Global Debt – Central Banks And The Rise Of Extremism by Danielle DiMartino Booth – Money Strong
“Those who honor me I will honor.” So read the scripture on a piece of paper slipped into the hand of 1924 gold medal runner Eric Liddell. Liddell’s refusal to run on the Sabbath catapulted him into a jeering hall of athletic infamy. That gut wrenching scene is memorably and painfully recreated in Chariots of Fire, winner of 1981’s Oscar for Best Picture. But ultimately, it was the ideal of so gifted an athlete standing unflinchingly before his stunned country to defend his principles and the appeal of his unwavering faith that earned Liddel the Champion of Conviction Crown.
On a recent trip to England, that classic film and its not so distant period setting of a Britain deeply divided across class and religions lines were both brought to mind. Portrayed against this backdrop, Liddell’s Chariot co-protagonist, Harold Abrahams found himself continually confronting the scourge of anti-Semitism so readily apparent in his fellow countrymen’s thinly-veiled bigotry and snobbery. Time and ability saw these two real-to-life athletes prevail. The country under whose flag they ran was not to enjoy such a storied fate.
Britain and its superpower counterparts are chronicled in Liaquat Ahamed’s “Lords of Finance.” It is this more than any other written work that so clearly captures the era depicted in Chariots, one in which the increasingly speculative financial markets were fonts of brewing instability. Booms were followed by busts in a seemingly perpetual cycle. Geopolitical tensions were at a generational peak. And the world’s all powerful central bankers were driven blindly to cleave, come what may, to an orthodoxy that was to prove fatally flawed. Now, if only the past could be placed squarely in the past.
Ahamed’s book also recalls a time when the world suffered from a leadership vacuum. It is this parallel in particular that, combined with today’s equally myopic monetary philosophy, makes one shudder to contemplate what the future holds. If there was one takeaway from traveling abroad, it was that the anger emanating from the U.S. populace is matched and then some overseas.
It is no longer as simple as squabbling about Greek debt or fretting over the possibility of a Brexit. The very fate of the euro hangs in the balance as the migrant crisis bleeds into economies and feeds nationalistic leanings. Look no further than Germany itself and its announcement that it would begin to rebuild its armed forces for the first time since the Cold War. The acknowledgement that conflicts will rise, not fall, is in and of itself a validation of the growing menace of extremism.
It is increasingly a simpler task to tally the countries within the Eurozone that are not expressing their outrage at the deteriorating landscape. The ouster of Turkey’s prime minister greatly decreases the probability that a controversial deal the EU struck with the Turks will reduce terrorism in that country. Hungary’s parliament has voted to hold a referendum challenging the EU’s migrant redistribution quotas. Meanwhile, voters in Austria, Denmark, the Netherlands, Poland, Slovakia, Sweden and even France are backing anti-immigration efforts in one shape or another.
Of course, the migrant crisis is a relatively new phenomenon to these countries, but one country, Italy, has struggled and been entrenched in this crisis for the better part of a generation. And, while all eyes may now be on Great Britain and its upcoming vote, some suggest that Italy’s September constitutional referendum poses the greater near term threat. The hypothetical dominoes could line up as such: Prime Minister Matteo Renzi quits in protest to the referendum failing and Mario Draghi comes to the rescue of his embattled country, leaving his post at the ECB before his term ends in 2019. Germany easily gathers the necessary consensus to replace Draghi with a hawk from its own country who then reestablishes monetary order.
If this scenario seems far-fetched, consider the tie that binds the yesteryear of the 1920s to today; that is, debt. According to figures compiled by the International Monetary Fund (IMF), public debt as a percentage of global gross domestic product (GDP) reached its nadir in 1914, at 23 percent. The onset of World War I would alter that landscape for generations to come. Global debt peaked at nearly 150 percent in 1946 following the Great Depression and World War II.
By all appearances, the global economy has come full circle, without the World War part, that is. In a March 2011 report, the IMF made the following observation as the world crawled its way out of the darkest moments of the financial crisis:
“While the impact on growth of the recent crisis is less dramatic than that of the Great Depression, the implications for public debt appear to be graver. That’s because the advanced economies were weaker at the outset of the current episode – with debt ratios 20 percentage points of GDP higher in G-20 economies in 2007 than in 1928. In addition, the sharp drop in revenues (due to the collapse in economic activity, asset prices and financial sector profits) and the cost of providing stimulus and financial sector support hit debt ratios harder during the recent crisis than during the Depression.”
How sweet it would be to report that since 2007 the tide of debt has turned. But, instead, an early 2015 McKinsey report documented that global debt had ballooned with none of the world’s major economies taking positive steps towards reducing their debt levels. Such is the disastrous bent of modern day central banking thinking, and its belief that the only way to alleviate the problem of over-indebtedness is with ever increasing debt.
In all, according to McKinsey’s math, global debt increased by $57 trillion in the seven years ending 2014. The gold medal winners among creditors were the sovereigns: at 9.3-percent growth, government debt swelled to $58 trillion from a starting point of $33 trillion. Corporations came in second place with their debt levels rising by 5.9 percent to $56 trillion from $38 trillion. The onus was clearly on these two competitors to offset the relatively weaker growth of financial and household debt which was no doubt dragged down by the collapse in U.S. mortgage availability and the recapitalization of (some) lenders.
Where does that leave us? Apparently angry. Very, very angry.
Refer back to the IMF’s warning about the critical importance of the starting point for indebted countries’ economies. Then flash forward to the reality that the world economy today is that much more indebted. As for its economies, they are on ever weaker footing.
Maybe the anger stems from the injustice of it all, and the knowledge that future growth has been sacrificed for little more than yet another run for a place in the history books of rampant speculative fervors. Though the average man on the street might not be able to put their finger on it, they do know it’s impossible to put food on the table with the ethereal proceeds from a share buyback that does nothing more than prop up a stock price.
As The Credit Strategist’s Michael Lewitt recently noted, “Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to