Guest commentary by Ernst Wolff
The situation at the end of 2017 was extremely contradictory. The economy is growing, stock markets are going up to record levels, unemployment figures are falling and the industry is showing a level of optimism that has not been seen for a long time. At the same time, the world suffocates under the highest debt burden in its history, suffers from the greatest social inequality and is threatened by higher risks than before the 2007/2008 crisis.
Where do we really stand now? Most of us ask ourselves at the turn of the year, if we can look to the future with peace of mind, or if we´re facing historical dangers? Is there any economic theory that can answer these questions clearly and unambiguously?
The economic theories of the past do not help anymore
No, there is no such thing. For one simple reason: Because we live in an exceptional situation that the world has never seen before: The global economic and financial system has been clinically dead since 2008. It only works because it is kept alive artificially by the central banks, like a patient in the intensive care unit.
Since the near collapse of 2008, the world’s largest central banks have pumped USD 14 to 16 trillion into the global financial system and cut interest rates almost seven hundred times. The majority of this “cheap” money has gone into financial speculation, creating a historically unprecedented distortion of the markets.
In the past, it was assumed that share prices could say something about the health of a company, but now it’s over: Large corporations all over the world have used the cheap money to buy back their own shares and artificially inflate their prices. While the costs and interest income of government bonds used to say something about a country’s economic and financial strength, this is now a thing of the past: The central banks have saved entire countries from bankruptcy by buying up their bonds at excessive prices and generating artificially created demand to create markets where there were no longer any.
Manipulation is boundless
But that’s not all: In the meantime, the central banks are also intervening directly in the stock markets and ensuring that even companies that are caught in the act are kept afloat and that others are traded far above their actual value. The Swiss National Bank (SNB), for example, is now a major shareholder in Apple, Alphabet, Microsoft, Amazon and Facebook and holds US stocks worth USD 91 billion at the turn of the year 2017/2018. Just as a reminder: the SNB can create its own money to buy shares…
All this means: We live in a system that is artificially driven and inflated by money creation and interest rate cuts. This has fatal side-effects, however, because central banks operate according to the same principles as the rest of our economic and financial system: The money they raise is not given away, but must be repaid. It is thus steadily increasing the global debt burden.
In order to ease the servicing of these debts, there is only one proven means: To fuel inflation. The rise in the general price level leads to a reduction in the level of debt in relation to other monetary values. However, in order to bring about such inflation, exactly the same means are needed as have been used since 2008: Money creation and interest rate cuts.
Although the world’s central banks have been announcing for some time now that they intend to tighten their monetary policy again after ten years of cheap money (and, like the Fed, have made some very tentative attempts in this direction), they can´t continue along this path without the biggest mountain of debt in history getting in their way. Ignoring it would result in the bankruptcy of countless debtors, would tear huge holes in creditors’ coffers and plunge the system into the next, possibly even more serious crisis than in 2007/2008.
There’s no going back
The situation we are in can therefore be described as follows: The central banks have embarked on a monetary policy which, while producing some positive phenomena on the surface, can´t be reversed without bringing the complete system down.
In other words, the global financial system resembles an addict who experiences short periods of recovery due to drug injections, but whose organs are more and more severely damaged from time to time and who will eventually – without prior notice – fail to perform their duties.
Nobody can predict when this will be – whether in 2018 or later. Only one thing is certain: The means of manipulation available to central banks are largely exhausted. After low and zero interest rates, all that remains is negative interest rates – and thus the destruction of traditional banking business, namely lending – and after the flood of newly created money, only the creation of more money remains – and this ends in hyperinflation.