“Debt-financed growth model has reached its limits”, admits German finance minister

Economic growth


ACC OR Feb16aCentral bank policy-making is becoming more and more dysfunctional, as German Finance Minister Wolfgang Schäuble‘s comments highlighted on Friday:

The debt financed growth model has reached its limits.  It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy….and may have laid the foundation for the next crisis.

One clear sign of the problems this is causing can be seen in the latest capacity utilisation (CU%) data from the American Chemistry Council.  As the chart shows, last month was the weakest January since 2009:

  • The chemical industry is known to be the best leading indicator for the global economy
  • It is the world’s 3rd largest industry after energy and agriculture, and contributes $800 to GDP for every man, woman and child on the planet
  • Its slowing CU% rates had warned of the downturn all through 2015 – for example, my January 2015 analysis was headlined “Rocky road ahead for global economy as chemical industry remains downbeat

Chemical bellwether BASF confirmed the downturn on Friday, when it told analysts that “Chemicals 4Q15 is a good proxy for 1Q16…the start of the year has been relatively slow”.  As one leading analyst told me afterwards:

This is shocking. In recent history, only 4Q08 and 1Q09 have been as poor as 4Q15.

GDP Feb16The second chart highlights the scale of the problem.  As the New York Times has confirmed, official IMF data shows global GDP fell by 4.9% in current dollars in 2015 (only slightly less than the 5.3% fall in 2009), whilst global trade fell by 13.8%.  Yet the US Federal Reserve seems stranded, like the proverbial “rabbit in the headlights” in deciding how to respond to this crisis, as vice-chairman Stanley Fischer admitted last week:

“I expect most of you are less interested in what we did at our previous meetings, and more interested in what we are going to do at the next one. I can’t answer that question because, as I have emphasized in the past, we simply do not know.”

This is equally shocking.  It is one thing to say you can’t discuss potentially market-sensitive information.  That would be normal.  But for the world’s main central bank to say “we simply do not know” is unbelievable:

  • It has, after all, run-up $3.7tn of debt in pursuit of its stimulus policies.  This is not small change
  • Any finance director who continued to tell his Board that “we simply do not know” the likely outlook for next month, would be sacked pretty quickly

Schäuble at least recognises that the policies have created more problems than they solved.  But will this stop ECB President Mario Draghi launching more stimulus next month, as he has threatened?  “We simply do not know”…

And, of course, policymakers continue to reject the idea that demographics, not monetary policy, drive the global economy.  They persist in arguing that the 3 men and 1 woman running the world’s major central banks can somehow control the economic fortunes of the world’s 7.3bn people.

Even more disturbing is the fact that the arrival of 1bn people in the lower-spending, lower-earning New Old 55+ generation means the debt created by their policies can never be repaid. They have indeed “laid the foundations for the next crisis”.  And cleaning up after this crisis is going to be a very difficult job – if, indeed, it is possible.

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 67%
Naphtha Europe, down 63%. “Crack spread fluctuates but remains negative”
Benzene Europe, down 60%. “As downstream demand tapers off next month and into Q2, sources said that there was room for some downward movement on benzene spot levels”
PTA China, down 45%. “Major PTA producers in the country said they were also increasing run rates. Rates in China are estimated to increase to about 60-65% in March”
HDPE US export, down 42%. “Domestic prices remained stable following the slight move up in a few prices last week”
¥:$, down 11%
S&P 500 stock market index, unchanged


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