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Central banks are driving the economy towards a global "zombification"

Vlad Dobrea (Translated by Cosmin Ghidoveanu)
English Section /

Collage by MAKE

Collage by MAKE

The risk of central banks leading the economy towards a period of stagnation is increasingly evident. Both the considerable drops in the growth estimates, as well as the expectations of the central banks concerning the GDP and inflation, as well as the main economic indicators show a far weaker economy.

The process of stimulating the economy by China which encourages the growth of risky assets, as well as the weak macroeconomic data which are being ignored by the markets, assuming that they will all improve in the second half of the year, are factors which can kickstart events similar to that of 2008.

Also, the yield curves are reversing. 15 economies now have 30 year yields lower than the overnight LIBOR rates, and the amount of debt already due amounts to 11 trillion dollars, are other signs which predict a financial crisis, according to Zerohedge.

Financial repression is at a peak, while the peak indicators show an increasingly higher risk of recession.

In Q1 2019, stocks have added 9.3 billion dollars, to the market capitalization.

As for bonds, they have gained approximately 2 trillion dollars.

Meanwhile, the Conference Board index (ed. note: an index estimated to predict future economic activity, which is being calculated based on the values of ten key variables. Those variables drop before a recession and rise prior to an expansion), which refers to the main market indicators has dropped in the case of the major economies. The Citigroup Economic Surprise index (ed. note: which shows how economic data is progressing in relation to the consensus of market economists' predictions) has also dropped, especially in March, in spite of a small depreciation of the Eurozone in the beginning of the year.

The growth of global trade, orders for mechanical equipment and the manufacturing indices remain weak, while global debt is increasing to a record of 244 trillion dollars, according to the Bank for International Settlements and the IMF.

The difference from the Asian crisis or that of 2008 is that this time the risk is hidden in the balance sheets of the central banks, and will continue to do so.

According to Zerohedge, if the risk is hidden under the increase of the money supply, we ought to worry, because the end is not one similar to that of 2008, but rather a slow and unstoppable "zombification" of the global economy (ed. note: an economy that cannot support itself, being dependent on the support of central banks).

Investors are being forced to obtain riskier assets for lower profits. The shrinking of productive sectors to the detriment of sectors subsidized by the government is accelerating, and the money velocity is decreasing. At the same time, productivity growth is collapsing. Mass economists are praising the madness of financial repression using "inflation" as an excuse, while citizens all over the world are complaining and proving precisely the opposite through the hike of the cost of living. The intensification of financial repressed with the justification that "there is no inflation" is the most absurd mantra. It is like driving a car at maximum speed on the highway and saying that "we haven't had a crash yet", according to Zerohedge.

Many economists defend the "zombification" of the economies under a false social premise. The argument is the following: What is so bad about following Japan's example? It has low unemployment, its debt is cheap, and the economy is surviving rather well. It is a social contract and the debt doesn't matter.

Still, there is nothing right about this argument. Japan's low unemployment has nothing to do with the monetary and fiscal policy, due to the high demographics and lack of immigration. The low cost of Japan's debt is not a blessing. It is the result of using the citizens' savings to perpetuate a system that is nearly similar to a Ponzi scheme (ed. note: a fraudulent investment operation which involves the payment of very high returns to investors using money from other investments and not based on the revenues which the company has generated in reality) which doesn't prevent the country from spending more than 20% of its budget on interest expenses. It is a massive policy which transfers the risk to the future generations.

This endless debt machine is making the economy less dynamic, and stagnation is guaranteed. But the strength of the yen and the low cost of the Japanese debt are only backed by the high level of international reserves and by the country's strong financial flows. Japan is keeping its imbalances stable, because it is one of the few countries which have implemented this concentrated "zombification" policy. The same method cannot be applied to the rest of the world, because the result would not be the stagnation of the economy as has happened in Japan, but rather an Argentinean style chain-reaction crisis.

The fact that Japan has survived for almost two decades in stagnation through mistaken Keynesian policies should not be an excuse to do the same, but an opportunity to do the opposite.

"The current combination in some countries of strong balance central bank sheets and weak government ones is worrisome, where the fiscal decision making factors are looking at central banks as part of their solution. The risk is for the balance sheets of central banks to also become weak, and trust to decrease", said James McCormack, the head of the Fitch sovereign ratings department.

Central banks can have a room for maneuver highly increased when it comes to the credibility of policy in the debate that has already begun, but "governments often have the legal authority to impose their will", the Fitch study shows.

The central bank can issue currency and relies "on trust, above everything", McCormack warned. Confidence in turn, relies on a solid balance sheet and caution on the management of every aspect tied to the finance of central banks and the areas of monetary policy responsibility.

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