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How would you prefer your collapse?

There are three possible futures for the global economy, according to Satyajit Das at the Independent.  First, there is the highly unlikely Lazarus scenario in which the global economy is risen from the dead by the economic wizardry of the central banks:

“Such an outcome is unlikely. The fact that current policies have not led to a recovery after six years suggests that they are ineffective. A general lack of demand combined with demographics, slower improvements in productivity, reduced rates of innovation, resource constraints, environmental factors and rising inequality is likely to constrain growth. Overcapacity, technological improvements, competitive devaluations and a lack of pricing power is likely to keep inflation low, despite loose monetary conditions.”

So what are the two more likely futures?  First there is the prospect of “a managed depression” in which the whole world follows the Japanese example of prolonged stagnation:

“Economic growth remains weak and volatile. Inflation remains low. Debt levels continue to remain high or rise. The problems become chronic requiring constant intervention in the form of fiscal stimulus and accommodative monetary policy, low rates and periodic QE programs to avoid deterioration.”

This, in effect, is the new normal – a continuation of the policies that have been employed since 2008.  As we all know, the working definition of insanity is to keep doing what you have been doing in the hope that things will turn out different.  Das argues that this approach can only be temporary:

“Authorities may be able to use policy instruments to maintain an uneasy equilibrium for a period of time. But it may prove unsustainable over time.”

This brings us to the most likely future for the global economy – “the mother of all crashes.”  Effectively picking up where we left off in 2008:

“Financial system failures occur as a significant number of sovereigns, corporate and households are unable to service their debt. Defaults trigger problems in the banking system which leads to a major liquidity contraction, which in turn feeds back into real economic activity. Falls in employment, consumption and investment drive a severe contraction. Concerns about safety and security of savings create capital flight from vulnerable nations, banks and investment vehicles. The problems are global with developed and emerging markets affected.”

Das notes that in spite of the gathering economic storm clouds, politicians and central banks continue to believe that QE and low interest rates are working.  In fact, each successive round of QE has brought less growth.  Interest rates are negative in Japan and the Eurozone, so further cuts are unlikely.  The USA and UK could make one last cut to interest rates; but after that it is game over.  At this stage, all that remains is investor confidence.  At present, this remains in place.  But then, foresight was never a strong attribute in the world’s financial markets… one more economic shock, and the whole house of cards could come tumbling down.

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