This past week the IMF trumpeted the news that global debt in 2020 is a record $226 trillion, but even more remarkable that it is 256% of world GDP
At the same time, it is growing at the fastest rate since World War II, increasing by 28 percentage points against the background of the global epidemic crisis and deep recession. And even against a background of accelerating inflation.
“Debts were high even before the crisis, but now states have to cope with a record high debt burden in both the public and private sectors, new coronavirus mutations and rising inflation”, – the fund said.
There is no doubt that in 2021 the increase in debt, although slowing somewhat, will still be at a very high level. Inflation, on the other hand, continues to rise at unprecedented speeds around the world for a very long time, including in developed countries, above all in the USA.
Western financial officials have long blamed the pandemic and the resulting “supply-demand mismatch” for both problems (debt explosion and runaway inflation) in their comments. In doing so they seem to overlook the barbaric actions of the world’s leading central banks (above all the US Federal Reserve) to pump the global financial system with unsecured liquidity. Once again, the mantra of a mismatch between supply and demand was repeated by the Fed at this week’s meeting as well.
But it certainly does not mean that they do not understand where the root of the evil is and how deep the problems are. Both the IMF and the Fed have been saying recently that the rise in inflation is a temporary phenomenon. Almost short term. In a recent US agency communiqué the phrase that inflation is a temporary phenomenon has disappeared. So rising prices are serious and for the long term.
It would seem that the recipe for dealing with these problems is obvious: stop printing unsecured money plus raising base rates by the leading central banks. This is about the same advice that former treasury secretary Lawrence Summers was giving out this week: he urged the Fed to immediately stop buying mortgage-backed securities and Treasury debt, and to quadruple its base rate at the same time. But at the same time he said there was a risk of “spontaneous deflation in the financial markets”, an over-euphoria among private investors who were “chasing income by taking on additional risk” and that “it will be very difficult for the Fed to arrange a soft landing”. “All the disinflationary efforts the Fed has made historically, when it was clearly established that inflation was too high, have ended in a recession,” Summers said. However, he said nothing about the extent of the impending recession. And he should have, for the stock market has never seen such a debt overhang or bubble before.
And Summers is not the only big financier trying to predict where this unhealthy situation is headed. Experts’ scenarios vary, but everyone agrees that unprecedented problems are coming.
However, the Fed did not make any breakthrough decisions after the meeting. In particular, it left the base rate at 0-0.25% and pointed out that “financial conditions remain favourable”. The only measure that can be somehow interpreted as being aimed at fighting inflation was the reduction of asset purchases by 30 billion dollars in January: US Treasuries by 20 billion and mortgage bonds by ten billion. In other words, the injection of unfunded dollars into the global financial system will continue, just somewhat reduced. Well, they also hinted that the base rate will rise next year after all. And that’s with official US consumer inflation at 6.8% and industrial inflation approaching 10%, a record high for the US for 40 years. Moreover, few people believe in such low figures – the common opinion is that they should be multiplied by two.
By the way, the European Central Bank, which later met, also left its base rate at zero percent. Only the Bank of England unexpectedly raised its base rate from 0,1 % to 0,25 % because of official inflation which reached 4,2 %. But it left the scope of its asset purchase programme unchanged, i.e. the same pumping of the market with unsecured sterling.
That is, the reaction of leading Western central banks to the situation in global finance is best described by the words of the song “All is well, fair marchioness”. Why so? Because their options in their own pumped-up, unfunded financial system are very limited. A significant increase in interest rates combined with an end to so-called asset purchases would lead to a stock market crash, massive bankruptcies and the inability of these nations to finance their expenses (including paying their debts), because, for example, most of the treasury securities in the USA were bought back by the Fed itself a long time ago. And all of this together will lead to the collapse of the global financial system.
The Fed is still hoping to weave through the old scheme: by raising the rate, attracting capital from other countries, thereby making the rest of the world pay to get out of the crisis. This kind of thing has been done many times before. This time the bonus may be a reduction in the real size of the public debt of the U.S. and other major countries because of inflation, and a real reduction in the size of the savings of those who have them. But just now, the trick may not work. Record bubbles, record debt overhangs, and a gradual loss of confidence in the US and the US dollar could be a rattling mix that will fracture the US economy and destroy the global financial system based on the dollar.
One should not get too excited about such a scenario: it would not be good for anyone. Dramatic declines in living standards will be seen all over the world. Just as prices are now rising all over the world because of the Fed’s actions. That has to be understood. But there is cautiously optimistic news in this scenario: Perhaps what emerges in its place will be less unfair in terms of resource distribution and consumption. Under the current system, the centre of the global financial system, the US, consumes many times more than it produces.
However, the collapse of the financial system is not the only possible scenario. But all scenarios without exception suggest that tough times await the global economy and most of the world’s population.
Valery Mikhailov, RIA