There’s no doubt that India wants looser monetary policy in an effort to boost economic growth. The departure of Raghuram Rajan, the governor of India’s central bank, may have been in the cards long ago. Global credit markets are showing fatigue because of riskier investors generating lower returns. The effect has been a significant global debt sprawl across international borders.
Even with the IMF’s stern warning of soaring Chinese corporate debt, capital markets are choosing to neglect measures to offset these risks because of banalities and wishful thinking. The IMF is saying that there is systematic global risk in China threatening the reform policies aimed at converting China into a domestic consumer country.
If the IMF’s calculations are correct that the public sector accounts for 55% debt and only produces 22% of economic output then one must examine the private sector because of how it mimics the attitude in how China runs their public companies. Corporate debt in China has risen from 160% of GDP in 2011 to 230% of GDP today. Chinese officials have expressed great concern that the stability of their financial system is now in peril with the companies unable to meet debt payments.
Capital markets are simply not in the mood to increase equity financing to reduce Chinese corporate debt. Rajan stated, “Often when monetary policy is really easy, it becomes the residual policy of choice.” Rajan’s supposition indicates that low interest rates globally could distort markets and that countries could become trapped by fear when rates are raised. This has to do with central bankers punishing savers and inflicting higher asset bubbles that leave financial institutions and capital markets reliant on easy money.
Global corporate companies have taken advantage of the central bank’s induced easy-money policies by prolonging the inevitability of paying down debt. It’s a type of Ponzi scheme that enables corporations to leverage their debts with more debts until an inflection point is reached leading to the next distressed cycle of a market plagued with recession. Central bankers are not accountable because they can not avoid economic tragedies and are quick in allowing public funds to be streamlined as a safe haven without being scrutinized.
In this millennium, how can banks survive without loans? It has to do with central bankers that realize that banks need to be subsidized by their wishes, not by the public. The problem with loans crafted from thin air is the eventual bloated inventory of banks becoming obfuscated by debtors that need to be rescued.
The G20 Summit in Hangzhou, China was simply a glorified meeting to raise concerns of soaring debt, sluggish trade, and turbulent financial and commodity markets. Xi Jinping did not reassure the world of economic growth and reform. He simply stated what other countries wanted to hear. China keeps reassuring the world of an innovation-driven economy but fails to mention a word about industrial overcapacity, soaring debt levels, pollution, and faltering global demand. How can Xi forge a green economy whereby even regulations can not be enforced in the corporate sector?
Xi is saying that structural reforms to the economy have been painful but are beginning to show positive signs. Consumption now accounts for over 73% of the country’s economic growth, up 13.2% from the previous year. Additionally, state-owned companies are in a process of modernization where coal and steel companies have successfully slashed overcapacity while the government leaves more power in the market’s hands. Finally, free trade zones have spread their boundaries and have allowed foreign companies to reap benefits from China.
China’s story isn’t any different from the American story. China will have the same problems with their markets similar to what happened in the 2008 financial crisis. The CEO of New York-based BlackRock Larry Fink stated, “The climb was necessary and quite cleansing, quite important for the foundation of the markets.” What the CEO doesn’t understand is that the world hasn’t tackled the global economic problem of slow growth that makes it more challenging to service a global corporate debt burden.
BlackRock CEO Larry Fink continues to fail to believe that China’s economic growth rate has slowed for the past 5 years. If commodity prices have been devastated and have not risen then it’s obvious global growth is slowing a lot quicker than anticipated. It’s based on the fact that a rising market will continue to rise long before the actual collapse happens.
We have markets dominated by disembodied minds that continue to breed economists with the valid contract based on an envy-driven fantasy of redistributing liquidity. Market crashes or bubbles are consistent with rational thinking; it does require the presence of new players forever, which is a human trait. This human trait requires individuals or institutions attaching higher value to stock prices than the price they’re willing to give them away.
When you have central bankers chasing investors fuelled in large part by Federal Reserve zero-interest rates then it elicits the same competitive forces for other global central bankers to follow suit. The 2008 financial crisis was also led by CCC Credit, a form of lower-grade credit that totaled $122.7 billion and accumulated a default rate of 47%.
So who picks up the tab? Donald Trump is correct, “At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.” Janet Yellen is quite political and if Trump wins the election then his first move must be to remove Yellen. She’s done playing the game. When she finally leaves, she will become a Wall Street lobbyist.