Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

When Covid-19 first impacted major economies last Spring, stock markets throughout the world plunged  by double-digits in a period of only 3-weeks. Yet, not only have these losses all been recouped; less than a year later equities have reached record levels, led by the Dow Jones index. In addition, other speculative investments such as the cyber currency Bitcoin have soared to dizzying highs. Yet, amid this financial exuberance veteran investors are displaying growing concern for the future. The  Financial Times has characterized their concern as seeing  “a bubble to rival anything  seen in the past century.”

Simply put , there is a disconnect between the equity markets and  the real economy, which is in dire straits in virtually every country. The sole reason for the escalation in equity prices is the unprecedented money printing by central banks, combined with equally unparalleled deficit spending by sovereigns. It is only this monetary and financial sugar high which is driving soaring equity prices.

When the first hint occurs that the pump-priming may be receding, however, the investors will run for the exists. What is likely to occur is a global stock market crash of calamitous proportions which, like the 1929   crash on Wall Street, will usher in a period of deep economic depression.

The Dow Jones Industrial Index was the one shining light in President Donald Trump’s unconventional administration. No matter how perplexing his tweets were, there was no denying that Wall Street investors loved his pro-business posture. That is until now.

The massacre that occurred on Wall Street on Black Monday, February 5, 2018 was the largest one -day loss on  the New York Stock exchange. This comes after a bad week on Wall Street, meaning all of the gains trumpeted by Trump have been erased. Of course, there will be pundits claiming that this is just a temporary correction. But is it?

After a decade of money printing and near zero interest rates undertaken by central banks around the world, but especially by America’s Federal Reserve, inflation  fears are returning with a vengeance

It must be recalled that a major reason the world supposedly escaped a massive economic depression following the global economic crisis of 2008 has been  money printing by central banks and massive borrowing by sovereigns. This borrowing binge continues to the present day.  Up till now, zero interest rates have enabled major sovereign borrowers, especially the United States, to service its growing government debt. However, should interest rates return to anything approaching normal historical levels, then many countries, the USA being in the lead, face the prospect of a massive insolvency crisis. Fear of this approaching fiscal Armageddon may be what is animating the growing  fear among Wall Street investors.

Black Monday may very well be  a sign of much worse to come.

Wall Street has incurred 2-days of brutal losses. Friday’s drop of more than 530 points follows Thursdays’ decline by more than 300 points on the Dow Jones index. The NYSE collapse parallels that of major bourses across the world.

The sudden crash in stock prices will undoubtedly send the various plunge protection teams of the world’s major central banks into action, seeking to reverse the sharp losses. In spite of what the central bankers do, they cannot much longer hide the fact that the world barely recovered from the global economic crisis that emerged in 2008, and the likelihood of a return to the Great Recession has grown exponentially, with the accumulation of bad economic news, especially from China.

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With the Dow Jones having reached 14,000, it can be said that the worst losses on the index since 2008 have been made whole. But does that mean the global economic crisis is over? Hardly, as what we are seeing on Wall Street is totally unconnected to the real economy, American or global, as most economists and experts realize. The Dow Jones rally is a product of financial engineering, as opaque as any mortgage backed security, courtesy of the U.S. Federal Reserve and its chairman, Ben Bernanke.

While the rally on Wall Street has been occurring, unemployment in virtually every advanced economy, including America, has remained at historically high levels, despite unprecedented deficit spending  by governments. With austerity now replacing stimulus as the mantra of policymakers in the United States and Europe, there is no realistic likelihood for any meaningful reduction in the unemployment rate in the U.S., Eurozone and U.K.  in 2013. Currency wars are being waged by desperate governments, as economic strife leads to political unrest and instability, and geopolitical tensions threaten to blow up what remains of an anemic global economic recovery at anytime during the next twelve months. Yet, despite  the dire straits and fragility of the real economy, central bankers worldwide, but especially the Federal Reserve in the United States, have succeeded in raising equity valuations with all the deft  cunning of a snake charmer.

By design, the Fed, spooked over a moribund economy that is saturated with  sovereign debt and enfeebled by incompetent policymakers, has deployed monetary policy for one purpose; to create the mother of all asset bubbles, right on Wall Street.  Fed  Chairman Bernanke has imposed an essentially zero interest rate policy, or ZIRP, for what seems an eternity, with the objective of punishing savers and fixed income investors, and forcing them to plow their money into equities in search of any yield above real inflation, irrespective of risk factors.

The brokers on Wall Street are obviously delighted. But this stock market engineering by Ben Bernanke can only work in the long-term if the real economy recovers. Failing that, there is the old Newtonian law of physics; whatever goes up must surely come back down to earth.

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First there was the dotcom bubble. When it deflated, the U.S. Federal Reserve set interest rates at historic lows for far too long, in turn giving birth to a new asset bubble; residential real estate in America. We all know what happened to that asset bubble, and our world is still gripped with the consequences of its implosion.

How has the Fed responded? By establishing a near zero interest rate policy (ZIRP), which in turn has created a new asset bubble; equities. With the Dow Jones surging past 10,000 for the first time in a year, and Wall Street handing out executive bonuses at a rate that exceeds the  previous best year for their self-congratulatory excess, 2007, by 10%, one would think that the global economic crisis is over.

Perhaps we are just witnessing a new and potentially more dangerous asset bubble being inflated by government bailouts and monetary policy courtesy of the Federal Reserve that has gone berserk. With the U.S. dollar plummeting like a lead weight falling off a cliff, and banks providing depositors with virtually no interest, it seems that it is a matter of policy to encourage stock market trading and speculation.

The question that must be asked is this; when accelerating levels of unemployment, contracting consumer spending and elevated levels of loan foreclosures make it clear that the real economy is still in deep crisis, how sustainable will this latest asset bubble prove? I think recent history has already provided an answer.

Two contradictory financial trends are in evidence, in effect the Ying and Yang of the global economic crisis. The NYSE has experienced a steep Bear Market rally from its March lows, setting the stage for the Dow Jones to pass above the 10,000 level. On the other hand, the American greenback is plunging to new lows, having previously demonstrated impressive strength as a safe haven when the global economy imploded after the demise of Lehman Brothers.

Actually, there may be less of a contradiction than meets the eyes. If the U.S. national debt and annual budget deficits continue to expand with reckless abandon, it is inevitable that global market forces, especially the bond market, will set in stage a deep contraction in the U.S. dollar’s relative value. The apparent replacement of the Japanese yen by the U.S. dollar as the preferred vehicle for the carry trade seems to point in the direction of growing weakness. In that scenario, equities may, for a time, become the new flight to safety for investors.

The rise in equity prices may reflect an inverse relationship to the decline of the value of the American dollar, as opposed to a realistic market appreciation of economic fundamentals. Now, when the value of both the dollar and the Dow Jones plummet, what would that convey?

A global economic depression, most likely. At present, however, the inverse relationship of the U.S. dollar and NYSE merely reflects a synchronized global recession.  The dangerous moment will come when the world’s central banks begin to engage their long-speculated exit strategies. Then, I think, we will witness volatility with both the American dollar and equity prices.