Why the world’s a mess

So is everything all right with the world again? Distance yourself from the media tittle-tattle about the timing of the next move in US interest rates and it’s very clear that the answer’s no. Here’s why… It’s all about money.

World Crisis

…Last week, all bets were on an imminent rise in US interest rates…

…But yesterday, dovish Fed governor Lael Brainard suggested that policy rates aren’t heading up soon…

…The Dow Jones rallies 240 points and the FTSE 100 opens higher too…

So is everything all right with the world again? Distance yourself from the media tittle-tattle about the timing of the next move in US interest rates and it’s very clear that the answer’s no. Here’s why…

It’s all about money.

Grillions of new cash has been created via quantitative easing (QE) by central banks – such as the US Fed, the Bank of England, the European Central Bank and the Bank of Japan – since the Great Financial Crisis of 2008/09. But the world economy simply isn’t expanding as quickly as expected.

Nor is consumer price index (CPI) inflation, seen by the great and the good among the monetary authorities as one of the best ways of oiling the economic wheels, rising as had been hoped. Indeed, deflation has been the bigger threat.

This is a huge concern – because there’s another major reason why achieving better economic growth, along with more inflation, has become so important.

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The world’s drowning in debt

Global public borrowing alone is almost $60 trillion, according to the debt clock published by the Economist. (Warning: don’t open if you’re faint-hearted. Watching this tot up the planet’s soaring state overdrafts is very scary).

There’s plenty more personal borrowing too. The only way it’s all likely to be repaid is out of devalued currency, in other words from cash that’s being eaten away by inflation. Deflation just makes matters worse by increasing the real value of debt.

Yet most of the new money that’s been issued via the various QE doses around the world has leaked into financial and property markets rather than boosting economic growth or pushing up CPI prices.

What’s more, the economic situation isn’t set to improve for the foreseeable future. Here’s a recent comment from IMF boss Christine Lagarde on the subject.

“…the world could suffer from disappointing growth for a long time”, she says. “High-frequency data points to softer growth this year.”

You’re right – the IMF is hardly the most forward-thinking financial machine on the planet. Yet if it does cut its worldwide economic growth forecasts again, 2016’s expected expansion rate could be the lowest since the 2008/09 crisis.

More of the same?

So what’s the answer? Of course, there could be plenty more standard QE to come. This would mean central bankers buying lots of debt issued by governments and sometimes by companies. Then hoping/praying this policy has the desired effect of stoking up more economic growth at higher prices to boot.

Don’t rule that out. One definition of insanity is continuing to take the same action and expecting a different result. I’m not saying central bankers are mad. But they could keep on doing what they’re used to. Further, they could veer into ‘helicopter money’ mode in which they splash freshly-minted cash around willy-nilly.

In that case, all bets are off.

But the winds of change may be blowing even in hallowed central bank halls.

As Ben noted in Daily Reckoning last week, there was a revealing comment from ECB boss Mario Draghi last Thursday.

He’s been expected to sanction another round of QE as per usual. But not only did he keep his fingers off the printing press, he also failed to offer any firm reassurance that more policy support was imminent.

While there was the usual claptrap about the “resilience of the euro-zone economy to the continuing global economic and political uncertainty”, he also said that “…monetary policy alone cannot lead to balanced growth. Underscoring the essential role of structural reforms, we emphasise that our fiscal strategies are equally important to supporting our common growth objectives”.

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…or QE with a difference?

Put another way, there’s been talk floating around that the ECB is reaching its debt–buying ceiling and will soon struggle to increase its purchases without breaking its self-imposed limits. I’ll save you the arcana because the exact details are only likely to interest bond geeks. More importantly, there could be a sentiment shift here. There could be QE with a difference on the way.

But remember that earlier quote from Christine Lagarde? In fact, she added another four, but highly significant, words. She actually said that global economic growth could disappoint: “…without forceful policy actions…”

If you’ve read my colleague Jim Rickards’ commentaries for Strategic Intelligence, you’ll be on the lookout for such statements from what he calls the Financial Elite. And you’ll be well aware how significant these Lagarde and Draghi comments are.

(Why not take a look at the reports Jim has written on the workings of the US Fed and also on the Petrodollar? Don’t worry, they may sound heavy-duty, but in fact they’re both easy to read and very informative. And they’re free if you take out a trial subscription to Strategic Intelligence here).

“Fiscal strategies” and “forceful policy actions” are, of course, euphemisms. They mean state spending using borrowed money. But if future QE can be tailored to central banks buying bonds straight from governments, politicians would have a big bazooka to fire at their own pet projects in an attempt to boost their economies.

This could be huge! Lots more debt will be created too. I haven’t space today to run though all the implications for the markets – I’ll try to address them next time – but yes, we’re looking here at much higher infrastructure spending.

At Strategic Intelligence we’ve been talking about this idea for months. In fact two of our first three selections have already risen enough be taken off the Buy list for now. So I’m not making any stock predictions today. But I believe that global infrastructure investment is developing into a great long-term theme.

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