The IMF’s annual fiscal monitor is as full of good and albeit hapless ideas as ever. It’s gets off to a poor start. The IMF has been calling (correctly) on large economies to increase debt and spend such money on growth generating projects. This could include infrastructure spending or perhaps tax rebates or write-offs for increased innovation or capital investment. The executive summary reports that government debt has been increasing and now approaches pre-crisis levels- yet money (debt) has not been used in the way the IMF suggested, nor has it been coordinated by regions. The money has been squandered on political issues and wasted away. Consequently growth remains lacking and yet risks are now greater and growing. IMF scores a B+ for ideas, D- for coordination. And leading nations a strait F for fail.
More alarming news in this weekends US print edition of the Financial Times is in an article titled, Chinese shadow lending evades regulation and more critically, a Comment by George Magnus, associate at Oxford University’s Chine Centre and senior economic advisor at UBS, titled China’s debt reckoning cannot be deferred indefinitely. This last article calls out the known risks: the share of total credit in the economy is approaching 260 per cent of GDP. It seems it is on track to bust past 300 per cent by 2020. Note here that the US is in a simile boat. Ignoring all the complexities in the data, its reliability and quality, it seems China has so little wiggle room to cope with any economic pressure and also little head room to sustain its credit binge.
The first article suggests that even though official credit might be at straining point, there is much more credit being created outside of the official governance. Given the reportedly growing amount of bad loans, all this boasts badly for China, and so the global economy. If China were to sneeze, we all would catch a severe cold. Everyone else that matters is already at the doctors office waiting treatment.
Finally I read John Auther’s The Long View in the US print edition of the Financial Times. It was depressing reading. He calls out the four reasons why the good times (yes, these are ‘good’ times) will not continue. Of course these ‘good times’ relate to the equity market, which has been the main beneficiary of central bankers quantitative easing experiment.
The flour reasons are:
- Inflation has been tamed – can it ever be tamed again?
- Interest rates have fallen – they have to go up soon
- The economy has grown – few new triggers remain and demographic drag will increase
- Corporate profitability rose – it’s leaked and in its way down
The article draws from McKinsey Global Institute and new research. All told its more data suggesting we are in the second half of a natural down cycle whose rise has been flattened by central bank policy and the lack of political policy agreement. We are now headed for what should be a natural slow down with no gas in the tank and no cash in the wallet and an already overloaded credit card. Hang in folks, it’s gonna be a bumpy ride.