The end is nigh (again) – could we be heading into another global meltdown?

As her Majesty, the Queen rather plaintively asked 10 years ago “why did nobody see this coming?”  A re-run of that global collapse is very much on the cards.

To remind you, 10 years ago the global economy was in meltdown.  Lehman Brothers, the US banking giant had collapsed, Northern Rock customers were queueing round the block to withdraw their funds and stock markets worldwide were in free fall.

The medicine served out by the Central Banks – Quantitative Easing (QE) - alleviated the pain but has not provided a cure.  QE meant that Central Banks printed money on a colossal scale (just £435bn in the UK, but £12tn worldwide) to buy up bank debt, providing them with funds to lend to investors and entrepreneurs to reinvigorate their economies.

The worst was, for the moment, averted but what we are left with is: 

  • Rock-bottom interest rates (good for borrowers, not savers)
  • Wildly inflated asset prices – shares, housing, commercial property
  • Risky borrowing, notably in developing countries who have borrowed cheaply to finance vast infrastructure projects by issuing bonds that are looking increasingly worthless.  Argentina, Turkey and India have the biggest problems, with Brussels regularly propping up our own problem children – Greece & Italy.

On top of this, we have the unpredictable force that is Trump determined to “make America great again” at the expense of everyone else.  Protectionism and a vain attempt to curb China’s inexorable rise to global supremacy may keep him in office for a few years but the other 7 billion people on Planet Earth will not thank him for it.

The era of cheap money is coming to an end as interest rates start to climb.  Can the over-inflated stock markets and other asset prices slowly adjust downwards or will there be a sharp crash?  If so, are there any weapons left in the armoury?  QE kicked the ball 10 years down the road in 2008, but it can’t work again because printing yet more money will only make the underlying problems worse.

So should you be worried? 

Will there be a sharp correction with a lot of collateral damage – unemployment, social unrest, high inflation etc? Or a long drawn out period of low growth, investment returns and static economies?  We are already seeing the latter in the UK economy and particularly within our banks.  Their loans are earning less than their liabilities (i.e. customer deposits) so when this happens, they don’t make more loans and they certainly don’t want more deposits – hence their failure to pass on the last Base Rate increase to savers.

A slowdown turns into a recession, asset prices fall, deposits are withdrawn (see Northern Rock 10 years ago) – sound familiar?  Where does that leave the insatiable demands of the NHS, pensions, adult social care at a time when personal taxation levels are already at historically all-time highs?

Flat growth = Flat living standards

And we haven’t even got to Brexit yet . . . . . .

Gordon Brown’s boast that he had “abolished boom and bust” will haunt him, and the rest of us, for a long time yet.