The Global Financial System Is Unraveling, and No, the U.S. Is Not Immune

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The “recovery”/Bull Market is in its 10th year, and yet central banks are still tiptoeing around as if the tiniest misstep will cause the whole shebang to shatter: what are they so afraid of?

The cognitive dissonance/crazy-making is off the charts:

On the one hand, central banks are still pursuing unprecedented stimulus via historically low interest rates, liquidity and easing the creation of credit on a vast scale. Some central banks continue to buy assets such as stocks and bonds to directly prop up the “market.” (If assets don’t actually trade freely, is it even a market?)

On the other hand, we’re being told the global economy is in synchronized growth and this is the greatest economy ever.

Wait a minute: so the patient has been on life-support for 10 years and authorities are telling us the patient is now super-healthy? If the patient is so healthy, then why is he still on life support after 10 years of “recovery”?

Healthy economies growing organically don’t need authorities pumping trillions of yen, yuan, euros and dollars into credit and asset markets.

So what are central banks so afraid of? Why are they still tiptoeing around in fear after 10 years of unprecedented stimulus?

The answer is as obvious as the emperor’s buck-naked body: central banks know the global economy is so brittle, so fragile and so dependent on cheap credit for its survival that the slightest contraction in credit will collapse the entire system.

If the world’s economies still need central bank life support to survive, they aren’t healthy — they’re barely clinging to life. The idea that central banks can wean a sick-unto-death global economy off life support is magical thinking, and central banks know it.

If the patient isn’t getting well after 10 years on life support, he isn’t going to get well.

And about the so-called synchronized global growth, just look at the U.S. and China…

The S&P is soaring to new highs, not just climbing a wall of worry but leaping over it. But the engine of global growth — China — is exhibiting signs of serious disorder. If it was so healthy, why are Chinese authorities expanding credit in such manic desperation?

This divergence is worth pondering. How can the two economies that have powered a 28-year Bull Market in just about everything (setting aside that spot of bother in 2008-09) be responding so differently to the global economy and global financial system’s woes?

There’s a rule of thumb that’s also worth pondering. While the stock market attracts all the media attention — the bond market is larger and more consequential. And larger still is the foreign exchange market (FX).

And right now, a great many currencies around the world are in complete meltdown. This is not normal.

Here’s the key takeaway: a currency crisis is a symptom of a deeper disease —it is not the illness.

The fact that so many currencies are melting down at the same time is telling us the global financial system is unraveling, and unraveling fast. This is a symptom of a fatal disease.

Currencies reflect all sorts of financial information; they’re akin to taking an economy’s pulse: trade balances, debt levels, interest rates, central bank policies, fiscal policies, and so on.

The global financial system is inter-connected, but this is not a viable excuse for the meltdown. The general explanation floating around is that currency weakness is like the flu: one currency gets it, and then it spreads to other weak currencies.

This diagnosis is misleading. What’s actually happening is the unprecedented global bubble of debt and assets of the past decade is popping, and it’s laying waste to the most indebted, over-leveraged and mismanaged nations first, either via stock market declines or meltdowns in currencies.

These are symptoms. The disease is the “fixes” of the past decade — extreme expansions of debt and asset valuations — are unraveling.

The global meltdown of currencies is evidence that the symptomatic “solutions” to the brush with collapse in 2008-09 — skyrocketing debt and asset bubbles — fixed nothing. All they did was inflate an even larger, more vulnerable bubble.

Currencies don’t melt down randomly. This is only the first stage of a complete re-ordering of the global financial system, a re-ordering that will reprice all the assets currently bubbling at absurd levels to much lower valuations.

The illusion that the U.S. is immune to the unraveling of debt and asset valuations won’t last. When the defaults start piling up, so will the losses, and when asset bubbles pop, incomes and spending decline. Although few seem to notice, almost half the profits of the S&P 500 corporations are earned overseas.

The belief that U.S. markets are somehow disconnected from global markets and immune to the repricing of risk, debt, assets and currencies is magical thinking.

They’re not. And we’ll learn that painful lesson soon enough.

Full article: The Global Financial System Is Unraveling, and No, the U.S. Is Not Immune (Daily Reckoning)

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