Posted on 07/13/2020 9:29:33 AM PDT by SeekAndFind
According to the IMF, global fiscal support in response to the crisis will be more than 9 trillion US dollars, approximately 12% of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way in which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105% of GDP.
If we add government and private debt, we are talking about 200 trillion US dollars of debt, a global increase of over 35% of GDP, well above the 20% seen after the 2008 crisis, and all in a single year.
This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented to support bloated government spending, and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.
Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis and to help large companies that were already in trouble in 2018 and 2019, the so-called ‘zombie’ companies.
According to Bank Of International Settlements, the percentage of zombie companies – those that cannot cover their debt interest payments with operating profits – has exploded in the period of giant stimuli and negative real rates, and the figure will skyrocket again.
That is why all this new debt is not going to boost the recovery, it will likely prolong the recession.
Debt is neither free nor irrelevant, even if interest rates are low, as interventionists want us to believe. More debt means less growth, a slower exit from the crisis, with lower productivity growth and a tepid employment improvement. The often-repeated argument that “it would have been worse” if these bailouts and spending plans had not been implemented and that “nothing else could have been done” is easily rebuttable: The countries that will fall the least in 2020, recover first and do so with the lowest unemployment rates, are the ones that have maintained prudent spending plans, preserved the economic fabric and address the health crisis with serious protocols. South Korea, Taiwan, Singapore, Austria, Switzerland, Sweden, Ireland, Luxemburg, Netherlands… Many countries have not fallen into the trap of massive government spending, have delivered better health and economic results than most nations, and have done so with lower levels of interventionism.
Many countries show that it is not necessary to cover the economy with enormous budget imbalances to guarantee health.
It is important to remember these figures of enormous indebtedness because of the disconnection between financial markets and the real economy, which has reached almost record-levels and presents bubble-type features. First, these huge stimuli are probably too big, too soon, and clearly geared toward sustaining low-productivity sectors. All this is supported by a monetary policy that has gone from providing liquidity to being the enabler of asset bubbles.
The balance sheet of the European Central Bank has increased by almost two trillion euros so far this year and is already more than 52% of the eurozone’s GDP, much higher than that of the Federal Reserve, which is in 32.6% of the GDP of the USA or the Bank of England, 31.1%. The Bank of Japan’s balance sheet already accounts for 117% of GDP and its consequences should be a warning sign to all nations. Consumption has plummeted again in May and the country has been stagnant for two decades with debt that will exceed 260% of GDP. Copying Japan is the recipe for secular stagnation.
The huge increase in the balance sheet of central banks to artificially keep bond yields low, has pushed stock markets higher just as 80% of listed companies have abandoned their business profit targets and analysts are slashing estimates for 2020, 2021, and 2022 at the fastest speed in the past decade, according to JP Morgan and Bank of America.
This enormous action of central banks leads to an unprecedented disconnection between the real economy and the stock markets. The expansion of multiples has accelerated just as earnings’ estimates plummet.
By making sovereign bonds prohibitively expensive, two dangerous things happen: Governments believe low bond yields are due to their policies, and investors take much more risk than what they think they have in their portfolios.
All of this looks harmless if the bubble expands and the placebo effect works, but if macro, earnings and employment data remain disappointing, the next crash may be worse than the economic shutdown, because it may add a financial crisis to the already weak economy.
Yes, but whoever prints money slowest is King.
China: ‘Well, if our economy is going to go to sh*t, let’s take the rest of the world with us.....’
I want a 40,000 dollar stimulus check to get the newest Challenger
I totally ying and yang on this all day.
Too bad there are no functional Crystal Balls.
Yes, but whoever prints money slowest is King.
“...to get the newest Challenger”
You got a culturally appropriate haircut again? ;-)
New debt will not boot the recovery but will buy time to allow a smart person to prepare the depression. The smart people see it and realigning their investments for least impact.
lol
The black market barbershop I went to was also offering massages in the back.
I passed :)
Probably a small casino in there somewhere too :)
Democrats in NY, CA, NJ, MA and MI: “We’re with you all the way comrade Xi.”
Blah blah blah. Fiat “funny money” currency, backed by nothing, created with a key stroke. Spend like hell until all the infrastructure is built, forgive the phony debt, and convert to gold back currency. We can do that now that the “Fed” (actually a private bank) is part of the Dept of Treasury.
I had to look it up.
That’s the shadiest looking bar/casino i’ve ever seen :)
I've been to Ekalaka and there is not much there. You don't get there by mistake.
There is no recession. The recession was 8 years long and ended in 2017. It was called a recovery but that was never fact checked. What we have now is a contraction, an artificial recession imposed on us by people who don’t want us electing the wrong people. Debt will do us no good but growth will certainly postpone the bad effects of debt until the next actual recession.
lol
New debt will not boot the recovery but will buy time to allow a smart person to prepare the depression. The smart people see it and realigning their investments for least impact.
************
I’ve been dialing back my risk exposure. My personal view is that the economy will be facing a lot of headwinds due to growing structural problems and I don’t want to get caught in the downdraft.
The market is presently significantly overvalued. The forward PE on the S&P 500 is about 25. Its way ahead of itself.
Imagine what this market would be like if the government and the Fed were not backstopping this economy?
What are the means used to beat inflation ?—other than the obvious tactic of removing money from circulation—which has been ignored since COVID. Are there other means ?
What are the repercussions of drastically reducing money in circulation once the fake pandemic quiets ?
I bought my first house in Tacoma,WA in 1980 for $40,000.
Granted, it wasn't as much fun driving it around as a Challenger would've been but it sure turned a lot of heads.
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