The global economy is collapsing, and neither the banks nor governments can save it
- With interest rates rising, markets are waking up to what central banks already know: that inflation isn’t coming down and there won’t be a swift return to easy money
- This policy unravelling is going to be painful, but may be necessary to purge the worst excesses of the past decade
And now it begins: the great unravelling of monetary excess and faux prosperity that has characterised the past decade. Where it will end is still uncertain but the bursting of the monetary bubble must ultimately prove salutary for the global economy, and for the planet itself.
It may seem odd to speak of this process as just “beginning”, but the truth is that the slowing economic growth, falling markets and rising inflation we have witnessed so far are but a prelude to the cascading impact that such trends will have as they feed on each other.
Slipping growth was always going to accelerate into an uncontrolled slide, but the inability of liquidity-gorged markets to see beyond the “first-round” effects of an economic downturn has masked that inevitability.
As both the cost and quantity of bank borrowing tighten, debt distress will inevitably grow in both corporate and household sectors of the global economy, where borrowing has reached record levels on the back of historically low interest rates.
World Bank president David Malpass noted recently that “as central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward recession and a string of financial crises in emerging market and developing economies”.
Malpass is rightly concerned about the risk of financial crises erupting in developing nations, but the risk of crashes everywhere from Wall Street to the City of London cannot be ruled out.
Such risks are naturally played down by financial authorities for fear of provoking crises of market confidence – and confidence is the X factor that cannot be computed by economic models.
Confidence, like financial asset prices, has been buoyed artificially in recent years by a public perception that there was a “Magic Money Tree” or MMT (which also stands for Modern Monetary Theory); that governments and central banks could support economic growth indefinitely.
They cannot and will not, as is becoming painfully clear from the stampede by central banks to reduce the supply of money while governments seek to rein in fiscal largesse. Next will be the turn of banks to reduce their bloated balance sheets by cutting lending.
Among the “second-round” effects is the wage-price spiral now under way, which explains why inflation continues to climb even though oil and other commodity prices look to have peaked while supply chain shocks caused by the pandemic may also be ending, according to the Institute of International Finance.
These effects will result in rising corporate bankruptcies and household debt defaults, including on mortgage payments. These, in turn, will adversely impact corporate and household consumption of goods and services, with an obviously negative effect on employment too.
Highly borrowed governments will suffer debt-servicing shocks as interest rates continue to rise at least into 2024. Governments, it is said, “do not go bankrupt, they tax” – but raising taxes at a time of recession could be both economically and politically suicidal.
Is all this too pessimistic? No, it is more realistic than the habit (understandable perhaps among politicians but not among economic and financial analysts) to behave like someone who has fallen off a cliff and clutches at any tuft of grass on the way down.
In a speech given in 2010, former Bank of Japan governor Masaaki Shirakawa noted that “as Japan’s experience shows, it is a hard fact that [an] economy will be unable to achieve a strong recovery without resolving excesses accumulated during a bubble period”.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs