The doom loop spins faster as we enter the second half of 2018
Darren Winters takes a look at the short-term solutions chosen over the years that could have made the fundamental problem worse going forward. Investors need to be mindful that doom loops are everywhere and that a second stock market correction like the one experienced early in the year could be imminent.
The greatest monetary easing experiment in the history of finance which was intended to prevent what might now be inevitable, a Great Depression is perhaps one of the greatest doom loops.
Post financial crisis 2008 the Fed and its western aligned central banks (ECB, BoE, and BoJ) have pumped approximately 12 trillion dollars into the financial system through their asset purchase program, known as quantitative easing (QE). In the wake of the 2008 financial crisis QE, a short-term fix kept asset prices propped up and banks solvent thereby preventing a financial meltdown.
QE, central bank currency creation is the mother of all doom loops
As Darren Winters explains, the nature of the 2008 financial crisis was a subprime mortgage crisis but you can not solve a debt crisis with more debt. The post-2008 financial crisis has been a debt-fueled recovery. G7 governments piled on more sovereign debt and the central banks then purchased the debt which is what fueled a public debt doom loop.
The further nations go into debt, the greater the burden of those interest payments will be on servicing the debt and the more they need to borrow to just keep up with interest payments. The UK national debt is 65,000 GBP for every household (and rising).
Moreover, the doom loop of the central bank’s currency creation at the top of the food chain triggered a boom in speculative investments. Corporate welfare led many CEOs to opt for the easy route, to create shareholder value by simply buying their own company’s stocks. Stock buybacks were all a CEO needed to do to inflate the company’s stocks. Investment in research and development, building plants and new machinery is considered too risky, bearing in mind that stock buyback scheme is a guaranteed way of inflating the stock price and improving PE ratios.
Stock buyback also attracts more speculative investments into stocks as short-term investors seek out the elevator rise in the stock prices. But a boom in speculative activity kept asset prices artificially high, enriched a few, meanwhile it deprived capital away from productive investments, thereby impoverishing the wage class(middle class).
Political instability is on the rise and populist governments could be another doom loop
In other words more superficial solutions which will make the fundamental problem worse. The Trump administration is spearheading a nationalist, protectionist agenda. In an attempt to address US’s ballooning twin deficit (fiscal deficit and current account) Trump is imposing billions of dollars of tariffs on its key allies, the EU, Mexico and trading partners China.
Already that has invited a relation from Mexico who will target American products worth billions of dollars.
Moreover, in Europe Jean-Claude Juncker, president of the European Commission, said the bloc would move ahead with tariffs that are expected to affect roughly $7.5 billion worth of US exports. It will also lodge a case with the World Trade Organization (WTO).
Trump’s “America First” policy has started a trade war with a self-fueling doom loop.
Europe’s sovereign debt crisis is yet another doom loop
The sovereign debt crisis of the peripheral countries of the EU was duct taped over with a short-term fix to provide those countries with more debt. It was a short term fix for the European troika so that these heavily indebted countries could service immediate interest payments to their creditors. But granting an insolvent country more loans so that they can meet immediate interest payments on their debt only made the fundamental problem worse in the long term. Trying to solve a debt problem with more debt is not a solution it will just compound the problem.
Moreover, crushing austerity in the peripheral countries has resulted in a populist revolt and that has made the EU politically unstable. There is chatter among the populists about Italy leaving the euro, but a weak unstable currency isn’t helping Argentina nor Venezuela. There is no case study of a country devaluing their currency to prosperity.
The fourth-revolution could be another doom loop
The fourth-revolution is blurring the lines between the physical, digital, and biological spheres, also known as the “second machine age” could make many humans obsolete from the workforce.
Whether it be robotics, artificial intelligence, 3D printing, quantum computing and nanotechnology demand for human labor is likely to fall. World Economic Forum predicts that 47% of jobs may be automated away.
Moreover, with an ever-shrinking workforce, the trajectory of household consumption is likely to continue to decline. Businesses will then be forced to adopt even more cost-saving four-revolution technologies to cut costs in the hope of attracting more consumers. The four-revolution doom loop is already a genie out of the bottle.
The landscape is littered with doom loops
Corporate profits are likely to decline in a backdrop of growing political instability, trade wars, and lackluster household consumption. Furthermore, with the Fed and western aligned central banks now withdrawing from monetary easing another correction seems in risk assets could be on the cards.
But let’s hope that the four horseman of war is not the only way out of these doom loops?