Western economies still feeling untold damage
The current market volatility around Europe should come as no surprise. The supposed magic wand of the long term refinancing operation (LTRO) was nothing more than another ‘kick the can’ policy from our eminent political and monetary leaders.
The LTRO billions were supposed to buy time for the politicians to deal with the crisis. However, this intermission did not even last 10 weeks before a Spanish banking crisis and European elections quickly overtook the politicians as they were busy celebrating the most recent of many ‘successes’ in solving the crisis.
This leads directly to an important question for investors and asset managers alike: is our current policy mix going to solve this global crisis or only ‘extend and pretend’ the real issues before we get to another ugly end game?
Looking at the hard evidence first, we have embarked on the greatest stimulus package the world has ever seen – or even contemplated. It is so significant that if one was to add all previous stimulus packages, fiscal and monetary, since the 1940s, the current policies are greater than the sum of all previous efforts put together. Furthermore, it will soon outweigh all bailouts including the Great Depression.
The result of this stimulus has been one of the worst economic rebounds ever seen in the developed markets.
The UK, without even reaching previous output levels, has fallen back into a double-dip recession and the US job recovery is the slowest and most protracted on record. As for Europe, with the exception of Germany, domestic economies have barely moved anywhere but down since the dark days of 2008. It is interesting to note that the scale of the recovery is not that closely related with the size of the fiscal stimulus in different western countries – extra spending has not correlated well with extra growth.
Emerging markets (EMs) also participated in this massive stimulus. But unlike the low multiplier recoveries in the West, the EM countries boomed on the back of a massive credit explosion in their own economies.
In Brazil and China the expansion of credit since the crisis has grown at a faster rate than it ever did in the west. The effects of this can be seen now in some of the Bric nations, such as China and India. The side effects of such rapid credit also has unintended inflationary consequences in the developed markets.
The outcome of all this stimulus clearly indicates that this is not just a cyclical slowdown, but rather indicates something much more structural has gone wrong in developed market economies. Commentators can point to their deleveraging as a positive development, and they would probably have a point.
However, given the scale of the fiscal spending and stimulus provided by governments, we have seen no real deleveraging at the aggregate level.