Are we in a depression?

1. Probably.

2. Maybe

This is a serious question for which I do not have answers, or the professional competence to assess,  but something is weirdly amiss when interest rates are so low, growth is nearly stagnant, oil prices have crashed, and the central bank warns us that Canadian housing prices are overvalued.

What can be asserted safely is this:

Central banks are devaluing currencies by printing lots of money. There is a race to the bottom, to try to increase competitive advantage by devaluation of the currency.

So says William White, a former chief economist at the OECD, quoted in article in the Daily Telegraph.

Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.

“We are in a world that is dangerously unanchored,” said William White, the Swiss-based chairman of the OECD’s Review Committee. “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.”

Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel.

William White has a special relevance because he was one of the few in authority who thought the real estate market was dangerously unhinged before – and not after – the 2008 wipe out of Lehman Brothers. Says Mr. White speaking at the World Economic forum at Davos, Switzerland:


Mr White said QE (quantitative easing)  is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.

“There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.

The dark view is held by Torontonian  Alex Jurshevski, an economic expert – read: rescuer of distressed companies and failing economies – in his blog at Recovery Partners. His article is worth reading.

Jurshevski’s thesis is that, once the crash of 2008 occurred, we ought to have let a lot of large companies fail, and taken the hit. The managers of the world decided to avoid anything so drastic. Since that time, policy makers have been engaged in a policy called quantitative easing – government in the form of central banks buying government debt – and holding interest rates low. With low interest rates you can borrow more money cheaply, and prolong the party.

Rising piles of debt may be setting off significant deflation, or reduction in prices, of which the oil price reductions of late may be a harbinger.

This is consistent with what William White is saying at Davos.

He deplores the rush to QE as an “unthinking fashion”. Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing “correlation with causality”. The Anglo-Saxon pioneers have yet to pay the price. “It ain’t over until the fat lady sings. There are serious side-effects building up and we don’t know what will happen when they try to reverse what they have done.”

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. “They have created so much debt that they may have turned a good deflation into a bad deflation after all.”

Jurshevski believes that actual distress is being masked by

  • a vast expansion of entitlement programs,
  • including a large withdrawal from the work force as people go on disability pensions, and
  • ultra-low interest rates, which allow “zombie” corporations to stagger on, with dire consequences for investment, productivity, and growth.

and that economic growth is all but wiped out by population increases. He contends that shares of zombie corporations are being foisted on professional money managers, and much else besides.

The oil price reductions of recent weeks may not be the sign of hope that we take them for, but a signal that actual demand for oil is not being sustained.

Somehow I think that world economy is a bit like Wiley Coyote out over the chasm, and that awareness of how bad things are would cause us to plunge. Expect therefore a great deal of propaganda to persuade us that mere air will sustain our weight.

wiley coyote

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