The latest clunk down in global and Australian share prices is not just about slowing Chinese growth and Glencore’s frailty, although both of those are real enough.
At the heart of what’s happening is the huge rise in world debt since the GFC coupled with the manifest failure of central banks to stimulate the real economy despite six years of virtually zero interest rates and printing money.
Glencore declared last night it had “absolutely no solvency issues”, it is confident about the medium- and long-term future of commodity markets, and was cutting debt by “up to $US10.2 billion”. Its share price bounced 20 per cent. Tomorrow, perhaps, markets will wonder why the company is reducing debt by 20 per cent if there are absolutely no solvency issues or any concerns about commodity prices.
Whether or not Glencore itself is facing problems, it has focused more attention on the entire resources sector and specifically whether the losses from the bear market in commodity prices will start to extend from shareholders to lenders via bankruptcies of small- and medium-sized producers.
In China it’s clear from the latest data that the modest economic rebound in the second quarter will be short lived and that Q3 will see growth fall below 7 per cent and to 6 per cent next year.
Following the 42 per cent share market correction, the financial sector has joined construction and heavy industry in the slowdown, along with exports and consumption.
The failure of the People’s Bank of China to move the dial on growth despite cutting interest rates to all-time lows is symptomatic of the key global problem in 2015: not only have central banks not been able to generate growth and inflation despite throwing a party for financial speculators, they may have made things worse.
According to the Bank for International Settlements’ latest quarterly review issued two weeks ago, total debt (household, corporate and government) in the advanced economies is now 265 per cent of GDP, compared with 226 per cent in 2007.
For Australia it’s a little below average at 230 per cent of GDP, up from 197 per cent. (By the way, according to the BIS figures, most of Australia’s increase has been government debt.)
China’s total debt stands at 235 per cent of GDP, up from 153 in 2007, Japan’s is now 393 per cent, up from 316, Euro area 270 per cent, up from 225 and the US’ total debt stands at 239 per cent of GDP, up from 218. Emerging economies generally have increased total debt from 117 per cent of GDP to 167 per cent.
The only countries to have reduced total debt as a percentage of GDP are Argentina and India, and in each case the reduction is just 1 percentage point.
There are two problems with this: first monetary policies have taken wealth from savers and given it to borrowers – what Keynes called “the euthanasia of rentiers”, and second, the debt thus encouraged itself weighs on real economic growth.
Quantitative easing, commonly described as the “Fed put”, has favoured speculation over capital investment and produced a global bond bubble that has fed through to all asset prices via what’s known as the capital asset pricing model, which is built on the Government bond yield, or “risk free rate”.
Central banks are now in a bind. Having encouraged a massive increase in leverage and asset prices they can’t raise interest rates without derailing growth.
So the Federal Reserve had to put off its well-flagged September rate hike, the European Central Bank has signed a pledge recommitting itself to stimulus and central banks in Norway, Taiwan and, last night, India, have announced big rate cuts.
What markets can see is that after six years of blazing away at recession and deflation, the big central banks are now out of ammunition. Meanwhile the enemy continues to advance. Now what?
Separately, far from reducing debt levels since the credit crisis and recession of 2008, the debt overhang has only increased – a lot – which has had its own deadening effect on growth.
Debt reduces the ability of consumers to spend, business to invest and governments to build infrastructure. Lower interest rates don‘t stimulate activity because nobody can borrow any more, and in fact the focus is to reduce investment to get debt down: Glencore is far from alone.
As the head of the BIS monetary and economic department, Claude Borio, said at the press conference announcing the quarterly review: “Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening.”
The latest clunk down in global and Australian share prices is not just about slowing Chinese growth and Glencore’s frailty, although both of those are real enough.
At the heart of what’s happening is the huge rise in world debt since the GFC coupled with the manifest failure of central banks to stimulate the real economy despite six years of virtually zero interest rates and printing money.
Glencore declared last night it had “absolutely no solvency issues”, it is confident about the medium- and long-term future of commodity markets, and was cutting debt by “up to $US10.2 billion”. Its share price bounced 20 per cent. Tomorrow, perhaps, markets will wonder why the company is reducing debt by 20 per cent if there are absolutely no solvency issues or any concerns about commodity prices.
Whether or not Glencore itself is facing problems, it has focused more attention on the entire resources sector and specifically whether the losses from the bear market in commodity prices will start to extend from shareholders to lenders via bankruptcies of small- and medium-sized producers.
In China it’s clear from the latest data that the modest economic rebound in the second quarter will be short lived and that Q3 will see growth fall below 7 per cent and to 6 per cent next year.
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Following the 42 per cent share market correction, the financial sector has joined construction and heavy industry in the slowdown, along with exports and consumption.
The failure of the People’s Bank of China to move the dial on growth despite cutting interest rates to all-time lows is symptomatic of the key global problem in 2015: not only have central banks not been able to generate growth and inflation despite throwing a party for financial speculators, they may have made things worse.
According to the Bank for International Settlements’ latest quarterly review issued two weeks ago, total debt (household, corporate and government) in the advanced economies is now 265 per cent of GDP, compared with 226 per cent in 2007.
For Australia it’s a little below average at 230 per cent of GDP, up from 197 per cent. (By the way, according to the BIS figures, most of Australia’s increase has been government debt.)
China’s total debt stands at 235 per cent of GDP, up from 153 in 2007, Japan’s is now 393 per cent, up from 316, Euro area 270 per cent, up from 225 and the US’ total debt stands at 239 per cent of GDP, up from 218. Emerging economies generally have increased total debt from 117 per cent of GDP to 167 per cent.
The only countries to have reduced total debt as a percentage of GDP are Argentina and India, and in each case the reduction is just 1 percentage point.
There are two problems with this: first monetary policies have taken wealth from savers and given it to borrowers – what Keynes called “the euthanasia of rentiers”, and second, the debt thus encouraged itself weighs on real economic growth.
Quantitative easing, commonly described as the “Fed put”, has favoured speculation over capital investment and produced a global bond bubble that has fed through to all asset prices via what’s known as the capital asset pricing model, which is built on the Government bond yield, or “risk free rate”.
Central banks are now in a bind. Having encouraged a massive increase in leverage and asset prices they can’t raise interest rates without derailing growth.
So the Federal Reserve had to put off its well-flagged September rate hike, the European Central Bank has signed a pledge recommitting itself to stimulus and central banks in Norway, Taiwan and, last night, India, have announced big rate cuts.
What markets can see is that after six years of blazing away at recession and deflation, the big central banks are now out of ammunition. Meanwhile the enemy continues to advance. Now what?
Separately, far from reducing debt levels since the credit crisis and recession of 2008, the debt overhang has only increased – a lot – which has had its own deadening effect on growth.
Debt reduces the ability of consumers to spend, business to invest and governments to build infrastructure. Lower interest rates don‘t stimulate activity because nobody can borrow any more, and in fact the focus is to reduce investment to get debt down: Glencore is far from alone.
As the head of the BIS monetary and economic department, Claude Borio, said at the press conference announcing the quarterly review: “Hence a world in which debt levels are too high, productivity growth too weak and financial risks too threatening.”