Summary:
This post will focus on the financial outlook for 2019 and onward, concentrating on the current changing economic indicators which have experts believing that the global economy is approaching a recession, most likely to occur in between 2020 -2022. There will be an analysis of shifting international monetary policy, changes in the US bond yields and the deregulation of financial markets, followed by a discussion on the present risks in the world economy particularly relating to global government and corporate debt. Finally, this piece will finish with an overview of the why today's geopolitical situation and the lack of power in monetary and fiscal tools undermine international institutions', organizations' and governments' ability to effectively fight the next recession.
Introduction:
The
last 12 months have started to see the tides turn, as global economic
indicators, heightened financial risks, and geopolitical uncertainties have
begun to paint a gloomy picture for 2019/2020. Overall economic conditions are
still healthy as 2018 saw the United States record some of its lowest
unemployment rates since October of 1969, while maintaining a 1.9% inflation
rate, on par with the Fed's goal of 2%, and achieving levels of around 4% GDP
growth at the mid-year mark.[1] 2018's third quarter also experienced
great returns for equity markets as consumer confidence levels in the US
reached their highest levels since 2000 and wage growth rose the highest since
2009. The US' booming economy also saw a strong rise in US stocks while a
survey conducted by the National Federation of Independent Businesses' showed
that small business' were the most optimistic that they have been since 1974.[2] All in all, 2018 was a
good year, but the fourth quarter began presenting some economic indicators
signaling more significant changes in global economic patterns which are causes
for concern moving forward.
Warning
Indicators and Signals
Two
thousand eighteen highlighted three signals which are in alignment with a
future slowdown in economic growth. These include shifting monetary policy
relating to rising interest rates, changes in the US bond market and severe
widespread financial deregulation. The United States has slowly been raising
interest rates since 2015, increasing in 2018 by 0.75% to an overall rate of 2.5%,
this marks the highest annual rise since 2007. These rate hikes and future
speculation contributed to vast market volatility in 2018's fourth quarter as
the S&P 500 and Dow Jones both saw 18-month record high and lows. In light
of this, Federal Reserve Chairman Jerome Powell, recently announced a potential
slowdown in rate hikes in 2019 to calm markets, revising its original forecast
of 3 rate hikes to only an additional two rate increases, but he ensures that
the Fed will maintain a "wait and see" approach.[3] Globally, the Bank of
England started rising interest rates in 2017, which currently stand at 0.75%
but due to recent major uncertainty caused by Brexit, the BOE has decided to
hold off on any increase opting into a similar "wait and see"
approach. Additionally, the European Central Bank last September kept interest
rates steady, while some expect an increase in 2019 as Sweden raised interest
rates by 25 basis points last week but remain in negative territory. In
highlight of these prospects, interest rates are still on the rise and
therefore in alignment with tighter monetary policy as governments build
firepower for when the economy experiences a future downturn, and while the
reduction or hesitation in interest rate increases might calm markets now, it
could cause problems in the future.
According
to investors, bond yields are one of the most critical indicators predicting
recessions, having forecasted the last seven US recessions, only being wrong
once. The US federal government issues US bonds to investors as a way to borrow
money, while being considered to be the safest investment in the world due to
their backing of the US government and their relatively low-interest rates. As
a general rule of thumb demand for US bonds is low during a boom as market
speculations are bright, and investors are willing to take chances on riskier
but higher yield investments. When the economy is performing poorly, investors
seek a safe – haven, and therefore US bond demand rises. There are also
different types of bonds with shorter-term bonds usually having lower yields,
as longer-term investments face a higher risk of inflation deteriorating their
gains over time. Therefore, regarding increasing bond – yields, the yield curve
slope upwards typically in the order of 2-year, 5-year, 10-year, 20-year, and
30-year term bonds. Where abnormality occurs is when the yield curve flips
upside down, and shorter-term bonds post higher yields than longer-term bonds.
This event occurs due to the wavering of future speculations and rising
uncertainty, leading investors to flock towards long term lower risk bonds,
which in turn pushes longer-term bond prices up and yields down.[4] Such a situation mirrors
what we saw in 2018 as longer-term bond yields continued to decline and in late
2018 the 2/5-year yield curves inverted for the first time since 2007. This set
off warning signals across global bond markets and the world economy. The
reversing of 2/5-year bond yields often precedes the inversion of the 2/10-year
yield curve which is the yield curve most watched by analysts and has
successfully predicted six of the last seven recessions. While the 2/10-year
bond yield curve has not yet inverted it currently stands at its lowest rate
since 2007, a level of 0.18. Since 1978, the average number of days between the
2/10- year yield curve inversion and the start of the next recession have been
627.7 days, suggesting that if the yield curve flips in 2019, we can speculate
a downturn around the year 2021, but uncertainty remains. Thus, while the most
critical yield curve has not yet inverted, the signs are there, and the bond
markets an area to watch closely in anticipation of an economic slowdown as we
move into 2019. [5]
The
third signal of economic change is the vast amount of deregulation which has
occurred as a constant pattern since the 1970s and has dramatically increased
over the past 24 months. President Trump's administration has "done a
number" on federal regulations relating to small and large businesses.
According to a report last year by Investor's Business Daily, since entering
office in 2016 President Trump has, "slashed the total number of pages in
the Federal Register, the government's regulatory bible, from 95,894 in 2016 to
61,308 pages in 2017. That's a decline of 36% and the lowest since 1993."[6] While deregulation has
brought some short-term growth, particularly to small businesses, it's within
the long-term context which calls for concern and in which this analysis is
focused.
A
specific and key example of recent deregulation occurred in 2018 after the
Trump administration, repealed some aspects of the Dodd-Frank act, packaged
into a bill called the "The Economic Growth, Regulatory Relief and
Consumer Protection Act." This law raises the threshold at which
individual banks are subject to oversight by the federal government including
various stress tests that are aimed at measuring a bank's ability to withstand
an economic downturn. Specifically, it raised the limit from US$50 million to
US$250 million in assets, while banks under US$100 billion are freed entirely
of these oversight conditions and those between US$100 billion and US$250
billion would no longer be subject to oversight conditions after 18-months.
While candidates for and against general regulation of the financial sector
agreed that the original limit of US$50 billion was too low, the new benchmark
of US$250 billion has raised serious questions. Questionability revolving
around the new parameter originates from the reality of past situations such as
the Lehman brothers in 2008, who failed and filed for bankruptcy, and at the
time only had US$210 billion in assets which is well below the government's new
threshold.[7]
Since
1970s deregulation of national banking
systems and the lifting of constraints on the global flow of capital used in
the new era has dually accelerated the exaggeration of financial booms and
busts. Re-regulation, mainly in Obama's term between 2009 and 2016 was
initially impactful but over time has lacked a certain degree of effectiveness,
as the current value of outstanding cross border financial claims stands at $30
trillion (and growing). This level is below the peak of $35 trillion in 2008
but well above the 1998 level of $9 trillion.
Furthermore,
according to the Behavioral finance and financial stability project at Harvard
University, "an average of four countries a year suffered a banking crisis
between 1800 and 2016. From 1945 to 1975, when the global financial system was
tightly controlled, most years were entirely free of banking crisis but in a
dramatic turn since 1975, an average of 13 countries a year have found
themselves in a banking crisis." (The Economist, 2018) Thus, deregulation
has caused much more instability amongst financial institutions and remains a
dangerous procedure.
Volatility
surrounding deregulation is further backed by an IMF working paper released
last year by Jihad Dagher titled Regulatory Cycles: revisiting the Political
Economy of Financial Crises. Dagher visits ten different economic crisis which
have unfolded since the 17th century all over the world. He finds evidence that
while financial crises are a "reoccurring phenomena… regulation has been procyclical,
effectively weakening during a boom and strengthening during the bust." He
also analyzes numerous international recessions in which downturns were
preceded by deregulation in various instances, while in some cases by months
such as the British crisis of 1825 and others by an average of around 3-4 years
such as the case with the unrelated Swedish and Korean banking crises of the
1990s. The current state of the US economic boom and the heightened examples of
deregulation, while the effects may not be immediate, the looming consequences
are set to be felt in the future.
(Dagher, 2018)
Overall,
these are a few of crucial signals of economic change indicating a looming
economic downturn in the US and the global economy in the coming years. Now
that we have an idea of where the economy is heading let's take a look at some
of the current risks within the global economy before moving onto why
international governments and institutions aren't ready to take them on.
Global
Debt Risks
One of the most lethal risks the
US and the global economy is facing at the moment is the quickly expanding size
of debt. Nassim Taleb, the author of bestseller Blackswan and former derivatives trader, who predicted previous GFC
in 2008, warns that debt is on the rise and has shifted from housing to
governments and corporate balance sheets. The total amount of global debt is
currently up to US$247trillion, up US$150 trillion in 15 years, doubling from
pre-recession levels. At present, the US Treasury Department estimated it issued
US$1.338 trillion in debt in 2018, more than double the levels seen in 2017,
while the Office of Management and Budget (OMB) reported that the government is
set to run trillion-dollar deficits for the next four years, despite the
roaring economy. Overall, the US currently has US$24.5 trillion in government
debt which stands at 105.4% of GDP, compared to the mere 62.5% of debt to GDP
levels recorded in 2007. After mortgage, student debt is the most abundant form
of debt in the US, as student loans are currently valued at US$1.6 trillion,
more than 30% larger than the junk mortgages in the housing market of 2007
which were worth approximately US$1 trillion. Adding to the risk specifically
relating to student loans, default rates on student loans are higher than they
were on mortgages in 2007 and this time loan losses are falling not on the
banks and hedge funds but on the US Treasury itself due to government guarantees.[8]
Furthermore,
mounting fears are accumulating amid corporate debt in the US which in 2007 was
at US$4.9 trillion as investors took advantage of low interest rates, but now
after surging 86%, corporate debt stands at US$9.1 trillion. There is also
growing worry that the global shift in monetary policy and rising interest
rates on debt will reduce corporate profit margins. One of the main concerns, is the low amounts of cash surrounding the debt, as the cash to debt ratio for
corporate profits in 2017 fell to 12%, which is the lowest on record. On the
positive side sizeable corporate tax cuts sponsored by the Trump administration
are in some cases being used by companies to reduce debt, and current investor
demand remains strong for debt, but in the quick flip of a switch, as we saw in
2008, this can change quite rapidly, and corporate debt could present a severe
burden on the economy.[9]
Emerging
markets and developing countries are also entering the danger zone as 24/59 low-income countries (40%) as defined by
IMF, are in a debt crisis or are at high risk of a debt crisis. Countries such
as the Republic of Congo and Mozambique have already defaulted on some loans,
while Sri Lankan politicians have hinted that bankruptcy may not be off the
table. When a country defaults on its debts, services such as the following are
taken from its citizens: security and policing, health care clinics, schools, food
programs for low-income earners, and investments in infrastructure. Default
consequences make it extremely hard to get access to money once loan repayments
cannot be made leading the country down a dark spiral. Plunging currencies in
emerging markets due to global investors becoming increasingly worried about
developing economies ability to pay back the debt, is a harsh reality as will
be mentioned later in the form of Argentina and Turkey in 2018. According to
Lagarde, head of IMF, emerging markets excluding China, could see investors
sell as much as US$100billion of their bonds, which broadly outmatch outflows seen
during the financial crisis.[10]
Furthermore,
China's "One Belt and One Road" project has worldwide politicians and economists
worried that it might be a debt trap, as many developing countries are signing
on and recent developments have seen struggles concerning loan repayments. Sri
Lanka accepted billions in loans for the port of Hambantota from China but was
unable to pay back debts, and a lease for the port was signed to Merchant Port
Holdings, a Chinese company, for 99 years priced at US$1.4 billion. In August,
Prime Minister of Malaysia, Mahathir Mohamad asked China to cancel three
infrastructure projects that he said Malaysia could not afford and he warned against
"a new version of colonialism." Likewise, last August, Tongan Prime
Minister, Akilisi Pohiva, said Tonga would request to China to waive their
debts, in the hope of finding "proper solutions through friendly
consultation."[11] Tonga is the only nation
in the South Pacific in debt to China, but recently more countries have signed
onto the "One belt, One road" project at the last APEC meeting in
2018. Much uncertainty arose at this summit as China while meeting with the
Pacific Island nations prevented all Non – Chinese national journalists from
entering. It was later revealed that countries such as Vanuatu received a loan
from China for a new infrastructure project paying interest of around 2% on the
loan. Concerningly, after Australian analysts in Canberra examined the
situation and loan options available to Vanuatu, it discovered that an almost
identical loan could have been obtained from Japan for around 0.5% interest on
the loan repayment. Other deals and discussions between China and the Pacific Island
nations are not entirely transparent as the Asian giant is attempting to expand
its influence into the South Pacific. Elsewhere in 2018, El Salvador asked for help to develop a port
from Taiwan, after which they sent over engineers who did an assessment and
said that the port was not financially feasible. In the aftermath of the evaluation, El Salvador broke relations with Taiwan and established ties with
China, where they are expected to ask for funding.[12]
China
itself may have a hidden "Titanic" debt worth an estimated US$6 trillion
according to S&P Research, while other analysts believe, LGFVs (local
government financing vehicles) are being used to shield government debt.
S&P says that central government may be open to the possibility of
insolvent LGFVs filing for bankruptcy. China has US$34 trillion in public and
private debt while, Chinese borrowing costs rose 14% in 2017 to 266% of GDP,
compared to 166% in 2008. Corporate debt is a massive reality in 2018, while
the government is targeting spending cuts, and implementing sweeping rules to
target shadow banking. Experts believe shadowing banking is a network of
unregulated lending and risky investment products worth around US$10 trillion within
China’s economy. During 2008, Beijing
officials ordered local governments to build roads, bridges and other public
works to keep economy pumping and workers in jobs, leading to significant
amounts of borrowing. Japan experienced a similar potential debt bubble in the
1980s which led to a property and stock market crash that left banks crippled
for decades. China has had busts before, US$650 billion bailout in the 1990s,
but its current debt risk is one that can drag on the global economy or create
a new financial crisis.[13]
Geopolitical Uncertainty
The
current geopolitical landscape is in one of the most unstable states it has
been in for many years. Two of the world's leading economies, particularly in
the west, are experiencing severe political strife. In the US Donald Trump's
administration, as leader of the world hegemon, is causing a great deal of
uncertainty with various policy and international relation decisions. A few
events, on a very long list, include the United States trade war with China,
its refiguring of NAFTA, anti-immigration rhetoric and current longest – ever
standing government shutdown, as he repeatedly deteriorates the United States'
longstanding relationships with worldwide economies and governments. According
to Steven Davis, a professor at the University of Chicago Booth School of
Business, Trump is trying to, "weaponize uncertainty" throughout his
various attempts to negotiate with clashing parties in and outside of the US.
The United States has experienced a fall in foreign direct investment in 2018,
and it was only the 6th time since 1982 that FDI was negative, which was when the
current official FDI data series began. In 2017, long term capital allocated in
the US by foreign investors also fell 40% in 2017. While stock markets rode a
see-saw in late 2018, we can see that uncertainty caused by Trump's administration
is growing, and quickly undermining global confidence in the US economy.
On
the other side of the Atlantic, Britain
is suffering through a political disaster. Theresa May has been battling with
Brexit, having negotiated with the European Union she was able to have the
meaningful vote on the deal delayed in December 2018 due to significant
opposition within British parliament. This strategy had little impact as the
vote took place on January 15th and saw Theresa May face a historic defeat of
more than 230 votes believed to be the largest loss in U.K. political history.[14] Within hours of the
vote's aftermath, May now faces a vote of "no – confidence" severely
heightening uncertainty and the chances of a no – deal Brexit. Moving forward
Britain faces numerous roads in which the nation can travel down, including the extension
on Britain's leave in Article 50, loss of no confidence vote by May (a
situation in which the government would fall, and a new one would need to form
in 14 days), a no – deal Brexit, a second referendum, renegotiation with the EU
or parliament voting against all the preceding options. The current uncertainty
within Britain and its relations with the EU are immense. Economic
ramifications are also building as estimates from leading global management
consulting firm EY believe banks, insurers and money managers are planning to
move US$1 trillion out of Britain and warn their estimates might be too low.[15]
Across
the EU further uncertainty looms as 2018 saw an additional rise in populist and
nationalist movements. This included the vast "yellow vest" protests
seen across France, to the rise of Italian deputy minister Matteo Salvini
governing by an "Italians first" policy, and the rise of Germany's
largest opposition party the far right Alternative for Germany (AfD) which has
13% of the parliament after only entering in 2017. Even Austria and Sweden have
experienced nationalism influence after proposals to seize migrant phones and
ban headscarves were established, and Sweden saw its anti-immigration party,
Sweden Democrats, who have roots in Neo-Nazism,
make gains of nearly 6% in 2018. Thus, it is evident uncertainty is
rising and populist governments are making significant gains across Europe.[16]
Two
days before the onset of 2019, German Chancellor, Angela Merkel, called out to
nations to stand up against nationalism saying that we must take into account
the interest of others warning that, "today that conviction is no longer
shared by all. Certainties of international cooperation are coming under
pressure. In such a situation, we have to advocate, argue, and fight our
convictions more strongly. We have to fight for them together, even if ...its
uncomfortable and demanding."[17]
Elsewhere
around the world, emerging markets are experiencing various uncertainties from
South America, to Africa and over to Asia. In South America populist leader
Jair Bolsanaro has proposed restructuring the Brazilian education system such
as to omit "Marxist Garbage" which translates to any teaching
revolving around sexuality and gender issues or evolution. He also suggested
introducing mandatory lessons on "moral and civic education" which
many interpret as patriotism 101. Bolsanaro also dreams of implementing vast
privatization within Brazil despite polls showing most are against
privatization and enjoy Brazil's nationalized health, education and
unemployment systems.[18] Lisa Chua, a money
manager at Man GLG, 2018's top developing – nation debt fund, said, "In
Brazil, you're also seeing rising idiosyncratic risks not necessarily with
referendums but risk around reforms that need to get done and a president who
may not have the support to implement them. In the case of Brazil, it's
possible the market got overly euphoric with investors ignoring some of the
risks."[19]
Back
across the Atlantic to Africa, South Africa, and Nigeria, Africa's two leading
economies both face stark political challenges in 2019 as each encounter
elections which analysts are proving to say are the most fiercely contested
elections since either country's transition to full-fledged democracy in 1994
and 1999. In South Africa, while the economy went through a recession in 2018,
the ruling ANC party has faced mass scandals of corruption in the face of
former president Jacob Zuma and other current members. Political assassinations
are also on the rise within the ANC, with a current count of 90 murders since
the start of 2016, double the annual rate of the past 16 years, while the
majority of victims were those speaking out against corruption scandals.[20] In Nigeria, candidate number
one is President Muhammadu Buhari who according to Bloomberg reports is an,
"elderly and infirm leader who lacks the energy, creativity, or political
savvy to significantly move the needle on Nigeria's most intractable
problems," while candidate number two is former Vice President Atiku Abubakar,
also under longtime scrutiny amongst numerous corruption allegations.
Globally
geopolitical uncertainty creates an environment for poor economic decisions,
undermining investor confidence in world markets and international relations,
having potentially severe impacts on the global economy.
Why
do risks matter?
So
far we have discussed the economic signals and the current risks within the
worldwide economy, but we haven't analyzed why these risks are such a threat to
the current status quo. The growing amount of debt has numerous consequences
with one of the main arguments surrounding the negative impact on growth. One
of the key to reasons countries, companies, and even individuals put themselves
into debt is to stimulate growth. For instance, many students in the US have
put themselves into debt to enable themselves the opportunity to access higher
education in the hopes that they will learn, earn a degree and get a higher
qualified job that in the long run will provide them with a higher quality of
life. Countries and governments do the same thing, but the problem is, high
debts are stunting growth, and when it gets to a point where debts are not
promoting growth, they become a burden which can very quickly spiral out of
control. Debt in a country doesn't necessarily matter as long as a country's
economy is growing alongside with it, but when it doesn't, it leads down a dark
path. In 2017, Hoisington Investment Management, a Texas-based investment
advisor with over US$3.6 billion in assets, conducted specific data analytics
showing that one dollar of non – financial debt generated only 40 cents of GDP
in the United States. Meaning for every dollar borrowed less than half of its
value is produced in GDP growth. This ratio is a severe 1000% percent down from
the US$4 of US GDP growth per one dollar borrowed around 1970. In China, debt
productivity dropped 42.9% just between 2007 and 2017. According to Economic
Cycle Institute for Research, in the past 12 months alone, 2018 saw, "the
combined debt of the US, Eurozone, Japan and China [increase] more than ten
times as much as their combined GDP [growth] over the past year."[21] This fully translates to
the globe's most advanced economies generating 10x more debt than GDP growth in
a span of 12 months. It is evident that debt is very rapidly losing its capacity
to stimulate growth, so what happens next? Economies become vulnerable.
Two
thousand eighteen already unveiled some of the dangers of massive debts in
emerging markets relating to the currency crisis in Argentina and Turkey. In
Argentina, up until 2015, they had a controlled exchange rate, to limit buying
and selling of foreign currencies aimed at protecting the countries depleting
reserves which the government had used for many years to prop up the value of
the peso. Essentially, when a new government entered in 2015 leader, Macri,
lifted the currency controls and experts expected to see a gradual decrease in
the value of the peso, but the opposite happened. Amid high inflation rates, on
back of years of populist governments printing money to finance budgets and
shifting monetary policy in the United States as interest rates increased,
investor confidence in Argentina plummeted in the 2nd quarter of 2018. The
depreciation of the peso has made the cost of repaying government debts
skyrocket, leaving Argentina fiscally crippled and forcing them to turn the IMF
as a last resort, receiving the biggest loan in IMF's history valued at US$57 billion.
The future impact on growth and Argentina's unsustainable reliance on the IMF
puts the country in a vulnerable position as its debt to GDP ratio climbs to
nearly 60% with growing repayments and a failing economy.[22] In Turkey, a similar
situation ensued where Turkey's currency, the Lira, nosedived 35% against the
dollar amid strong fears and doubts surrounding the ability of Turkish
companies to repay loans in dollars and euros as Turkish companies accumulated
massive debts during their construction boom.[23] Therefore, as 2018 showed
in emerging markets, debt causes mass uncertainty which undermines market
stability and fiscally disables governments.
In
the United States a worst-case scenario regarding growing US debt, alongside
lagging economic growth and possibly a slip of the US dollar (to make it easier
to repay American debt), could severely undermine global investor confidence in
the US dollar. If foreign countries, who hold approximately US$5 trillion in
U.S. treasuries including China and Japan who both hold approximately US$1
trillion in U.S. Treasuries, start dumping treasury holdings on the secondary
market, a collapse could follow. Investors would flee to trade in other
currencies, with China being a major contender, and could result in the US
dollar losing its status at the World Reserve Currency, which would lead to a
major devaluation in the US dollar severely damaging the economy and further
ability to pay back debt.[24]
While
the latter is quite an unlikely scenario, mainly because it wouldn't be in
Japan and China's best interest as the US is one of their biggest customers,
the debt still poses a global problem. While current accumulating debt creates
growing uncertainty globally, if debt doesn't stimulate growth and the world
economy falls into a recession, it hard to imagine exactly what would happen
besides chaos and crisis. The fiscal power of governments would rigorously
deteriorate, which is a massive issue as running deficits to fight recessions
has been one of the primary recovery tools used by governments since the 1930s.
Some analysts believe that there could be a long period of possibly ten years,
drawing similarities with the great depression, of stagnation that could incur
where future consumption is reduced, and debt gets liquated. Others talk about
the Great Reset and a type of "super cycle" which has been developing
since the 1930s on the backhand of broken government promises and the eventual
confrontation of debt. Regardless of the exact details of such a situation, it
more likely than not, it will ensue in a painful economic downturn.
Are
we ready?
Now the inevitable and genuine
question is, are we ready for the next recession? In past recessions,
governments have relied upon various tools falling under monetary and fiscal
policies. These include those such as reducing interest rates to boost the
attractiveness of loans, to kick start credit flows and attract overseas
investors. In the most recent recession, the government enacted quantitative
easing in which the central bank purchased government securities or other
securities from the market to increase the money supply, by essentially
flooding financial institutions with capital in an attempt to promote lending
and liquidity in financial institutions.
Others include an expansionary fiscal policy in the wake of Keynesian
economics which sees governments as they did in the 1930s take on deficits
injecting money into the economy through infrastructure projects such as the
Theodore Roosevelt highway or war spending as seen in the lead up to World War
2.
The
power of these recession-fighting tools have been heavily weakened and are
quickly diminishing given current economic conditions. For example, concerning
the adjustment of interest rates, to fight a recession, most economies, like
the US, aim to have interest rates at a level of around 5% when a recession hits.
This target enables the central bank to make steady cuts that over time help
stimulate economic growth and turn the economy around. Unfortunately, due to
the severity of the Global Financial Crisis in 2008 interest rates have been
kept at a historically low rate for the past ten years. As mentioned earlier
the US interest rate stands at 2.5%, Britain's is at 0.75%, and the ECB holds
steady at 0%. Recently, the US central bank revised its current outlook on interest
rate increases for 2019 as markets were reacting poorly to those in late 2018.
In Britain, with mass uncertainty revolving around Brexit, in late 2018 the
Bank of England decided to hold steady at 0.75% while 2019's outlook will
heavily depend on the outcome between Britain the European Union. While the ECB
with Germany and Italy already feeling powerful pressures of a recession, the
Eurozone is unlikely to see an increase in interest rates anytime soon as some
analysts believe it could be postponed to as late as mid – 2020.
The
aim of this interest rate summary is to highlight the minimal room for any
maneuverability amongst current interest rates. While only three banks are
being analyzed, they are significant drivers of the current global economy and
with interest rates so low, if a major recession or crisis were to hit the
world economy in the near future, central banks' powers to fight downturns in
economic growth are exceedingly limited. Regarding QE, while it is still
possible tool at central banks disposal, there are various arguments in favor
of the fact the QE widely caused, "global inflation in asset prices, with
the price of everything, from equities to art and wine, [going up]. The owners
of such assets tended to be already wealthy," and therefore global
inequality increased dramatically.[25]
Concerning
fiscal policy, as previously discussed alongside debt, particularly in the US,
global debt is already at historical levels. In a recession, if extensive
borrowing is done, US government debt could quickly rise to US$30 trillion. The
ramifications of this would heighten those discussed earlier, as on the current
track, by 2046, interest on US debt repayments are going to the be the 3rd
largest category in the United States budget. According to a recent Moody's
analysis, there will be a "persistent deterioration in the U.S.'s Fiscal
strength over the next ten years." Fast growing and excessive levels of
debt make a fiscal crisis much more likely and leave minimal room for lawmakers
to alter spending policies and change taxes to help solve a crisis.[26] In Europe, any debate
about government borrowing threatens to revive "disastrous political
showdowns of euro – area debt crisis and the
horrors of the Greek Economy."[27] Thus, in terms of the
size of global debt, various worldwide economies, have less flexibility in
their national budgets preceding a recession.
In
addition to the lack of power in fiscal and monetary tools there currently no
cohesive global economy or political platform to cooperatively fight a global
recession. In 2008, "when the weak link was a disintegrating financial
system, co-operation among governments--from the close coordination of
central-bank action around the world to the establishment of the G20 as a
crisis talking-shop--helped prevent a bigger disaster."[28] At the last G20 in
December 2018, according to Thomas Bernes, a distinguished fellow at the Centre
for International Governance Innovation, the G20, "veered all over the
road." He said that "leaders buried their differences in obscure
language and dropped language to fight protectionism, which had been in every
G-20 communique since the leaders' first summit."[29]
In
other news, while markets were briefly lifted with a 90 – day truce between the
US and China, the trade war doesn't seem to have a near end in sight. Earlier
mentions of Brexit and the European Union are still array while African and
Asian nations are fighting their own battles. Before 2008, the geopolitical
situation was the complete opposite, as Britain was stable, the war on terror
in the US had settled down since 2001, China was still growing at tremendous
rates and political turmoil within the world seemed far from anyone's mind. As
can be seen, today paints a different picture as the global geopolitical
network is severely divided, volatile and seemingly hostile.
Concluding
Remarks
The
tides are turning, and economic indicators are signaling a change in the
current economic situation, providing pre-warning signs of a future recession.
There are considerable US and global risks revolving around debt. The
consequences of these risks continue to develop rapidly as their ability to
undermine the current economic system is becoming more of a reality. Once the
recession does set upon us, given the current status quo, the power of fiscal
and monetary tools of the past have been severely minimized, while geopolitical
conditions remain profoundly ominous and unstable. Thus, the global economic
conditions are quickly altering, intensified instability and worry is creeping
into markets, a bust is on the radar, and WE ARE NOT READY.
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