The Slog has been pretty universally lambasted over the last five years for saying that ‘permanently low interest rates’ are an arrogant myth put about by a bloc of the World (‘the West’). I’ve posted more than a dozen times to say other economies in other theatres have little or no advantage in playing that game…and someday, someone would break ranks.
Not every economy on the planet is growth-free; many in Asia may be slowing, but they still deliver growth rates at which the West would salivate. When there’s money pushing an economy forward – and it’s virtually free to borrow – the only results possible are overheating in the economy, wage-inflation and (above all) enormous asset bubbles. Look around most of the Asian economies at the minute, and this is what you’ll see.
All this is merely another dogs-bollocks of a flaw in the globalist drivel peddled by Ted Levitt and his multinational followers some forty years ago. There is no way, in a world where the daily rate for labour ranges from a bowl of soya beans to $15m, a ‘globalised’ system can ever have the balance to work. It will be, by definition, a dysfunctional system: a series of crises waiting to happen.
The fastest ways to damp down overheating and deflate asset bubbles are to restrict credit by raising interest rates. That in turn slows growth, and of course also restricts the West’s already feeble ability to export to the East (and south). All Zirp will do in the end is exacerbate the natural slowdown in emerging markets, and cause a rebound via interest rates and production outputs in the mature (aka knackered) Western economies.
This piece at Forbes yesterday sums up my fears very well:
‘As the world’s most important benchmark interest rate, approximately $10 trillion worth of loans and $350 trillion worth of derivatives use the Libor as a reference rate. Libor-based corporate loans are very prevalent in emerging economies, which is helping to inflate the emerging markets bubble…. Libor is used as the reference rate for nearly two-thirds of all large-scale corporate borrowings. Considering this fact, it is no surprise that credit and asset bubbles are ballooning throughout Asia.’
Several events more recently have made interest rate pressures more likely. The Russian Trial by Oil fiasco orchestrated by the US and the Saudis showed how quickly a market’s rates can go through the roof…..but that was based on a need to support a currency (the Rouble) under attack. Since then, the Asia International (AIB) has began to attract members in droves – and whatever it morphs into in the end, it is bound to be an influential player in all decisions relating to Asian asset bubbles and realistic interest rates.
This is bad news for all of those still actively engaged in real-economy western business. In the eurozone, it could be the straw that breaks the 17-humped camel’s back. Yet more ‘surprisingly weak’ figures have emerged this morning (although whoTF is surprised any more is very hard to glean) and they once more spell out what a con-merchant Mario Draghi is: the new figures suggest that the European Central Bank’s €1.1 trillion bond-buying programme, which has helped to weaken the euro, has so far failed to lift France out of its chronic malaise.
French manufacturing activity contracted for the 11th consecutive month in April, with the rate of decline the fastest so far this year…..and employment levels fell for a thirteenth successive month in April. (The Slog has been posting on this trend for nearly two years).