The Great Reset

The continuing decline of the global economy has seen traditional economic theories fail on an unprecedented scale. Perhaps the worst is yet to come.

The Great Reset

Don't worry this isn't some Green New Deal post embracing the marxist agenda masquerading as progressive thought. This post is about how the traditional approach to global finance is proving to be a spectacular failure.

Traditional economic theory suggests that lowering interest rates stimulates the economy. The premise is that reduced interest costs makes more cash available for people to spend or invest. To an extent this is correct but it only works when people have confidence in the future.

I have stated before that confidence is the key to everything.

If people have confidence they will borrow, consume and invest whatever the going rate of interest. But when they are fearful and uncertain, even the lowest cost of money won't loosen their purse strings.

We are seeing that now. Money is the cheapest it has been in modern history and yet borrowing is down. That's because people are worried about their jobs, their businesses and their existing obligations.

Record low interest rates are merely a sign of crisis. They just wouldn't be this low if the economy was doing well. Unfortunately there is no sign of blue sky to inspire spending and investment. One could say the opposite is actually happening.

Most thinking people know that the only thing keeping our economy afloat is the tidal wave of borrowed money being pumped out by the government. That's the same all over the world and, despite that pump priming the global economy is in tatters.

Global GDP is around $88 trillion and has declined by around a third in the March- June period. With the pandemic not expected to run its course (deliberately or otherwise) until end of 2021, it's reasonable to conclude that global GDP could shrink by up to 50 per cent from the peak. I cannot think of another time in history when this occurred.

During the Great Depression of 1929 -1932, global GDP declined by around 14 per cent. In 2008-2009 it was around one per cent. What we are facing now is of a scale that has every central banker and investment analyst simply guessing as to the future.

That's why I think the old world economic thinking doesn't apply anymore. It is based on assumptions that debts will be repaid, that business cycles are allowed to run their course and monetary policy will prove to be the magic elixir.

You also have to consider the impact that zero real rates have on savers. The self-funded retiree can no longer support themselves. Those on fixed incomes spend less as they receive less income from bonds and savings accounts. They become more dependent on government handouts to meet the cost of living.

Lowering interest rates in a crisis doesn't cause people to borrow. It could actually do more harm than good because it confirms fear and uncertainty. History tends to support that position as when interest rates begin to rise after a crisis, the stock market also tends to rise.

Of course now we have stock markets hitting record highs as institutional money chases returns and relative safety in order to fulfil their own pension/ investment obligations even though most businesses are doing very poorly.  

It's like a giant pyramid scheme where buying something at any price is ok as long as you can  find someone to sell it to at an even higher one. At some point, reality hits as less people clamour to get into the game. That's when it gets really ugly.

I suspect that the ebbs and flows  of market gyrations will continue for a while yet as governments around the world try to keep the game going but I fear an inevitability that it will all end very badly.

Maybe that's the intention of this whole process. After all, the global elites at the World Economic Forum are pushing for a 'great reset'. I am just cynical enough to think that their agenda won't be in our interests.

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