'..massive overinvestment in manufacturing capacity and incessant global financial instability..'<blockquote>'For a long time now, I’ve viewed the unique backdrop in the context of a historic multifaceted Experiment in: 1) Unconstrained global “money” and (market-based) Credit; 2) Unconventional economic structure; and 3) Activist/inflationist monetary management on a coordinated global basis.
There was no doubt in my mind that unfettered finance would foment market and economic instability. Indeed, evidence of global financial dysfunction has been on full display now for well over two decades. As custodian of the world’s reserve currency and champion of financial innovation, the U.S. has all along been the global leader with respect to Credit excess, speculation and monetary management. The financialization of the global economy has been integral to the U.S.’s unique capacity to run persistently large trade and Current Account Deficits.
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Unfettered global “money” and Credit coupled with a world flooded with U.S. financial claims (largely IOUs) was a recipe for extreme financial instability. Never did I imagine such an experiment could be sustained for so long. I simply did not contemplate the extent to which central bankers would be willing to underpin unsound global finance.
It’s not as if this great Experiment hasn’t been at the brink a few times: 1997, 1998, 2002, 2008, 2012 and early-2016. At this point, markets are understandably convinced that central bankers have no alternative than to always come immediately to the rescue.
Granted, QE retains the capacity to incite speculation and levitate markets. Yet monetary inflation’s myriad effects on societies and democracies are at this point progressively – and openly - corrosive. Rising anti-establishment sentiment and anti-globalization movements reflect mounting frustration with the existing world order. I believe the Brexit and Trump movements are indicative of the unfolding failure of this Global Experiment. I had assumed that the Experiment’s downfall would be marked by a crisis of unstable markets. At this time, the world is at monumental crossroads in terms of social, political, market and economic instability.
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The Trump campaign was built upon a platform of economic nationalism and the imperative of major change. Trade deals must be canceled or significantly revamped. Jobs and manufacturing must be brought back to the U.S. America must come first to be great again. In the view of Trump and his advisors, The Experiment has clearly failed. Donald Trump often referred to the “Bubble.” He lashed out at Federal Reserve policymaking and the massive U.S. debt. With indices sprinting to record highs, it’s the nature of markets to forget why the Trump campaign received scant support from the business community and was viewed with contempt by Wall Street (and global markets).
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There’s a huge issue: The world – economy as well as financial “system” – is addicted to enormous U.S. Current Account Deficits. America has for two decades simultaneously flooded the global economy with purchasing power and international markets with cheap liquidity. Over years the upshot has been massive overinvestment in manufacturing capacity and incessant global financial instability. Central banks then moved to mitigate this troubling backdrop with a now protracted period of unprecedented reflationary measures. This only accommodated greater economic maladjustment and financial excess – while deepening global addictions.
From my analytical framework, it was never “the chicken or the egg” issue. It was loose monetary policies, financial excesses and associated U.S. Current Account Deficits that were the core of the so-called “global savings glut.” U.S. trade deficits ensured massive financial flows abroad, especially to rapidly growing China, Asia and EM. These dollar balances were then recycled right back to U.S. securities markets, in large part through EM central bank purchases of Treasuries and agency securities.
Moreover, EM, flush with dollar reserves and booming economies, enjoyed a self-reinforcing and destabilizing boom in “hot money” inflows (which could also be recycled into U.S. securities). This dynamic went into overdrive after the 2008 crisis and the introduction of QE. Virtually unlimited cheap liquidity on a global basis incentivized “carry trades” and all varieties of leveraged speculation. So long as yields continued their historic decline, central banker, the leveraged hedge fund operator, sovereign wealth fund manager, derivative player and Joe Public could all just keep buying and relishing the spectacular windfall.
A rapidly changing trade backdrop now risks significantly altering the global financial landscape. A focus on making America great again will ensure a radically different view of trade and “globalization.” I’ve always believed in the important distinction of trading goods for goods– as opposed to creating endless quantities of new financial claims to pay for boundless cheap imports. Fiat for goods may have appeared miraculous – with central bankers happy to Credit themselves for whipping inflation. But at the end of the day the world is left with destabilizing economic imbalances and unstable finance. Too much finance, overcapacity and inequality. And, as we’ve witnessed of late, there’s an alarming amount of angst and social divisions, along with a democratic majority demanding an end to the status quo.
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A few weeks back I argued the case for Peak Monetary Stimulus. This week it’s Past Peak “Global Savings Glut.” I suspect liquidity conditions worldwide will react poorly to any retreat from global QE.'
- Doug Noland,
Revisiting the Global Savings Glut Thesis, November 25, 2016</blockquote>
Context<Blockquote>
'..If we don’t get the debt and deficit under control..''..the third decade of what has been a period of monumental financial innovation..''..many different directions depending on the ideas that prevail in their wake..'(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'('The Age of Deleveraging (2012 - 2025)) - '..Few readers believe chronic deflation is in the wings..''..a 30-year bear market..''An oil price drop to below $20 per barrel would be a shock reminiscent of the dotcom collapse..''..I'm sticking with my forecast of $10 to $20 a barrel..'</blockquote>