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  • Jerry Schuitema

Messing with money.

The greatest experiment in the history of global finance is underway.

Many events in history have passed virtually unnoticed in their time, only to prove highly significant a few years later. We are currently experiencing a fundamental shift in global finance – an experiment which could profoundly change global economic growth, prosperity and indeed rewrite many of the economic text books while highlighting the deep flaws of conventional neo-classical economic thinking. It’s largely been missed by the mainstream media, and perhaps even neglected in most of the specialist news platforms.

This is understandable in South Africa, preoccupied with local issues and the elections. The scant attention elsewhere can be attributed to the complexity of monetary issues today -- especially because the size and impact of the financial sector have been understated if not virtually ignored in conventional economic models based on linear and equilibrium assumptions and informed by abstracts and aggregates. Financial services are fully entrenched globally and sovereign monetary policies are mostly driven by global events. At the core is the developed Western economies, of which the United States and the dollar are the primary forces. South Africa may not be a significant direct party to these events, but as we saw in 2007/2008, they have a profound effect on our own livelihoods.

It’s been common cause that global debt has become a key concern for the world economy.

After cutting interest rates to nearly zero following the 2008 crisis, the US Federal Reserve board started raising rates. Following the most recent hike in December 2018, Fed Chairman Jerome Powell seemed determined on further tightening. But then Wall Street fell by 20%, and within weeks, Powell spun 180˚ from his rising interest rates stance to hint at no interest rate hikes this year and mooting a return to quantitative easing should it be needed. President Trump has added his voice to those opposed to any tightening of monetary policy, and both the European Central Bank and Japan have shifted their own position to favour further declines. There is even the prospect of negative interest rates on a broader global scale.

Tyler Durden of ZeroHedge sums it up well: “Ten years after central banks launched the greatest monetary experiment in history, pushing rates to zero or lower in an attempt to reflate away an unsustainable debt load while purchasing $12 trillion in securities to prop up risk assets, we are back where we started with deflation once again emerging as the biggest threat to the world, over $10 trillion in sovereign bonds yielding below 0%, and after a disastrous attempt at renormalizing monetary policy, the market is convinced the Fed will cut rates in the next few months.”

Some statistics and graphs are quite startling: See this live graph from the World Bank on broad money as a percentage of GDP. It shows a massive leap in global money supply as a percentage of GDP: more than double what it was in the 1970’s, and 30% more than the level before the 2008 financial crisis.

The above graph from ZeroHedge’s summary confirms not only the correlation between money supply and credit extension, but the record level of global debt standing at more than 270% of gross world product last year. But that is only part of the dilemma: another is the falling level of money velocity. (The number of times one unit of currency is used in a transaction in a year.) It has fallen in the US from 2.19 to less than 1.5 meaning that despite all the money being printed, it is actually being used less in broad public spending. This clearly reduces demand for goods and services and is deflationary.

I have touched on only a few of the 20 “stunning” market statistics captured in the Bank of America’s latest “Hitchhiker’s guide to investment” which has been unpacked by Tyler Durden. Most of the conditions they reflect have never been seen before and now leave some questions like:

If the United States economic recovery has been so sound, why go soft on interest rates when there is a clear need to do the opposite?

What happens when interest rates lose their effectiveness in economic policy?

Why have the record levels of debt and excessive money supply not led to rampant inflation? There are some authoritative voices who believe they will – soon and globally. In the meantime, inflation has been restricted to asset prices such as stocks, bonds and property. Less than 20% is deployed in productive capacity. It means that cheap money is not trickling down to the man in the street, but is restricted and being used mainly for short term risk assets by corporate entities and the super-rich, continuing to exacerbate wealth and income inequalities.

And finally, among all the questions that remain in these new uncharted waters in global finance is the one most difficult to answer: what will be the outcome and when? I was one who believed it would head for a resounding crash – led by a falling dollar against the background of lower trust in the US economy; concerted efforts at “de-dollarization” by other major players such as China and Russia, and their continuing building of gold reserves.

But there could be, much like we have seen in Japan for decades, an extended, rather muted, stagnant and low growth outcome; with perhaps a harder landing in some countries such as Australia and Canada. While the axiom holds true that in the end all debt has to be paid, either by the lender or borrower, it does not say by when, and in a world where you can constantly roll over debt at a cheaper cost, that “when” can be a long way off. None of the above augers well for the South African economy. All of our assumptions about and planning for a “new dawn” post elections will be overwhelmed by global events as they were ten years ago.

But there is a third outcome: political; social and civil unrest. When the dots of stagnation and hopelessness are connected to a monetary monster spawned by a parasitic financial sector; then those financial fortresses will simply be torn down.

That, by all accounts is already well underway.

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