Stephen Hill on the revenge of debt, distress, deflation and 'zombie banks'
''The financially fattened goose is well and truly cooked.'
The quote above is by Albert Edwards of Soci’t’ Generale as he had come to the conclusion that it's probably 'too late to avert another crisis'. It sounds like Albert the Realist is a reader of this column: the fact that no one has ever heard of him also means he's probably got it right.
When exactly will this next crisis materialise? No one knows – any time between now and 2022 seems a good bet. Given Cameron's political luck, he may be out before the next catastrophe. What will it be like when it does come? Read on.
The coming crisis, Global Crunch Part II (2015-whenever), is growing directly out of Global Crunch I (2008-2014) and the resultant QE to avert a complete financial crash, which kept bad debts in zombie banks while pumping up asset markets.
QE in the US ($3.5 trillion), the UK (’350 billion), the EU (’2.58 trillion by September 2016) and numbers impossible to comprehend in China (RMB trillions) and Japan (many trillions of yen) swelled the monetary base of these important currencies by massive multiples. When added to all the other debts in the world, it has stifled demand and growth and caused a massive debt-deflation spiral stalking the world.
The new Conservative government in the UK, for example, faced with a ’90 billion annual deficit, must increase taxes and cut expenses just to stand still, let alone begin to repay its ’1.4 trillion national debt. Every other QE nation has the same problem in a zero-growth deflationary world, as there is no official inflation – let alone any real growth – to reduce their debts.
So the first evidence of the coming crisis has been the currency wars, where every nation wants its currency to weaken, to boost its own economic growth: but in 2014 they all realised that they could not do it in the same economic cycle, or the result is zero.
Irving Fisher's debt-deflation theory defined a sequence of events that leads to the debt-bubble bursting: debt liquidation and distress selling lead to a contraction of the money supply as bank loans are repaid, causing a fall in the level of asset prices and a greater fall in business assets, causing bankruptcies, a reduction in output, a fall in profits and a rise in redundancies and soup kitchens. He saw it in the 1930s, when his own assets were lost.
For governments, deflation knocks the tax base and services and welfare just have to be cut and hacked back. For employers, sales prices, profits, headcount and investment are squeezed and cut back. The higher unemployment hits the government's budget again, meaning yet more tax increases.
In the end, the deflation disease kills governments', companies' and individuals' finances. Fiat currencies lose their value progressively and are finished, and have to have two or three noughts struck off them.
The middle classes are particularly badly hit, and their assets and pensions are practically wiped out. It has happened in Germany in 1923 and in America in 1929.
This 2015 deflation, in a global economy mired in debt, has the possibility of growing and going global. No wonder Albert Edwards of Soci’t’ G’n’rale is shaking, as with one more boom like the last one, he can see his own assets disappearing up the swanny, along with his bank and his job.