Monday, August 1, 2016

Satyajit Das: "QE-forever cycle will have an unhappy ending"

Ya think?
So what to do? Dance faster, the band is still playing.

From the Financial Times:

A combination of QE and the prospect of fresh fiscal stimulus won’t generate a recovery
Policymakers have chosen to ignore the central issue of debt as they try to resuscitate activity.
Since 2008, total public and private debt in major economies has increased by over $60tn to more than $200tn, about 300 per cent of global gross domestic product (“GDP”), an increase of more than 20 percentage points.

Over the past eight years, total debt growth has slowed but remains well above the corresponding rate of economic growth. Higher public borrowing to support demand and the financial system has offset modest debt reductions by businesses and households.

If the average interest rate is 2 per cent, then a 300 per cent debt-to-GDP ratio means that the economy needs to grow at a nominal rate of 6 per cent to cover interest.

Financial markets are now haunted by high debt levels which constrain demand, as heavily indebted borrowers and nations are limited in their ability to increase spending. Debt service payments transfer income to investors with a lower marginal propensity to consume. Low interest rates are required to prevent defaults, lowering income of savers, forcing additional savings to meet future needs and affecting the solvency of pension funds and insurance companies.

Policy normalisation is difficult because higher interest rates would create problems for over-extended borrowers and inflict losses on bond holders. Debt also decreases flexibility and resilience, making economies vulnerable to shocks.

Attempts to increase growth and inflation to manage borrowing levels have had limited success. The recovery has been muted.

Sluggish demand, slowing global trade and capital flows, demographics, lower productivity gains and political uncertainty are all affecting activity. Low commodity, especially energy, prices, overcapacity in many industries, lack of pricing power and currency devaluations have kept inflation low.

In the absence of growth and inflation, the only real alternative is debt forgiveness or default. Savings designed to finance future needs, such as retirement, are lost....MORE