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Marc Faber: The Global Economy Is Entering An Epic Slump
Famed
investor and author of the Gloom, Doom, Boom Report, Marc Faber,
returns to the podcast this week to discuss the slowdown in the
global economy, signs of which he claims are multiplying fast all
around the world.
He predicts the next year is going to be an especially bruising one for investors, and recommends a combination of diversification and defense for those with financial capital to protect:
I do not believe that the global economy is healing. I believe that the global economy is heading into a slump once again.
We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy were doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of American markets and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years. How would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive.
Preceding every bubble, you have a huge expansion of credit. That was the case in the period ’97 to 2000, and in the period 2003 to 2007, and on previous occasions in economic history. In the case of China, credit as a percent of the economy has grown by more than 50% over the last five years, which is essentially a world record. And in my view, its economy is slowing down rapidly. I had a drink with a friend of mine the other day who has car dealerships, luxury car dealerships, in China. He said sales have hit a brick wall. Not 'slowed down'; a brick wall. And indeed, exports were down and car sales were down in July. I think that this will then spill over again into other emerging economies because China is a large buyer of commodities and a large trading partner to other countries.
I travel extensively. I can see roughly what is going on. So I really believe that the American market complex is not doing well at the present time. And everywhere, people basically are faced with rising costs of living and essentially declining currencies so that the persons in power goes down. So it's not a pretty picture.
Paul Craig Roberts: Central Banks Have Become A Corrupting Force
24
August, 2015
Are
we witnessing the corruption of central banks? Are we observing the
money-creating powers of central banks being used to drive up prices
in the stock market for the benefit of the mega-rich?
These
questions came to mind when we learned that the central bank of
Switzerland, the Swiss National Bank, purchased 3,300,000 shares of
Apple stock in the first quarter of this year, adding 500,000 shares
in the second quarter. Smart money would have been selling, not
buying.
It
turns out that the Swiss central bank, in addition to its Apple
stock, holds very large equity positions, ranging from $250,000,000
to $637,000,000, in numerous US corporations — Exxon Mobil,
Microsoft, Google, Johnson & Johnson, General Electric, Procter &
Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico,
Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.
Among
this list of the Swiss central bank’s holdings are stocks which are
responsible for more than 100% of the year-to-date rise in the S&P
500 prior to the latest sell-off.
What
is going on here?
The
purpose of central banks was to serve as a “lender of last resort”
to commercial banks faced with a run on the bank by depositors
demanding cash withdrawals of their deposits.
Banks
would call in loans in an effort to raise cash to pay off depositors.
Businesses would fail, and the banks would fail from their inability
to pay depositors their money on demand.
As
time passed, this rationale for a central bank was made redundant by
government deposit insurance for bank depositors, and central banks
found additional functions for their existence. The Federal Reserve,
for example, under the Humphrey-Hawkins Act, is responsible for
maintaining full employment and low inflation. By the time this
legislation was passed, the worsening “Phillips Curve tradeoffs”
between inflation and employment had made the goals inconsistent. The
result was the introduction by the Reagan administration of the
supply-side economic policy that cured the simultaneously rising
inflation and unemployment.
Neither
the Federal Reserve’s charter nor the Humphrey-Hawkins Act says
that the Federal Reserve is supposed to stabilize the stock market by
purchasing stocks. The Federal Reserve is supposed to buy and sell
bonds in open market operations in order to encourage employment with
lower interest rates or to restrict inflation with higher interest
rates.
If
central banks purchase stocks in order to support equity prices, what
is the point of having a stock market? The central bank’s ability
to create money to support stock prices negates the price discovery
function of the stock market.
The
problem with central banks is that humans are fallible, including
the chairman of the Federal Reserve Board and all the board members
and staff. Nobel prize-winner Milton Friedman and Anna Schwartz
established that the Great Depression was the consequence of the
failure of the Federal Reserve to expand monetary policy sufficiently
to offset the restriction of the money supply due to bank failure.
When a bank failed in the pre-deposit insurance era, the money supply
would shrink by the amount of the bank’s deposits. During the Great
Depression, thousands of banks failed, wiping out the purchasing
power of millions of Americans and the credit creating power of
thousands of banks.
The
Fed is prohibited from buying equities by the Federal Reserve Act.
But an amendment in 2010 – Section 13(3) – was enacted to permit
the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment
also created a loophole which enables the Fed to lend money to
entities that can use the funds to buy stocks. Thus, the Swiss
central bank could be operating as an agent of the Federal Reserve.
If
central banks cannot properly conduct monetary policy, how can they
conduct an equity policy? Some astute observers believe that the
Swiss National Bank is acting as an agent for the Federal Reserve and
purchases large blocs of US equities at critical times to arrest
stock market declines that would puncture the propagandized belief
that all is fine here in the US economy.
We
know that the US government has a “plunge protection team”
consisting of the US Treasury and Federal Reserve. The purpose of
this team is to prevent unwanted stock market crashes.
Is
the current stock market decline welcome or unwelcome?
At
this point we do not know. In order to keep the dollar up, the basis
of US power, the Federal Reserve has promised to raise interest
rates, but always in the future. The latest future is next month. The
belief that a hike in interest rates is in the cards keeps the US
dollar from losing exchange value in relation to other currencies,
thus preventing a flight from the dollar that would reduce the
Uni-power to Third World status.
The
Federal Reserve can say that the stock market decline indicates that
the recovery is in doubt and requires more stimulus. The prospect of
more liquidity could drive the stock market back up. As
asset bubbles are in the way of the Fed’s policy, a decline in
stock prices removes the equity market bubble and enables the Fed to
print more money and start the process up again.
On
the other hand, the stock market decline last Thursday and Friday
could indicate that the players in the market have comprehended that
the stock market is an artificially inflated bubble that has no real
basis. Once
the psychology is destroyed, flight sets in.
If
flight turns out to be the case, it will be interesting to see if
central bank liquidity and purchases of stocks can stop the rout.
Is This The Great Crash Of China?
Steve
Keen
20
August, 2015
China
has achieved a remarkable transformation in the last 30
years—something that you can only fully appreciate if, like me, you
visited China before that transformation began. In 1981/82, I took a
group of Australian journalists on a tour of China on behalf of the
Australia-China Council. The key purpose was to take part in a
seminar with Chinese journalists under the auspices of the “All-China
Journalists Association”. Given the unfortunate acronym by our
Chinese hosts of SAPS—for the “Sino-Australian Press Seminar”—it
was the first seminar between Chinese journalists and those of any
other nation.
After the seminar, we
went on a tour of China, taking in Sichuan, Shanghai, and Shenzhen.
Shanghai’s skyline then was dominated by Soviet-style
architecture—mixed with French and Chinese touches—and on the
south side of the river, paddy fields stretched as far as the eye
could see. On the north side, we saw furtive black-market trading of
currencies as we strolled along the banks of the Bund.
Today, some of the
Soviet-style buildings still exist on the north side, while the south
side is an extravaganza of skyscrapers that turn on an impressive
light show every evening. So capitalism has come to China.
Almost. The one thing
China hasn’t yet had is a full-blown financial crisis. But the
plunging Shanghai stock market has raised fears that that
quintessential capitalist experience has finally arrived in China.
In fact, this isn’t the
first time that Shanghai has crashed: it did so in 2008 as well. Then
the index plunged by over 2/3rds in one year (see Figure 1).
At a superficial level, the 2008 crash had it all: the index quadrupled in one year only to fall right back down over the following year. And yet it didn’t lead to a sustained economic slump, because one of the key ingredients of such a slump was absent: there had not been an explosion of private debt. While the Chinese economy had been sundering along at over 8% growth per year, private debt was effectively constant at 100% of GDP.
All
that changed after the financial crisis. In just 6 years, private
debt grew by over 80% of GDP—and that’s using official figures as
submitted to the Bank of International Settlements
(see Figure 2) when there’s every reason to expect that this
particular figure is likely to understate the actual level.
Figure 2: Private
debt in China exploded as it sidestepped the Global Financial Crisis
Why
does the level of private debt in China matter? If you
believe conventional
economics and finance theory,
it doesn’t—which is why I find myself having to repeat the
(expletive deleted) obvious so often that it does.
The
simple reason is that demand and income in our money-driven economies
are the sum of demand and income generated by the turnover of
existing money, plus that generated by the growth of the money
supply, which is overwhelmingly due to new debt. When a bank lends
money, as
the Bank of England patiently and sagely explains here,
it creates new money. The point the Bank didn’t develop in detail,
but which I
explain in this journal in a forthcoming paper,
is that a huge proportion of demand (and income—pardon the
repetition, but if you read the forthcoming paper, you’ll
understand why) comes from the change in debt, and that this can be
negative as well as positive—that is, repaying debt (or going
bankrupt) destroys demand just as rising debt creates it.
China had very little
debt-created demand to destroy back in 2008: then the vast majority
of the collapse in demand was due to the collapse of export sales to
the West as America and much of the rest of the OECD slumped into the
deepest economic downturn since the Great Depression. Nominal GDP
growth plunged far more than did private debt growth—see Figure
3. Nominal GDP growth dropped from over 20% per year to under 10%.
The growth of private debt also slowed down in the immediate
aftermath of the crisis—falling from 22% per year to 18%. But from
2009 on, growth in private credit went into hyperdrive as a
deliberate government policy to boost the economy.
Figure 3: China
avoided the Global Financial Crisis by boosting credit growth
Banks
in the West effectively ignore what the government wants: in the
West, the political class is effectively subservient to the financial
class. But in China, despite its economic transformation, the
political class remains dominant: any Chinese entity that ignores a
government directive does so at its peril. Things are not as they
were in the 1980s, when every answer to every question that I and my
group of touring Australian journalists asked began with “We
followed the directives of the Central Committee of the Communist
Party of China”. But it’s still not good for your health to flout
Central Committee policy.
So the Chinese banking
system and its satellites lent like crazy to any company and many
individuals, and one of the biggest credit bubbles in
history—possibly the biggest ever—took off. In 2010, the increase
in private debt in China was equivalent to 35% of GDP. That dwarfs
the rate of growth of credit in both Japan and the USA prior to their
crises: Japan topped out at just over 25% per year, and the USA
reached a “mere” 15% of GDP per year—see Figure 4.
Figure 4: China’s
credit bubble is the biggest ever
As I have argued for a
decade now, crises begin when the rate of growth of credit slows down
in heavily indebted countries. China was not heavily indebted in
2008, which is why it could take the credit growth path out of the
Global Financial Crisis. But now it is more heavily indebted than
America was when its crisis began—even relying on official
statistics which undoubtedly understate the real situation—and the
momentum of debt may well carry it past the peak level reached by
Japan after its Bubble Economy collapsed in the early 1990s
(see Figure 5).
Figure 5: China is
on course to reach Japan’s Private Debt to GDP peak
So China is having its first fully-fledged capitalist crisis. To date its response to it has been to try to sustain the unsustainable: to transfer the bubble from housing to the stockmarket, and to keep the stockmarket rising like some production target for wheat from the bad old days before the fall of the Gang of Four. It can’t be done. At some point, the Chinese government is going to have to make the transition from generating a credit bubble to trying to contain its aftermath.
How they might do that rather more intelligently than has the West will be the subject of a future post
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