source : www.wsws.org
So far, the global economy appears to have dodged a bullet. Predictions of a recession due to interest rate hikes by the world’s major central banks have not materialized. But there are warnings that more and more problems exist beneath the surface, and not far below, and that the current situation is not sustainable.
This was the theme of an editorial in the Economist magazine published this weekend under the title: “The global economy defies gravity. That cannot continue.” In a reference to the cartoon character of the roadrunner, some commentators have called it a Wile E. Coyote moment.
Even as wars rage and the geopolitical climate darkens, it began, “the global economy has been an unstoppable source of cheer.”
According to the magazine, the US economy advanced by 4.9 percent on an annual basis in the fourth quarter, inflation is falling, central banks may have stopped tightening interest rates and China, due to a real estate crisis, appears to be about to take advantage of this. of a modest incentive.
“Unfortunately,” the message continued, “this good cheer cannot last. The foundations for current growth appear unstable. If you look ahead, there are many threats.”
Citing the rapid rise in interest rates, one of the sharpest in decades, the editorial noted that the U.S. government now had to pay 5 percent to borrow for 30 years, compared to just 1.2 percent during the COVID recession. 19 pandemic. Not so long ago, German borrowing costs were negative but were now close to 3 percent, and even the Bank of Japan had all but given up on its pledge to keep borrowing costs at 1 percent.
The editorial directly addressed US Treasury Secretary Janet Yellen’s recent comments that higher interest rates were a good thing because they reflected a healthy economy.
“In fact, they are a source of danger. Because higher interest rates are likely to continue, current economic policies will fail, and so will the growth they have promoted.”
The Economist argued, like others, that one reason the U.S. economy has done better than expected is that consumers have spent the money accumulated during the pandemic and there is still $1 trillion in “excess savings” left.
Once that ran out, interest rates would ‘start to bite’ and problems would arise throughout the global economy as interest rates stayed higher for longer.
Corporate bankruptcies began to rise in the US and Europe, with companies that maintained low interest rates eventually facing rising financing costs. Higher mortgage costs would affect house prices. Banks that hold long-term securities (whose values have fallen) should take action to “plug the holes in their balance sheets left by higher interest rates.”
The editorial saw rising government debt as a major problem, with the US government deficit in the period through September about double what was expected in mid-2022.
“At a time of low unemployment, such borrowing is staggeringly reckless. All told, public debt in the rich world is now higher, as a percentage of GDP, than at any time since the Napoleonic Wars.”
The Economist clearly believes that debt growth is the cause of the bond market sell-off and the rise in interest rates (bond prices and interest rates have an inverse relationship) due to the growing inability of the financial markets to continue financing the government debt.
The opposing view, put forward by Yellen and others, is that rising interest rates are an expression of economic strength.
A key piece of evidence on this issue came last week with the market reaction to the US Treasury’s decision to reduce new debt issuance below market expectations and restructure debt issuance towards the shorter end of the market.
Like the Wall Street Journal reported the decision of the Ministry of Finance “to offer investors a happy surprise.”
By the end of the week, the yield on the 10-year government bond had fallen to 4.557 percent, after briefly exceeding 5 percent on October 23. The S&P 500 stock index rose 5.9 percent this week, “largely due to the relief over the past week. decline in interest rates, which are a critical driver of U.S. borrowing costs.”
Under what were once ‘normal’ circumstances, the Treasury’s steps would have had virtually no impact. That they were even undertaken and had the effect they produced indicated increasing liquidity problems in the world’s most important financial market, due to the increasing difficulties in dealing with rising government debts.
After the decision of the Treasury Department and the decision of the US Federal Reserve on the same day not to increase interest rates, the interest rate was lowered Wall Street Journal (WSJ) said that “relief was palpable on Wall Street.”
How long that will take is another question. Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, told the WSJ that the rally was “overdone.”
There was a perception that “the Treasury Department is supporting the market, but that’s not possible,” she said. “The size of the budget deficit means there is an absolute limit to how much the Treasury can do.”
The growth of US debt in a context of tighter liquidity is certainly not the only source of turbulence.
So-called basis trading still exists, in which investors use large amounts of borrowed money to sell bond futures and buy bonds to make money on the very small price difference – a practice that, according to research by the Federal Reserve, posed a “vulnerability to financial stability”.
Life insurance companies, once considered the pillar of financial probity, are also becoming entangled in the coils of the financial market.
Last week, the International Monetary Fund (IMF) urged financial regulators to scrutinize the activities of private equity funds such as Apollo, Blackstone Carlyle and others, warning of the potential for “systemic risk” and the danger of “infection”. to other parts of the financial system.
The IMF’s move followed a warning last month from private equity investor JC Flowers that the increase in life insurers investing with private equity groups posed a risk. There was a possibility that more than one company could be ‘zapped’.
The role of insurance companies is decisive. It should be recalled that in 2008, the financial authorities were ready to let the investment bank Lehman Brothers go under, but intervened to save the system when the insurance giant AIG was threatened.
On top of the ever-present and ever-increasing financial risks, there is the added threat of war and geopolitical tensions to the stability of the global economy. Two major figures from the world of finance capital warned about this this weekend.
Jamie Dimon, chairman of JP Morgan, said that, on top of the war in Ukraine, Israel’s war against Hamas was “pretty scary and unpredictable.”
The US still had a “strong” economy. “But these geopolitical issues are very serious – perhaps the most serious since 1938.”
Larry Fink, the CEO of BlackRock, the world’s largest asset manager, said geopolitical risks were a key component in shaping lives amid growing fears.
The rising fear led to lower spending and so “the likelihood of a European recession is growing and the likelihood of a U.S. recession is growing.”
Fink said inflation would stay higher for longer and that would require the Federal Reserve to raise rates further and “that will ultimately be how we get into a recession.”
source : www.wsws.org