I can’t emphasize this point enough: The fact that central banks are about to embark on a new easing cycle, here and now, represents a global fail of epic proportions the magnitude of which has to be appreciated with hard cold data.
I’ve discussed some of this recently in Game Over, but the background data is so much more profound than that. Perhaps it’s no wonder that the Wall Street Journal in a column today implored Jay Powell to “project calm and stability“.
After all confidence must be maintained. And I got to tell you a lot of confidence is needed in light of the data.
Consider what has happened in the last 10 years that has gotten us to the point of a new easing cycle.
Let’s start with central banks themselves. They haven’t normalized their balance sheets, despite the Fed’s marginal balance sheet reduction since 2018 (about to end as it is). Central banks balance sheets are still sitting at $19.4 trillion up from $6 trillion at the beginning of 2008:
These massive injections were originally undertaken as emergency measures to help save the global economy and help it set on a new growth path.
But fact is growth has stalled globally and the process started before trade wars began as leading indicators started turning in late 2017/early 2018 signaling a business cycle already pressing against its natural lifecycle:
Since 2008 global debt levels have exploded higher.
On the government level we can observe a 77% increase in debt over 2008:
On the corporate front an increase of over 50%, much of it coming from the US and China:
Consumers in comparison have increased debt by a much more modest 7% since 2008:
Of course the 2008 numbers represented over leveraging that resulted in the great deleveraging following the great financial crisis. The message: Consumers have re-levered.
The net result: Over 240% debt to GDP on a global basis with no end in sight. This entire debt construct remains one that is entirely dependent on low rates. The good news, if you can call it that, then is more low rates are coming and negative rates in many countries will remain in place.
But what has all this debt expansion produced? Aside from historic wealth inequality expansion not much really.
The promised growth acceleration never happened:
The US had a debt to GDP ratio of 63% in 2008, it’s now at 105% and with increasing deficits north of $1 trillion it can ill afford a recession.
Fact is each cycle has produced less and less growth over the decades and it requires ever more debt to manufacture it. Make no mistake: Without this vast expansion in debt real GDP growth figures would be even less than shown on the chart.
So what has all this debt and central bank balance sheet expansion really produced? Massive asset inflation above the natural state of the economy, a classic measure of an asset bubble.
Consider: Household assets over GDP reached a new record high, higher than during the 2007 real estate bubble:
But it gets worse. After all central bank policies to punish cash and create the TINA (there is not alternative) effect, have produced the largest valuations in financial assets versus the underlying economy ever.
Household financial assets over GDP:
And NOW central banks are forced to cut rates again and embark on a new easing cycle with debt levels jammed to record highs and household financial asset levels at record highs?
Here? With rates still on the floor?
How is this supposed to produce more growth? How is this supposed to stop a business cycle turning?
Consider this: At the beginning of 2000 the Fed funds rate was at 6.5%, they then were forced to cut by 525 basis points. From the recession low of 2002 the Fed raised interest rates by 400 basis points before being forced to cut by 500 basis points to zero. In this cycle they barely managed to raise rates by 225 basis points before now being forced to cut again with rates still below 1993 rates:
Which also implies they only have 225 basis points to play with here unless they go to negative. Less than half of the ammunition they had during the last 2 recessions.
What these charts all say: Economic recovery growth has been slowing from cycle to cycle, but is requiring ever more debt to produce less growth. At the same time asset bubbles, as defined by valuations over the underlying size of the economy, have increased ever more. It’s frankly a terrifying picture.
I humbly suggest this is not a system that is sustainable without a major reset, especially if you consider another hard core reality, perhaps the most ignored and least understood. Demographics.
Working age population has been slowing big time, and continues to slow, in fact has just turned negative again:
With a shrinking in the growth of the labor force you can’t produce more growth. This slowing trend commenced 20 years go and shows no signs of ending. Indeed in 2018 the US experienced its lowest birth rate in 32 years. And I suspect a free fall in male fertility rates over the last 10 years is not helping.
These are profound realities and they are not going away even if we want to wish them away.
These are facts, hard, cold facts. So sure, central banks may embark on the next hurrah here with more intervention and blow asset bubbles even higher. But it won’t solve a thing. It’s pissing against the wind of structural realities. And that wind is gaining force and Jay Powell can pretend to project all the ‘calm and stability’ he wants. It doesn’t change the fact that the last 10 years represent a global fail of epic proportions.
And now here we are, faced with a global slowdown with recession risk increasing as the world is more in debt than ever, with central banks still on bloated balance sheets and low to negative rates.
But fear not, they have a solution: More of the same. And they are telling you.
Here’s the BOJ’s Kuroda and he is telling you exactly what his solution is:
Kuroda: more negative rates, more asset purchases and increase the monetary base.
That’s his solution.
Can they just simply admit that the entire system can’t hold itself up without permanent stimulus?
Answer: No, because they need to keep up confidence.
The farce of it all. t.co/uFlZnKexZZ
— Sven Henrich (@NorthmanTrader) June 10, 2019
The definition of insanity: Do the same thing over and over and expect different results. That’s the global fail of our time.