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Policymakers Have Failed The World

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By John Richardson

WHEN the economic, social and political history of 2008-2014 ends up being written, there are two groups of people who are going to end up bearing a lot  of the blame for  the new global financial crisis. It is the people who run the Fed and those who ran China’s government until 2012.

This is a real human tragedy –and I don’t use this word lightly. Hundreds of millions of people are at risk of being denied the opportunity, for at least a few years, of escaping poverty in the developing world.

“Middle America” will also flounder even further as many of the other people on low incomes elsewhere in the developed world struggle.

This could well include a “lost generation” of young people in Europe. In the best of circumstances, much of this lost generation might never know what it means to do meaningful work. Just think of all the wasted potential, both economic and social, as this generation remains stuck in low paid, tedious work.  And in the worst of circumstances, they might not be able to find work at all.

But you obviously cannot just blame the Fed, China’s last generation of leaders – and more recently politicians in Japan and South Korea – for what, in the very best of outcomes, seems likely to be a new global financial crisis.

Every investment scam must also have plenty of people willing to take part in that scam. Charles Ponzi would have got nowhere without plenty of cheerleaders who claimed that nobody could possibly lose out by investing in his postal-reply coupons.

It is the scale of this latest Ponzi scheme that deeply worries me.

Last week, the Bank of International Settlements warned about the surge in US dollar-denominated lending in emerging markets. Much of this lending is now at risk of becoming unserviceable as a result of the end of the Fed’s quantitative easing (QE) programme.

And on 10 December, Bank of America made these quite shocking estimates:

  • 56% of global GDP is at the moment supported by zero interest rates.
  • 83% of free-floating equities on global bourses are similarly supported by zero lending rates.
  • Half of all government bonds in the world yield less than 1%.
  • Around 1.4 billion people are experiencing negative lending rates in one form or another.
  • QE in Japan and Europe will cover just 35% of the lost global stimulus as the Fed pulls back.

What the bank’s researchers didn’t mention was that Japan’s existing stimulus programme is not replacing growth at all, but is instead pushing the world towards a full-scale currency war – and thus deeper deflation. Printing more money in Europe will also have the same effect.

Crucially, also, a much bigger deal than the end of the Fed’s QE programme is China’s complete economic about turn. China added some $10 trillion of stimulus to the global economy in 2009-2013 compared with the Fed’s $3.5 trillion.

Meanwhile, the continued fall in oil prices is both a symptom and a cause of these rapidly unfolded events.

The collapse in crude prices is mainly a demand and not a supply issue, as the International Energy Agency (IEA) underlined last week. Global oil demand will grow by 900,000 barrels a day in 2015, 230,000 barrels a day less than it had forecast last month, said the IEA.

Tumbling oil is also a cause of the crisis because of the amount of lending to oil and gas companies, on the basis that the oil price would remain in the region of $100 a barrel. Even Janet Yellen has singled out leveraged loans, which are connected to this debt, as a systemic risk to the financial system.

Meanwhile, of course, petrochemicals prices are in virtual free fall.

In Asia, as the chart above illustrates, pricing for three of the industry’s biggest building blocks – ethylene, benzene and paraxylene – have declined even further for the week ending 12 December.