Central bankers remain in Denial about the failure of their stimulus policies.  Yet new IMF data for global GDP shows GDP fell by $3.8tn in 2015 – the biggest fall on record – as the world hits the “demographic cliff”.  We have now seen 2 record falls in 6 years, as the previous record was $3.3tn in 2009.

This confirms that the fault lines are now opening in the ‘Ring of Fire’, as discussed on Monday.  As  William White has warned:

“The global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability.  The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up.”

Sadly, today’s central bankers are just as blind to his warnings as they were in 2007-8.  Thus European Central Bank head Mario Draghi set off another mini-rally in shares and oil markets on Thursday, promising he would print more money to boost financial markets.  He made the same promise last month, also causing markets to rally sharply.

Yet common sense tells us that you cannot have the same levels of growth today as in the past.  As the chart shows, the world has now reached the “demographic cliff“.  We now have 1bn people moving into the low-spending, low-earning New Old 55+ generation for the first time in history.  They will be more than 1 in 5 of the population by 2030, twice the percentage in 1950.

So as White warns, the next recession will reveal that many of today’s debts will never be repaid:

  • White mentions a major Chinese devaluation as one potential cause of recession
  • The European refugee crisis is anther potential flashpoint, with the President of the European Commission continually warning that “a single currency does not exist if the Schengen (open European border Treaty) fails“. This problem is increasingly urgent, as more and more countries re-introduce border controls, and public opinion polarises after the Paris and Cologne attacks
  • Then there are potential flashpoints in the Middle East and, of course, in Eastern Europe
  • Plus, there is the vast debt associated with US financial markets, which complacently believe the central banks will never let prices fall

I am sure White is right again this time.  It is very hard to see how this debt can possibly be repaid, as the global economy continues to slow under the influence of its rapidly ageing population.  Historically, as he says, debt Jubilees used to occur every 50 years, going back to Sumerian times, and were when all debts were forgiven.

This will have to happen again in our society.  McKinsey’s report last year highlighted the vast debt that has been built up since 2007 – which is now 3x world GDP.  A simple calculation reveals the scale of the problem:

  • McKinsey estimated world debt increased by $57tn between 2007 – 2014
  • Global GDP grew by $19.8tn from $57.5tn to $77.3tn over the same period (IMF data)
  • It therefore took $2.9tn of debt to add $1tn of GDP growth
  • To put it another way round, $1 of debt gave only 35 cents of GDP growth
  • In the 2000-7 period, each $1 of debt gave 45 cents of growth – so the trend is clearly getting worse

And yet, of course, central bankers still insist that adding more debt is the way to solve today’s crisis.  They seem to be in total Denial about the fact that if $1 of lending creates only 35 cents of growth, you are effectively wasting the other 65 cents.  I therefore fear that White’s warning supports the forecast in my 2016-18 Budget Outlook:

“2016 will see China putting its foot hard on the brakes of the Old Normal economy – whilst Western policymakers compete to ramp up stimulus to compensate.  It could easily prove to be as difficult a year as 2008.  Companies owe it to themselves to plan ahead for this Scenario.  ’Flash crashes’ take place in a flash, not over months.  It could prove too late afterwards to regret that you had failed to put the necessary contingency plan in place.”