Kicking the can ever further only results in delaying the inevitable. Bad debts are like rotten apples in a basket full of otherwise good apples. The entire basket starts to rot.
How many at the very top went to jail or were punished for financial crimes and scandal since the last recession? None! The only ones to even be named or shamed were lowly scapegoats way down the corporate ladder.
Meanwhile the Central Bankers continue to fool everyone all the time. Their crowning glory is pumping market indices to record levels never seen before and that too during the after storms yet to die down from a major financial recession brought about by financial crimes and scandals quickly swept under the carpet.
What the Central Bankers cabal did was to bandage the wounds without cleaning… So their pals holding toxic bad debts could palm those off to the public kitties, resulting in the biggest transfer of wealth from prudent savers to rich asset owners.
And the rest of the world keenly observe these decisions made by the recent leaders of this Capitalist global economy… Long Live Capitalism!
Understanding the Global Recession of 2019[1]
Isn't it obvious that repeating the policies of 2009 won't be enough to save the system from a long-delayed reset?
Global Financial Meltdown / recession of 2008-09 was halted by the coordinated policies of the major central banks, which lowered interest rates to near-zero, bought trillions of dollars of bonds and iffy assets such as mortgage-backed securities, and issued unlimited lines of credit to insolvent banks, i.e. unlimited liquidity.
The success of these policies has created a dangerous confidence that they'll work in the next global recession, currently scheduled for 2019. But policies follow the S-Curve of expansion, maturity and decline just like the rest of human endeavor: the next time around, these policies will be doing more of what's failed.
The global economy has changed. Demand has been brought forward for a decade, effectively draining the pool of future demand. Unprecedented asset purchases, low rates of interest and unlimited liquidity have inflated gargantuan credit / asset bubbles around the world, the so-called everything bubble as most asset classes are now correlated to central bank policies rather than to the fundamentals of the real-world economy.
Unfortunately for central banks, global economies are now junkies addicted to zero interest rates and central bank stimulus / support of bond markets, stock markets and real estate markets.
So how do central banks normalize their unprecedented policies without popping the asset bubbles they've created?
As if this wasn't enough to guarantee recession in 2019, there's the unintended consequences of capital flows. Capital famously flows to where it's treated best, meaning wherever it earns the highest yields at the lowest risk, and where the rule of law protects capital from predation or expropriation.
When all central banks pursued roughly the same policies, capital had options. Now that the Fed has broken away from the pack, capital has only one option: the U.S. The Federal Reserve should have begun normalizing rates etc. back in 2013, and if they'd been wise enough to do so then even baby steps over the past 5 years would have led to a fairly normalized financial environment.
But Ben Bernanke and Janet Yellen blew it, so it's been left to the current Fed leadership to do the heavy lifting over a much shorter timeline. Predictably, pulling away the punch bowl has spoiled the asset-bubble party
Capital flows tend to be self-reinforcing: as capital flows out of at-risk economies, it dampens investment, speculation and spending as the economy is drained of capital.
Owners of assets notice this decay and so they decide to sell and move their capital to safer ground. Selling begets selling, and pretty soon nobody's left to catch the falling knife, ie. buy assets that are rapidly losing value.
This is what surprised Alan Greenspan (by his own account) in 2008: bubbly markets quickly become bidless
The central bank "solution" to bidless markets is to become the buyer of last resort: when no sane investor will buy bonds, stocks or real estate, then the central bank starts buying everything in sight.
We are already seeing this in action as Chinese governmental agencies have started quietly buying empty flats in ghost buildings to prop up the housing market… But when markets turn and confidence is lost, sentiment can't be restored so easily: sensing their last chance is at hand, sellers dump assets at a quickening pace…
This leaves the central bank with a stark and sobering choice: either let the asset bubble collapse… or buy the whole darn market. This is the unintended consequence of employing unprecedented policies for a decade: like using antibiotics every day for years, eventually resistance develops and the "fix" no longer works.
Now that central banks have inflated assets into the stratosphere, there's $300t in global financial assets sloshing around seeking higher yields and capital gains. How much of this $300 trillion can central banks buy before they destabilize currencies? How much can they buy before they run out of political goodwill?
[1] Understanding the Global Recession of 2019
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