let’s assemble the
evidence. First, the unsustainable debt. Since 2007, the pile of debt
in the world has grown by $57tn (£37tn). That’s a compound annual
growth rate of 5.3%, significantly beating GDP. Debts have doubled in
the so-called emerging markets, while rising by just over a third in
the developed world.
John Maynard Keynes
once wrote that money is a “link to the future” – meaning that
what we do with money is a signal of what we think is going to happen
in the future. What we’ve done with credit since the global crisis
of 2008 is expand it faster than the economy – which can only be
done rationally if we think the future is going to be much richer
than the present.
This summer, the
Bank for International Settlements (BIS) pointed out that certain
major economies were seeing a sharp rise in debt-to-GDP ratios, which
were well outside historic norms. In China, the rest of Asia and
Brazil, private-sector borrowing has risen so quickly that BIS’s
dashboard of risk is flashing red. In two thirds of all cases, red
warnings such as this are followed by a major banking crisis within
three years.
The underlying cause
of this debt glut is the $12tn of free or cheap money created by
central banks since 2009, combined with near-zero interest rates.
When the real price of money is close to zero, people borrow and
worry about the consequences later.
Next, let’s look
at the price of real things. Oil collapsed first, in mid 2014,
falling from $110 a barrel to $49 now, despite a slight rebound in
the interim. Next came commodities. Copper cost $4.50 a pound in
2011, but was half that in September. Inflation across the entire G7
is barely above zero, and deflation stalks the southern eurozone.
World trade volumes have contracted tangibly since December 2014,
according to the Dutch government index, while the value of global
trade in primary commodities, which scored 150 on the same index a
year ago, now stands at 114.
In these
circumstances, the only way in which the expanding credit mountain
can be an accurate signal about the future is if we are about to go
through a spectacular productivity boom. The technology is there to
do that, but the social arrangements are not. The market rewards
companies that create labour exchanges for minicab drivers with
multibillion-dollar valuations. Hot money chases after computing
graduates with good ideas, but that is – at this phase of the cycle
– as much an indicator of the stupidity of the money as the
brightness of the ideas.
China – the engine
of the post-2009 global recovery – is slowing markedly. Japan just
revised its growth projections down, despite being in the middle of a
massive money-printing programme. The eurozone is stagnant. In the
US, growth, which recovered well under QE, has faltered after the
withdrawal of QE.
In short, as the BIS
economists put it, this is “a world in which debt levels are too
high, productivity growth too weak and financial risks too
threatening”. It’s impossible to extrapolate from all this the
date the crash will happen, or the form it will take. All we know is
there is a mismatch between rising credit, falling growth, trade and
prices, and a febrile financial market, which, at present, keeps
switchback riding as money flows from one sector, or geographic
region, to another.
A better exercise is
to image what archetypes a dramatist might use if they tried to write
a farce describing the state of society on the eve of yet another
disaster. There would be a character obsessed with property: London
is fizzing with young professionals trying to clinch property deals
right now. The riverbanks of the Thames are forested with cranes,
show apartments and half-occupied speculative developments that will,
after the crash, make great social housing.
Then there would
have to be a hapless central banker, optimistically “looking
through” the figures for low growth, stagnant prices and collapsing
trade in order to justify doing nothing.
But the protagonist
would have to be a politician. The Kingston University economist
Steve Keen points out that, in the run up to 2008, the flawed
ideology of neoliberal economics made a dangerous situation worse.
Economists put their professional imprimatur on the idea that risky
investments were safe. Today, the stable door of economics is firmly
shut. Even mainstream bank economists are calling for radical
measures to revive growth: Nick Kounis, ABN Amro’s macro-economics
chief, called on central banks to raise their inflation targets to 4%
and flood the world with money in a coordinated survival strategy.
Instead, it is in
the world of geopolitics that the danger of elite groupthink is
clearest. The economic danger becomes clear if you understand that
printing $12tn incentivises every country to dump the final cost of
anti-crisis measures on someone else. But there is now also clear
geopolitical risk.
The oil price
collapsed because the Saudis wanted to stymie the US fracking
industry. Right now, although Russian and American diplomats are
capable of sitting together in Vienna, their strike-attack pilots do
not communicate as they attack their variously selected enemies on
the ground in Syria. Europe, weakened by the Greek crisis, its
cross-border institutions thrown into chaos by the refugee crisis,
looks incapable of doing anything to anybody.
So, the biggest risk
to the world, despite its growing seriousness, is not the deflation
of a bubble. It is the risk of that becoming intertwined with
geopolitics. Any politician who minimises or ignores this risk is
doing what the purblind economists did in the run up to 2008.
Paul Mason is
economics editor of Channel 4 News. @paulmasonnews
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