One advantage of being both 57 and a long time observer of particular types of behaviour is that it is increasingly easy to spot patterns. In that case that there is a world economic crisis coming is not hard to spot. Take this from the FT yesterday:
In its twice-yearly global financial stability report, the IMF simulated the effects of the current financial fragilities in emerging economies turning sour from another shock to confidence or a policy mistake.
“Shocks may originate in advanced or emerging markets and, combined with unaddressed system vulnerabilities, could lead to a global asset market disruption and a sudden drying up of market liquidity in many asset classes,” the report warned.
In these circumstances, spending growth would slow sharply in emerging and advanced economies leading to a shortfall in output of 2.4 per cent by 2017 compared with the baseline IMF forecasts.
With those forecasts already weak, it would imply global growth would face the strong possibility of falling below 2 per cent for a year, the standard definition of a global recession, although one that would fall short of another crisis on the scale of 2008.
As they note the report's author saying:
“Our central scenario is not a crisis. The downside scenario is not a global crisis but a situation in which we would have significant losses in terms of GDP,” Mr Viñals said.
My suspicion is that this is an understatement. Add in Syria, major banks in trouble (DeutscheBank, today), serious corporations at risk of failure (VW), commodity price volatility, the risk of EU break up (Brexit) and right wing governments around the world not willing to take action and things look much worse than this isolated exercise on risk suggests.
I've been forecasting this one with increasing confidence for months now. It's not required rocket science to do so. Just look for a market in trouble, check if there has been an associated credit boom of some magnitude and if the answer is yes then that bubble is going to burst soon and the ripples are going to be big, even if not of tsunami scale, and no one is going to avoid the pain.
The result is that, as I've now seen too many times in my life, the market is going to be delivering recession sometime soon. But that's not the issue I am really writing about. What concerns me here is the political reaction to this near inevitability.
We haven't had the SNP conference yet. The Greens always, and largely correctly, identify a different economic crisis. The LibDems simply don't count any more. So what of Labour and the Conservatives?
Jeremy Corbyn said he saw a downturn coming. It was how he made tangential reference to People's QE in his speech at Brighton. He will come to be very grateful for that comment; it will be the basis on which he will claim a lot of economic credibility over the years to come as the first party leader to acknowledge the developing crisis.
Did anyone at the Conservative Party conference do anything like that? No, not at all. There was a surreal underpinning assumption that all will carry on as normal, which for these purposes means as per the latest Office for Budget Responsibility growth forecast rubber stamping George Osborne's ludicrously optimistic and untenable forecasts.
Age doe then let me predict that we're sleep walking to another economic crisis. Thus time though it will arrive after the slowest economic recovery since 1720 and when many UK households are in no state at all to handle the shock. And this time there is a government in the UK disinclined to intervene. In that case I am worried. Experience tells me I should be.
And that, for me, was the biggest message from the Tory Party conference.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“Spot on” Richard
I wonder what will break first: my guess is a liquidity crunch, but that’s because it broke in 200/2009.
A real collapse in consumer spending is the likely one: not just a decline – the continuing effects of wage compression – but a 1930’s halt in circulation.
The denials take a form analogous to NHS planning for influenza epidemics: there’s the usual reassurances about the vaccine and additional winter capacity, but they are modelling the usual winter ‘flu and adding extra beds for elderly and vulnerable patients – there’s no thought, at all, about the 1919 Spanish Flu disaster.
Retreating from analogies, I’m reminded that a certain class of men do very well indeed in times of economic upheaval; and it may well be that they are better represented in the Cabinet than we are – or the vast majority of British businesess.
I share your worries Richard! Any tips for managing that worry?
“adding extra beds for elderly and vulnerable patients”
Not this year.
No extra beds are in planning.
None are available now, never mind the coming winter.
Clinics dealing with cardiac/pulmonary problems are reducing their patient lists.
Routine joint-replacement operations no longer exist.
Operations for spinal problems are, more or less, restricted to emergencies.
IC and HD units are at over 75% of capacity now. Never forget, in a crisis they rapidly fill….and also with private patients. Leaving the thought: Which take priority: Private or public?
Oh, and the NHS hospitals are also at high capacity with their own private patients….
The wise money is on a Russian/Israeli conflict in the Syria area, drawing the US directly into war conflict with Russian forces.
There are now five nuclear-armed nations involved in the Syrian conflict.
The US naval forces in that region, and the Russian naval forces, are bound to be armed with nuclear weapons…..
Another of the ‘big messages’ to emerge from the Tory conference was the extent and depth of spin (ie. deception) they are prepared to indulge in, Richard. It makes Blair’s and Alistair Campbell’s efforts look positively pathetic by comparison.
The Tories new closest allies abroad – The Chinese Communist Party – must be looking on with envy. Not least because we have a supposedly free press, the majority of which can be relied on to parrot and reinforce this patent nonsense without question and endlessly.
I have to admit that the term ‘free press’ is one I am increasingly beginning to doubt
Thank heaven for social media
But I am very aware how easy it would be to turn it off
One day I suspect that will happen to those considered off message
I’m in no doubt whatsoever that will happen, Richard (Indeed, I suspect that that’s another topic that Tories like Osborne find attractive about China). The question is only when. If the Tories do indeed win the 2020 election I suspect we’ll see it within ten years. If not it depends more on the extent to which an alternative government are prepared to stand up to the corporate takeover of the state – which by 2020 will be all but complete anyway.
You are even more pessimistic than me
Take a look at the shenanigans over ICANN…..
Note that if agreement cannot be reached between the parties, the internet could be run from the UN…..
Now where is my book about world government…….
Well they will have learned from the last one that they can get liquidity to banks at the touch of a button so that’s not the issue for me.
The issue, from an economic perspective, is still insufficient aggregate demand and consequently stubbornly high private debt levels.
Personally I can’t see the next financial crisis in the short term. What I see is stagnation and Tory clowns telling us they are fixing the roof while the sun is shining and selling off what remains of the silver at the same time.
I can almost say I wish you are right
But I can’t because it does not read like that
And I could never wish for that outcome
I’m afraid, I can’t see how any IMF forecasts are a basis for predicting the future.
These guys are just on a gravy train and have a quota to fill.
Stubbornly high private debt levels..
I cannot locate the data; yet. But the larger part of private debt is tied into property purchase.
As such, it seems unlikely that it will diminish any time soon (not in a good way, anyway)
Interesting article I noted (somewhere!)
“Those at the very tip of our economic pyramid understand that fiat money is unlimited, but most everyone below believes it to be scarce. We live under austerity and debt. But it doesn’t have to be this way. The idea that we don’t have the “money” to supply essential public goods to everyone is a pernicious myth that can only be maintained so long as we remain ignorant of how money actually functions. But this myth is merely justification for power structures that are ultimately backed by guns and the vastly unequal distribution of our finite planet’s resources. Knowledge is no substitute for political power. It is merely somewhere to start”
http://thenewinquiry.com/essays/the-world-according-to-modern-monetary-theory/
OH MAAN! And here I was thinking of doing a post-graduate degree in the west!
Anyway,
1)you say – “check if there has been an associated credit boom of some magnitude” . Of what magnitude? Can you please post some data which backs your intuition?
2) And when and where do you expect it to happen? Developing/emerging countries or developed/advanced countries?
3) And lastly,why do you say its inevitable? Can’t market actors be somehow persuaded or coerced into deflating or stabilising the bubble?
Emerging market debt has increased since 2008 from about $4trn to about $18trn as I recall from recent reports
When? Soon
Why can’t the crisis be avoided. Because there is denial
This is private debt I suppose?
If you are refereeing to EME figures, yes
Hi guys , I like Richard am old and wizened ☺. I am very afraid he is right but that it may well be much, much worse than has been predicted by Richard. A 30s scenario l fell, is more likely.
The PQE label has been damaged but the ideas underlying it continue to gain ground, right to the heart of the economics estalishment. In case you missed it, here is Larry Summers in a recent FT blog.
“The central banks of Europe and Japan need to be clear that their biggest risk is a further slowdown. They must indicate a willingness to be creative in the use of the tools at their disposal. With bond yields well below 1% it is very doubtful that traditional QE will have much stimulative effect. They must be prepared to consider support for assets that carry risk premiums that can be meaningfully reduced. They could achieve even more by absorbing bonds to finance fiscal expansion.
“…
“The case for expansionary fiscal policy policy is especially strong when it is spent on investment or maintenance. Wherever countries print their own currency and interest rates are constrained by the zero bound there is a compelling case for fiscal expansion until demand accelerates. While the problem before 2008 was too much lending, many more of today’s problems have to do with too little lending for productive investment.”
I think PQE will be normal soon….
Lyn
Mostly agreed but the ‘too little lending’ begs the question : Is private lending for investment driven by supply or demand for loans?
I would argue the latter and, as a business, why would you want to invest for the future in a stagnating economy.
Which, of course, then backs up the rationale for the government sector to ensure there is more spending power out there by taking the lead with, not only productive expenditure itself but also a higher current deficit targeted at incomes that will be spent.
Pretty much agree with that
Richard, from your involvement with Jeremy Corbyn and his party, has there been any vision put forward as to how to reduce the sheer alienation in the UK society and to get rid of the feeling of social stagnation?
I was not involved
They borrowed some of my ideas and as you may have noticed is my habit, I defended them vigorously
“One is that forecasting a recession gives the many non-economists who read Richard a false impression that economists can foresee the future. In fact, we can’t. Knowledge of the future is a contradiction in terms”
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2015/10/on-forecasting-recession.html
If you follow our Twitter exchange you will note we ended up agreeing fair risk assessment, which I think I am doing, is appropriate
From the above comments:
“Which I think is the tory plan, because their plan is transparently for London as a a bigger Dubai, and the rest of the country as a reserve for grouse and cheap labour. It is nostaglia for the 50s, the 1750s though”
Seems close to the truth……
Look at the US….the third chart is interesting…
http://wolfstreet.com/2015/10/09/household-incomes-across-time-divergence-at-top/