A new article by an IMF economist makes the point that in April 2008, not a single one of the mainstream economic forecasts covered by ‘Consensus Economics’ was forecasting a recession in 2009.
The IMF itself expected growth to continue, as did the World Bank and the Organisation for Economic Co-Operation and Development. Even by September 2008, the consensus view was still for continued growth, and no recession.
As the Financial Times comments, “it is an astonishing record of complete failure“.
We did forecast the Crisis. But, of course, most people preferred to believe the consensus. Their caution was understandable. But sometimes it is necessary to go against the consensus. And today it is essential.
The reason is simple. Central bank policies since 2008 have clearly not solved the problems of slowing growth and too much debt. Rather, they have made them worse, much worse.
Central banks have now created a debt-fuelled ‘ring of fire’ with multiple fault-lines, as the chart above shows.
Some of these fault-lines are becoming widely acknowledged. Thus the Governor of the Bank of England has warned that the record level of London house prices poses:
“The biggest risk to financial stability, and therefore to the durability of the expansion, those risks center in the housing market and that’s why we are focused on that.”
Similarly, the new Chinese leadership has recognised their economy has moved into a New Normal, and that more stimulus would cause many more problems than it would solve.
The problem is that these realisations all come too late. Policymakers have spend $33tn, and wasted 5 years, heading in the wrong direction. We could by now have begun to emerge from the Crisis with a soundly-based platform for future growth. But instead, we are faced with dealing with the same problems as in 2008, but on a much larger scale.
Even worse is the fact that most policymakers still do not accept that demographics drive demand. They do not want to admit that the ‘Demographic Dividend’ of the Boomer-led SuperCycle growth has been replaced by a ‘Demographic Deficit’ caused by ageing global populations and falling fertility rates. Instead, most prefer to indulge in wishful thinking – arguing that adding yet more debt will somehow enable growth to return.
Thus we face a ‘ring of fire’ where the tectonic plates are shifting all the time.
This is not to say we face one big earthquake. Rather, we face a period where one medium-sized earthquake will opens up cracks elsewhere. And these cracks create the potential to create another debt-related earthquake elsewhere along the fault-line.
China is the epicentre of the first earthquake, as we noted in February when launching our first Research Note. Tremors from the new policies have already moved along the fault-line, destabilising emerging economies in a wide arc from Argentina through India and Indonesia to Turkey.
The worrying feature is that these were just an early warning of the likely impact of China’s policy shifts. We are in a world where there are multiple fault-lines with the potential to crack open when stressed by tremors from another earthquake, for example:
- US financial markets are racing higher, fuelled by levels of debt never before seen in history
- The Eurozone debt crisis remains unsolved, and the recent EU elections will make it even harder to find a solution
- Russia’s establishment of a Eurasian Economic Union highlights its intention to pressure Western Europe, which depends on its energy exports
- And, of course, there is the great debt mountain in Japan, built even higher under Abenomics
There is little that any individual or company can now do to stop these earthquakes happening. Even a complete about-turn by policymakers today would only reduce their impact, not remove the risk. But we can at least try to understand why they are likely to happen, and prepare ourselves to survive them.
This will be the aim of a new series of posts, whch the blog will intends to publish over the next few weeks. Tomorrow’s post will begin the series, updating on China’s housing and shadow banking bubble. It hopes readers will find the series helpful.